Meaning of Business Environment

Business Environment consists of all those factors that have a bearing on the business, such
as the strengths, weaknesses, internal power relationships and orientations of the
organization; government policies and regulations; nature of the economy and economic
conditions; socio-cultural factors; demographic trends; natural factors; and, global trends and
cross-border developments.
Concept of Business Environment
A business firm is an open system. It gets resources from the environment and supplies its
goods and services to the environment. There are different levels of environmental forces.
Some are close and internal forces whereas others are external forces. External forces may be
related to national level, regional level or international level. These environmental forces
provide opportunities or threats to the business community. Every business organization tries
to grasp the available opportunities and face the threats that emerge from the business
environment. Business organizations cannot change the external environment but they just
react. They change their internal business components (internal environment) to grasp the
external opportunities and face the external environmental threats. It is, therefore, very
important to analyze business environment to survive and to get success for a business in its
industry. It is, therefore, a vital role of managers to analyze business environment so that they
could pursue effective business strategy. A business firm gets human resources, capital,
technology, information, energy, and raw materials from society. It follows government rules
and regulations, social norms and cultural values, regional treaty and global alignment,
economic rules and tax policies of the government. Thus, a business organization is a
dynamic entity because it operates in a dynamic business environment.
Nature of Business
Business may be understood as the organized efforts of enterprise to supply consumers with
goods and services for a profit. Businesses vary in size, as measured by the number of
employees or by sales volume. But, all businesses share the same purpose: to earn profits.
The purpose of business goes beyond earning profit. There are:
 It is an important institution in society.
 Be it for the supply of goods and services.
 Creation of job opportunities.
 Offer of better quality of life.
 Contributing to the economic growth of the country.
Hence, it is understood that the role of business is crucial. Society cannot do without
business. It needs no emphasis that business needs society as much.

BUSINESS TODAY
Modern business is dynamic. If there is any single word that can best describe today’s
business, it is change. This change makes the companies spend substantially on Research and
development (R & D) to survive in the market. Mass production and mass marketing are the
norms followed by business enterprises. The number of companies with an annual turnover of
Rs.100 crore each was only three in 1969-70.The figure has gone up by hundreds these days.
Today’s business is characterized by diversification, which may be:
Concentric Diversification - It refers to the process of adding new, but relates products or
services.
Horizontal Diversification - Adding new, unrelated products or services for present
customers is called horizontal Diversification.
Conglomerate Diversification - It refers to adding new and unrelated products or services.
Going international is yet another trend followed by modern business houses.
Business houses are exposed to global competition, which argues well for consumers. Also
occupying a major role is science in the global economic scenario.

Business in 21st Century

Large organizations, with a large workforce will not exist. They will be ‘Mini’ organizations.
Business during the 21st century will be knowledge-based; tomorrow’s manager need not
spend his time on file pushing and paper-shuffling. Information technology will take care of
most of that work. Organizations will become flat. Linear relationship between the boss and
manger and authority flowing downwards and obedience upward will disappear. Employees
will have no definite jobs. Most of the jobs will last for two to five years. Remuneration will
depend on one’s contribution to organization.

Business Goals
 Profit - Making profit is the primary goal of any business enterprise.
 Growth - Business should grow in all directions over a period of time.
 Power - Business houses have vast resources at its command. These resources confer
enormous economic and political power.
  Employee satisfaction and development - Business is people. Caring for employee
satisfaction and providing for their development has been one of the objectives of
enlightened business enterprises.
 Quality Products and Services - Persistent quality of products earns brand loyalty, a
vital ingredient of success.
 Market Leadership- To earn a niche for oneself in the market , innovation is the key
factor.
 Challenging- Business offers vast scope and poses formidable challenges.
 Joy of creation- It is through business strategies new ideas and innovations are given
a shape and are converted into useful products and services.
 Service to society - Business is a part of society and has several obligations towards
it.

TYPES OF ENVIRONMENT
On the basis of the extent of intimacy with the firm, the environmental factors may be
classified in to different types or levels. As indicated BELOW, there are, broadly, two types
of environment, the internal environment, i.e., factors internal to the firm and external
environment, i.e., factors external to the firm which have relevance to it.
The internal factors are generally regarded as controllable factors because the company has
control over these factors; it can alter or modify such factors as its personnel, physical
facilities, organization and functional means, such as marketing mix, to suit the environment.
The external factors, on the other hand, are, by and large, beyond the control of a company.
The external or environmental factors such as the economic "factors, socio-cultural factors,
government and legal factors, demographic factors, geo-physical factors etc; are, therefore,
generally regarded as uncontrollable factors.
It may, however, be noted that a firm may not sometimes have complete control over all the
internal factors. Also, it is sometimes possible to change certain external factors. Some of the
external factors have a direct and intimate impact on the firm (like the suppliers and
distributors of the firm). These factors are classified as micro environment, also known as
task environment and operating environment. There are other external factors which affect an
industry very generally (such as industrial policy demographic factors etc). They constitute
what is called macro environment, general environment or remote environment. Although
business environment consists of both the internal and external environments, many people
often confine the term to the external environment of business.
Business Decision
Internal Environment
The important internal factors which have a bearing on the strategy and other decisions are
outlined below.
Value System
The value system of the founders and those at the helm of affairs has important bearing on
the choice of business, the mission and objectives of the organization, business policies and
practices. It is a widely acknowledged fact that the extent to which the value system is shared
by all in the organization is an important factor contributing to success. The value system of
JRD Tata and the acceptance of it by others who matter were responsible for the voluntary
incorporation in the Articles of Association of TISCO its social and moral responsibilities to
consumers, employees, shareholders, society and the people. After the EID Parry group was
taken over by the Murugappa group, one of the most profitable businesses (liquor) of the
ailing Parry group was sold off as the liquor business did not fit into the value system of the
Murugappa group. The value system and ethical standards are also among the factors
evaluated by many companies in the selection of suppliers, distributors, collaborators etc.
Vision, Mission and Objectives
The business domain of the company, priorities, direction of development, business
philosophy, business policy etc., is guided by the vision mission and objectives of the
company. Ranbaxy's thrust in to the foreign markets and development has been driven by its
mission "to become a research based international pharmaceutical company. Arvind Mills'
mission - "To achieve global dominance in select business built around our core
competencies through continuous product and technical innovation, customer orientation and
focus on cost effectiveness", - has driven its future development strategy including the
portfolio strategy, and indicated the thrusts required in the functional areas to help achieve
the mission.
Management Structure and Nature
The organizational structure, the composition of the Board of Directors, extent of
professionalization of management etc., are important factors influencing business decisions.
Some management structures and styles delay decision making while some others facilitate
quick decision making. The Board of Directors being the highest decision making body
which sets the direction for the development of the organization and which overseas the
performance of the organization, the quality of the Board is a very critical factor for the
development and performance of company. The private sector in India presents extreme cases
in this respect. At one end there are companies with highly qualified and responsible Board
and at the other end there are companies which do not possess these qualities. The share-
holding pattern could have important managerial implications. There are very large
companies where majority of the share is held by the promoters (like Wipro) and there are
large firms where the promoters' position is very vulnerable (like the Tata group of
companies).
Financial institutions had large share holding in many Indian companies. The stand of
nominees of financial institutions could be very decisive in several critical instances.
Internal Power Relationship
Factors like the amount of support the top management enjoys from different levels of
employees, shareholders and Board of Directors have important influence on the decisions
and their implementation. The relationship between the members of Board of Directors and
between the chief executive and the Board are also critical factors.
Human Resources
The characteristics of the human resources like skill, quality, morale, commitment, attitude
etc., could contribute to the strength -and weakness, of an organization. Some organizations
find it difficult to carry out restructuring or modernization because of resistance by
employees whereas they are smoothly done in some others. The involvement, initiative etc.,
of people at different levels may vary from organization to organization. The organizational
culture and overall environment have bearing on them. John Towers, M.D., Rover Group,
observes that a Japanese company of 30,000 employees is 30,000 process improvers. In a
Western company, it is 2,000 process improvers and 28,000 workers. And in an Indian
company?
Company Image and Brand Equity
The image of the company matters while raising finance, forming joint ventures or other
alliances, soliciting marketing intermediaries, entering purchase or sale contracts, launching
new, products etc. Brand equity is also relevant in several of these cases.
Miscellaneous Factors
There are a number of other internal factors which contribute to the business success/failures
or influence the decision-making. They include the following.
1. Physical Assets and Facilities like the production capacity, technology and efficiency of
the productive apparatus, distribution logistics etc., are among the factors which influence the
competitiveness of a firm. For example, as quality is very important in the pharmaceutical
industry, particularly for a global player, in the case of Core Healthcare not only there is no
compromise on quality but also the company made the quality norms stricter than
international or other relevant standards and the quality mantra has been well imbibed
throughout the organization.
2. R & D and Technological Capabilities, among other things, determine a company's
ability to innovate and compete.
3. Marketing Resources like the organization for marketing, quality of the marketing men,
brand equity and distribution network have direct bearing on marketing efficiency. They are
important also for brand extension, new product introduction etc.
4. Financial Factors like financial policies, financial position and capital structure are also
important internal environment affecting business performances, strategies and decisions.

External Environment
As stated earlier, the external business environment consists of a micro environment and a
macro environment.
Micro Environment
"The micro environment consists of the actors in the company's immediate environment that
affects the performance of the company. These include the suppliers, marketing
intermediaries, competitors, customers and the publics." The macro environment consists
larger societal forces that affect all the actors in the company's micro environment namely,
the demographic, economic, natural, technical, political and cultural forces." It is quite
obvious that the micro environmental factors are more intimately linked with the company
than the macro factors. The micro forces need not necessarily affect all the firms in a
particular industry in the same way. Some of the micro factors may be particular to a firm.
For example, a firm which depends on a supplier may have a supplier environment which is
entirely different from that of a firm whose supply source is different. When competing firms
in an industry have the same' micro elements, the relative success of the firms depends, inter
alia, on their relative effectiveness in dealing with these elements.
Suppliers
An important force, in the micro environment of a company is the suppliers, i.e., those who
supply the inputs like raw materials and components to the company. The importance of
reliable source/sources of supply to the smooth functioning of the business is obvious.
Uncertainty regarding the supply or other supply constraints often compels companies to
maintain high inventories causing cost increases. It had been pointed out that factories in
India maintained indigenous stocks of 3-4 months and imported stocks of 9 months as against
an average of a few hours to two weeks in Japan.4 The liberalization, however, has caused a
significant change in the situation. Because of the sensitivity of the supply, many companies
give high importance to Vendor development. Vertical integration where feasible, helps to
solve the supply problem For example, Nirma has always been a believer of the logic'" that
captive production plants for raw materials is the best way to production costs in check and it
has gone for a mammoth backward integration. In many cases, however, outsourcing is more
beneficial. It is very risky to depend on a single supplier because a strike, lock out or any
other production problem with that supplier may seriously affect the company. Similarly, a
change in the attitude or behavior of the supplier may also affect the company. Hence,
multiple sources of supply often help reduce such risks. The supply management assumes
more importance in a scarcity environment. "Company purchasing agents are learning how to
"wine and dine" suppliers to obtain favourable treatment during periods of shortages. In other
words, the purchasing department might have to "market “itself to suppliers." Recognizing
the critical importance of the supply factor, companies all around the world are increasingly
resorting to partnering / relationship marketing.
Customers
As it is often exhorted, the major task of a business is to create and sustain customers. A
business exists only because, of its customers. Monitoring the customer sensitivity is,
therefore, a prerequisite for the business success. A company may have different categories
of consumers like individuals, households, industries and other commercial establishments,
and government and other institutions. For example, the customers of a tyre company may
include individual automobile' owners, automobile manufacturers, public sector transport
undertakings and other transport operators. Depending on a single customer is often too risky
because it may place the company in a poor bargaining position, apart from he risks of losing
business consequent to the winding up of business by the customer or due to the customer's -
switching over to the competitors of the company. With the growing globalization, the
customer environment is increasingly becoming global. Not only that the markets of other
countries are becoming more open, the Indian market is becoming more exposed to the global
competition and the Indian customer is becoming more "global" in his shopping.
Competitors
A firm's competitors include not only the other firms which market the same or similar
products but also all those who compete for thee discretionary income of the consumers. For
example, the competition for a company's televisions may come not only from other T.V
manufacturers but also from two-wheelers, refrigerators, cooking ranges, stereo sets and so
on and from Firms offering savings and investment schemes like banks, Unit Trust of India,
companies accepting public deposits or issuing shares or debentures etc. This competition
among these products may be described as desire competition as the primary task here is to
influence the basic desire of the consumer. Such desire competition is generally very high in
countries characterized by limited disposable incomes and many unsatisfied desires (and, of
course, with many alternatives for spending/investing the disposable income). If the
consumer decides to spend his discretionary income on recreation (or recreation cum
education) he will still be confronted with a number of alternatives to choose from like T.V.,
stereo, two-in-one, three-in-one etc. The competition among such alternatives which satisfy a
particular category of desire is called generic competition. If the consumer decides to go in
for a T.V., the next question is which form of the T.V black and white .or Colour with remote
control or without it etc. In other words, there is a product form competition. Finally, the
consumer encounters the brand competition i.e. the competition between the different
brands of the same product form. An implication of these different demands is that a marketer
should strive to create primary and selective demand for his products. Consequent to the
liberalization, the competitive environment in India has been undergoing a sea change. Many
companies restructured their business portfolio and strategies. In many industries where a
seller's market existed a buyer's market has emerged.
Marketing Intermediaries
The immediate environment of a company may consist of a number of marketing
intermediaries which are "firms that aid the company in promoting, selling and distributing
its goods to final buyers”. The marketing intermediaries include middlemen such as agents
and merchants who "help the company find customers or close sales with them", physical
distribution firms which "assist the company in stocking and moving goods from their origin
to their destination such as warehouses and transportation firms; marketing service agencies
which "assist the company in targeting and promoting its products to the right markets such
as advertising agencies, marketing research firms, media firms and consulting firms; and
financial intermediaries which finance marketing activities and insure business risks.
Marketing intermediaries are vital links between the company and the final consumers. A
dislocation or disturbance of the link, or a wrong choice of the link, may cost the company
very heavily. Retail chemists and druggists in India once decided to boycott the/products .of a
leading company on some issue such as poor retail margin. This move far collective boycott
was, however, objected to by the MRTP Commission; but for this the company would,
perhaps, have been in trouble. Hindustan Lever too faced major challenge when it faced a
collective boycott in Kerala on the issue of trade margin.
Financiers
Another important micro environmental factor is the financiers of the company. Besides the
financing capabilities, their policies and strategies, attitudes (including attitude towards risk),
ability to provide non-financial assistance etc. are very important.
Publics
A company may encounter certain publics in its environment. A public is any group that has
an actual or potential interest in or impact on an organization’s ability to achieve its interests.
Media publics, citizen’s action publics and local publics are some examples.
Macro Environment
A company and the forces in its micro environment operate in a larger macro environment of
forces that shape opportunities and pose threats to the company. The macro forces are,
generally, more uncontrollable than the micro forces. When the macro environment is
uncontrollable, the success of a company depends on its adaptability to the environment. For
example, if the cost of the imported components increases substantially because of the
depreciation of the domestic currency, a solution may be their domestic manufacture.
Important macro environment factors include economic environment, political and regulatory
environment, social/cultural environment, demographic environment, technological
environment, natural environment, and global environment.
a) Technological Environment
Technology is understood as the systematic application of scientific or other organized
knowledge to practical tasks. Technology changes fast and to keep pace with it, businessmen
should be ever alert to adopt changed technology in their businesses.
b) Economic Environment
There is close relationship between business and its economic environment. Business obtains
all its needed inputs from the economic environment and it absorbs the output of business
units.
c) Political Environment
It refers to the influence exerted by the three political institutions viz., legislature executive
and the judiciary in shaping, directing, developing and controlling business activities. A
stable and dynamic political environment is indispensable for business growth.
d) Natural Environment
Business, an economic pursuit of man, continues to be dictated by nature. To what extend
business depends on nature and what is the relationship between the two constitutes an
interesting study.
e) Global or international Environment
Thanks to liberalization, Indian companies are forces to view business issues from a global
perspective. Business responses and managerial practices must be fine-tuned to survive in the
global environment.
f) Social and culture Environment
It refers to people’s attitude to work and wealth; role of family, marriage, religion and
education; ethical issues and social responsiveness of business.

COMPETITIVE STRUCTURE OF INDUSTRIES

The Competitive structure of industries is a very important business environment.
Identification of forces affecting the competitive dynamics of an industry will be very useful
in formulating strategies. According to Michael Porter’s well known model of structural
analysis of industries, the state of competition in an industry depends on five basic
competitive forces, viz.
1. Rivalry among existing firms
2. Threat of new entrants
3. Threat of substitutes
4. Bargaining power of suppliers
5. Bargaining power of buyers.
Fig. 1.3 depicts the five forces competitive structure of industry. The diagram is a slightly
modified presentation of the one provided by Porter. The arrows in the diverse directions
indicate opposing forces. For example just as the buyers and suppliers may have bargaining
power over the firm, the firm may also have some bargaining power over the buyers and
suppliers.

Threat of Entry
A growing industry often faces threat of new entrants that can alter the competitive
environment. There may, however be a number of barriers to entry. Potential competition
tenor to be high if the industry is profitable or critical, entry barriers are low and expected.

The following are some of the important common entry barriers:

1. Government Policy: In many cases government policy and regulation are important entry
barriers. For example, prior to the economic liberalization in India, government dictated entry
barriers were rampant, like reservation. of industries products for public sector and small
scale sector, industrial licensing, regulations under MRTP Act, import restrictions,
restrictions on foreign capital and technology etc.
2. Economies of Scale: Economies of scale can deter entry in two ways: it keeps out small
players and discourages even potentially large players because of the risk of large stakes.
3. Cost Disadvantages Independent of Scale: Entry barrier may also arise from the cost
advantages, besides that of economies of scale, enjoyed by the established firms which
cannot be replicated by new firms, such as proprietary product technology, learning or
experience curve, favorable access to raw materials, favorable location, government subsides
etc.
4. Product Differentiation: Product differentiation characterized by brand image, customer
loyalty, product attributes etc. may form an entry barrier forcing new entrants to spend
heavily to overcome this barrier.
5. Monopoly Elements: Proprietary product / technology, monopolization / effective control
over raw material -supplies, distribution channels etc. are entry barriers which are
insurmountable or difficult to overcome.
6. Capital Requirements: High capital intensive nature of the industry is an entry barrier to
small firms. Further, the risk of huge investment could be a discouraging factor even for other
firms.
Rivalry among Existing Competitors
Rivalry among existing competitors is often the most conspicuous of the competitions. Firms
in an industry are "mutually- dependent" - competitive moves of a firm usually affects others
and may be retaliated. Common competitive actions include price changes, promotional
measures, customer service, warranties, product improvements, new product introductions,
channel promotion etc. There are a number of factors, which influence the intensity of
rivalry. These include:
1. Number of Firms and their Relative Market Share, Strengths etc.: Rivalry is likely to
be affected by the number firms, their relative market shares, competitive strengths, etc.
2. State of Growth of Industry: In stagnant, declining and, to some extent, slow growth
industries a firm is able to increase its sales only by increasing its market share, i.e., at the
expense of others.
3. Fixed or Storage Costs: When the fixed or storage costs are very high, firms are provoked
to take measures to increase sales for improving capacity utilization or reducing storage costs.
4. Indivisibility of Capacity Augmentation: Where there are economies of scale, capacity
increases would be in large blocks necessitating, in many cases, efforts to increase sales to
achieve capacity utilization norms.
5. Product Standardization and Switching Costs: When the product of different firms is
standardized, price, distribution, after-sales service, credit etc. become important strategic
variables of competition. Absence of switching costs makes firms more vulnerable.
6. Strategic Stake: Rivalry in an industry becomes more volatile if a number of firms have
high stakes in achieving success there. For example, a firm which regards a particular
industry as its core business will give great importance to success in that industry.
7. Exit Barrier: High exist barriers. (For example, compensation for labor, emotion!
attachment to the industry etc.) tend to keep firms competing in an industry even thou~ the
industry is not very attractive.
8. Diverse Competitors: Rivalry becomes more complex and unpredictable when
competition are very diverse in their strategies, origins, personalities, relationships to their
parents etc
9. Switching Costs: In some cases a barrier to entry is created key switching costs (i.e., on
time costs facing the buyer of switching from one supplier's product to another's) such as cost
of retraining the employees, cost of new ancillary equipment etc.
10. Expected Retaliation: The potential entrants' expectations about the reactions of the
existing competitors may also sometimes deter entry.
Threat of Substitutes
An important force of competition is the power of substitutes. Substitutes limit the potential
returns in an industry by placing a ceiling on the price firms in the industry can profitable
charge. The more attractive the price performance alternative offered by substitutes, the
firmer the lid on industry profits. Firms in many industries face competition from those
marketing close or distant substitute. Porter points out that substitute products that deserve
the most attention are those that (1) are subject to trends improving their price-performance
trade off with the industry's product, or (2) are produced by industries earning high profits.

Bargaining Power of Buyers

For several industries, buyers are potential competitors they may integrate backward.
Besides, they have different degrees of bargaining power. Buyers compete with the industry
forcing down prices, bargaining for higher quality or more services, and playing competition
against each other - all at the expense of industry profitability". Important determinants of the
buyer power, explained by Porter, are the following.
1. The volume of purchase relative to the total sale of the seller.
2. The importance of the product to the buyer in terms of the total cost.
3. The extent of standardization or differentiation of the product.
4. Switching costs.
5. Profitability of the buyer (low profitability tends to pressure costs down).
6. Potential for backward integration by buyer.
7. Importance of the industry's' product with respect to the quality of the buyer's product or
services.
8. Extent of buyer’s information.
Bargaining Power of Suppliers
The important determinants of supplier power are the following:
1. Extent of concentration and domination in the supplier industry
2. Importance of the product to the buyer.
3. Importance of the buyer to the supplier
4. Extent of substitutability of the product
5. Switching costs.
6. Extent of differentiation or standardization of the product.
7. Potential for forward integration by suppliers.
Porter's analysis, thus, shows that competition in an industry goes well beyond the established
players. "Knowledge of these underlying sources of competitive pressure highlights the
critical strengths and weaknesses of the company, animates its positioning in its industry,
clarifies the areas where strategic changes may yield the greatest payoff, and highlights the
areas where industry trends promise to hold the greatest significance as either opportunities
or threats. Understanding these sources will also prove to be useful in considering areas for
diversification, though the primary focus here is on strategy in individual industries.
Structural analysis is the fundamental underpinning for formulating competitive strategy.

ENVIRONMENTAL ANALYSIS PROCESS

Environmental analysis is the study of the organizational environment to pinpoint
environmental factors that can significantly influence organizational operations. The analysis
consists of four sequential steps:
Scanning
It involves general surveillance of all environmental factors and their interactions in order
to:
• Identify early signals of possible environmental change
• Detect environmental change already underway
Monitoring
It involves tracking the environmental trends, sequences of events, or streams of activities. It
frequently involves following signals or indicators unearthed during environmental scanning.
Forecasting
Strategic decision-making requires a future orientation. Naturally, forecasting is an essential
element in environmental analysis. Forecasting is concerned with developing plausible
projections of the direction, scope, and intensity of environmental change.
Assessment
In assessment, the frame of reference moves from understanding the environment- the focus
of scanning, monitoring and forecasting – to identify what the understanding means for the
organization. Assessment, tries to answer questions such as what are the key issues presented
by the environment, and what are the implications of such issues for the organization.

IMPORTANCE OF ENVIRONMENTAL ANALYSIS

The benefits of environmental analysis are as follows:
1. The very idea of environmental analysis makes one aware of the environmental –
organization linkage.
2. Development of broad strategies and long-term policies of the firm.
3. Development of action plans to deal with technological advancements.
4. To foresee the impact of socio-economic changes at the national and international levels on
the firm’s stability.
5. Analysis of competitor’s strategies and formulation of effective countermeasures.
6. To keep oneself dynamic.

ECONOMIC SYSTEM
Economic system is a social organism through which people make their living. It is
constituted of all those individuals, households, farms, firms, factories, banks and
government, which act and interact to produce and consume goods and services.

KINDS OF ECONOMIC SYSTEMS

Free Enterprise Economy
This economic system works on the principle of Laissez Faire system, i.e., the least
interference by the government or any external force. The primary role of the government, if
any, is to ensure free working of the economy by removing obstacles to free competition.
A free Enterprise Economy is characterized as follows:
• Means of production are privately owned by the people who acquire and posses them;
• Private gains are the main motivating and guiding force for carrying out economic
activities;
• Both consumers and firms enjoy the freedom of choice; consumers have the freedom to
consume what they want to and firms have the choice to produce what they want to;
• The factor owners enjoy the freedom of occupational choice, i.e., they are free to use their
resources in any legal business or occupation;
• There exists a high degree of competition in both commodity and factor markets; and
• There is least interference by the government in the economic activities of the people; the
government is in fact supposed to limit its traditional functions viz, to defence, police, justice,
some financial organizations and public utility services.
Government Controlled Economy
The government-controlled economies are also called as Command, Centrally planned or
Socialist economies. Such economies are, in contradistinction to the free enterprise
economies, controlled, regulated and managed by the government agencies.
The other features of a pure socialist economy are:
• Means of production are owned by the society or by the state in the name of the community
– private ownership of factors and property is abolished;
• Social welfare is the guiding factor for economic activities – private gains, motivations and
initiatives are absent,
• Freedom of choice for the consumers is curbed to what society can afford for all; and
• The role of market forces and competition is eliminated by law.
Mixed Economy
A mixed economy is one in which there exist both government and private economic
systems. It is supposed to combine good elements of both free enterprise and socialist
economies. A mixed economy is widely known as one, which had both “public sector” (the
government economy) and “private sector” (the private economy). The private sector has
features of a free enterprise economy and the public sector has features of socialist economy.
It is important to note here that most economies in the world today are There are two
different forms of the Mixed Economies.
• Mixed Capitalist Economies
A mixed Capitalist economy is a variant of the free enterprise economic system. To this
category fall the highly developed nations like the United States, U.K., France, Japan etc.
though these economies have a very large government sector, their private sectors work on
the principles of the free enterprise system. The government plays a significant role in
preserving capitalist mode of production, ensuring a workable competition in factor and
product markets, providing infrastructure for promotion of private sector economic activities.
• Mixed Socialist Economies
To the category of the Mixed Socialist Economies belong the countries which have adopted
“socialist pattern of society: and economic planning as he means of growth and social justice
(e.g. India) and the former communist countries (eg. Russia and china) which have of late
carried out drastic economic reforms and liberalized their economies for private
entrepreneurship. The government of these countries takes upon themselves to control and
regulate the private sector activities in accordance with the plan objectives.