26-06-2012, 11:54 AM
The Economic factors affecting business environment
Business, now-a-days is vitally affected by the economic, social, legal, technological and political factors. These factors collectively form business environment. Business environment, as such, is the total of all external forces, which affect the organisation and operations of business. The environment of an organisation has got internal, operational and general lives managers must be aware of these three environmental levels and their relationship and importance.
The term 'business environment implies those external forces, factors and institutions that are beyond the control of individual business organisations and their management and affect the business enterprise. It implies all external forces within which a business enterprise operates. Business environment influence the functioning of the business system. Thus, business environment may be defined as all those conditions and forces which are external to the business and are beyond the individual business unit, but it operates within it. These forces are customer, creditors, competitors, government, socio-cultural organisations, political parties national and international organisations etc. some of those forces affect the business directly which some others have indirect effect on the business.
Business environment as such are classified into the following three major categories, they are:
• Internal environment
• Operational environment
• General/external environment
Both internal and operational environment are the creation of the enterprise itself. The factors of external or general environment are broad in scope and least controlled and influenced by the management of the enterprises.
Now we discuss those factors in details as below:
Economic dimensions of environment
Economic environment refers to the aggregate of the nature of economic system of the country, the structural anatomy of the economy to economic policies of the government the organisation of the capital market, the nature of factor endowment, business cycles, the socio-economic infrastructure etc. The successful businessman visualizes the external factors affecting the business, anticipating the prospective market situations and makes suitable to get the maximum with minimize cost.
Social dimensions or environment
The social dimension or environment of a nation determines the value system of the society which, in turn affects the functioning of the business. Sociological factors such as costs structure, customs and conventions, cultural heritage, view toward wealth and income and scientific methods, respect for seniority, mobility of labour etc. have far-reaching impact on the business. These factors determines the work culture and mobility of labour, work groups etc. For instance, the nature of goods and services to be produced depends upon the demand of the people which in turn is affected by their attitudes, customs, so as cultural values fashion etc. Socio-cultural environment determines the code of conduct the business should follow. The social groups such as trade unions or consumer forum will intervene if the business follows the unethical practices. For instance, if the firm is not paying fair wages to its business in indulging in black marketing or adulteration, consumers forums and various government agencies will take action against the business.
Political environment
The political environment of a country is influenced by the political organisations such as philosophy of political parties, ideology of government or party in power, nature and extent of bureaucracy influence of primary groups etc. political stability in the country, foreign policy, Defence and military policy, image of the country and its leaders in and outside the country. The political environment of the country influences the business to a great extent. For instance, the Government of India, bottling and sale of cocoa-cola was discontinued in India in the late seventies following policy of restricting the growth of multinationals in Indian markets. But, its entry was allowed under the New Industrial policy of 1991. Under this new policy, government allowed liberalized licensing, imports and exports, inflow of foreign capital and technology on more liberal terms. The trend towards globalization and signing of GATT in 1993 have posed new challenges before Indian business.
Legal regulatory environment
Legal environment includes flexibility and adaptability of law and other legal rules governing the business. It may include the exact rulings and decision of the courts. These affect the business and its managers to a great extent. For instance, in 1992, the Supreme Court ordered the closure of a number of tanneries in Kanpur as they were polluting Holi Ganga. In August 1993 several foundries around the famous Taj Mahal were ordered to be closed down because of air-pollution caused by them had adverse impact on the whiteness of Taj Mahal.
Technical environment
The business in a country is greatly influenced by the technological development. The technology adopted by the industries determines the type and quality of goods and services to be produced and the type and quality of plant and equipment to be used. Technological environment influences the business in terms of investment in technology, consistent application of technology and the effects of technology on markets. In India, advancements in automation and information technology have posed the challenging situation for the organisation in future.
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relationships with organizations encompass subsidies, tariffs, import quotas, and deregulation of industries.The political environment includes governmental and special interest groups that influence and limit variousorganizations and individuals in a given society. Organizations hire lobbyists to influence legislation and runadvocacy ads that state their point of view on public issues. Special interest groups have grown in numberand power over the last three decades, putting more constraints on marketers. The public expectsorganizations to be ethical and responsible.
n example of response by marketers to special interests isgreen marketing, the use of recyclable or biodegradable packing materials as part of marketing strategy.The major purposes of business legislation include protection of companies from unfair competition,protection of consumers from unfair business practices and protection of the interests of society fromunbridled business behavior. The legal environment becomes more complicated as organizations expandglobally and face governmental structures quite different from those within the United States.4.
emographic Environment
emographics tell marketers who current and potential customers are; where they are; and how many arelikely to buy what the marketer is selling.
emography is the study of human populations in terms of size,density, location, age, sex, race, occupation, and other statistics.
hanges in the demographic environmentcan result in significant opportunities and threats presenting themselves to the organization. Major trendsfor marketers in the demographic environment include worldwide explosive population growth; a changingage, ethnic and educational mix; new types of households; and geographical shifts in population.5. Social /
ultural EnvironmentSocial/cultural forces are the most difficult uncontrollable variables to predict. It is important for marketersto understand and appreciate the cultural values of the environment in which they operate. The culturalenvironment is made up of forces that affect society's basic values, perceptions, preferences, and behaviors.U.S. values and beliefs include equality, achievement, youthfulness, efficiency, practicality, self-actualization, freedom, humanitarianism, mastery over the environment, patriotism, individualism, religiousand moral orientation, progress, materialism, social interaction, conformity, courage, and acceptance of responsibility.
hanges in social/cultural environment affect customer behavior, which affects sales of products. Trends in the cultural environment include individuals changing their views of themselves, others,and the world around them and movement toward self-fulfillment, immediate gratification, and secularism.6. Ecosystem EnvironmentThe ecosystem refers to natural systems and its resources that are needed as inputs by marketers or thatare affected by marketing activities.
reen marketing or environmental concern about the physicalenvironment has intensified in recent years. To avoid shortages in raw materials, organizations can userenewable resources (such as forests) and alternatives (such as solar and wind energy) for nonrenewableresources (such as oil and coal). Organizations can limit their energy usage by increasing efficiency.
oodwill can be built by voluntarily engaging in pollution prevention activities and natural resource.External MicroenvironmentThe external microenvironment consists of forces that are part of an organization's marketing process butare external to the organization. These micro environmental forces include the organization's market, itsproducer-suppliers, and its marketing intermediaries. While these are external, the organization is capableof exerting more influence over these than forces in the macro environment.1. The MarketOrganizations closely monitor their customer markets in order to adjust to changing tastes and preferences.
market is people or organizations with wants to satisfy, money to spend, and the willingness to spend it.Each target market has distinct needs, which need to be monitored. It is imperative for an organization toknow their customers, how to reach them and when customers' needs change in order to adjust itsmarketing efforts accordingly. The market is the focal point for all marketing decisions in an organization.2. SuppliersSuppliers are organizations and individuals that provide the resources needed to produce goods andservices. They are critical to an organization's marketing success and an important link in its value deliverysystem.3. Marketing IntermediariesLike suppliers, marketing intermediaries are an important part of the system used to deliver value tocustomers. Marketing intermediaries are independent organizations that aid in the flow of products from themarketing organization to its markets. The intermediaries between an organization and its markets
constitute a channel of distribution. These include middlemen (wholesalers and retailers who buy and resellmerchandise).
hysical distribution firms help the organization to stock and move products from their pointsof origin to their destinations. Warehouses store and protect the goods before they move to the nextdestination. Marketing service agencies help the organization target and promote its products and includemarketing research firms, advertising agencies, and media firms.
inancial intermediaries help financetransactions and insure against risks and include banks, credit unions, and insurance companies.Importance of understanding the environmentThe managers job cannot be accomplished in a vacuum within the organization. There are a number of factors both internal as well as external which jointly affect managerial decision-making. It is therefore veryimportant for the manager to understand and evaluate the impact of the business environment due to thefollowing reasons :a)Businesses may be doomed to be non starters due to restrictive business environment which may take theform of rigid government laws ( no polluting industry can ever be located in around 50 Km radius of the Taj), state of competition (
ar manufacturing capacity presently in the country is far in excess of demand) etc.b)The present and future viability of an enterprise is impacted by the environment
or eg no TVmanufacturer can be expected to survive by making only B&W television sets when consumer preferencehas clearly shifted to colour television sets.c)The cost of capital and the cost of borrowing - two key financial drivers of any enterprise are impacted bythe external environment .
or eg the ability of a business to fund its expansion plan by raising money fromthe stock markets depends on the prevalent public mood towards investment in stock markets.d)The availability of all key inputs like skilled labour , trained managers , raw materials , electricity ,transportation , fuel etc are a factor of the business environment.e)Increasing public awareness of the negative aspects of certain industries like hand woven carpets ( use of child labour ) , pesticides (damage to environment in the form of chemical residues in groundwater), plasticbags (choking of sewer lines) have resulted in the slow decline of some industries.f)
inally , the environment offers the opportunities for growth and profits .
or eg when the insurance andaviation industry was thrown open to the private sector , the new entrant could easily build on theexpectations of the public.
hanging profile of Indian economic environmentIndia gained independence in 1947 paving the way for national leaders of the Indian
overnment to build aneconomically independent new India.
olicies between 1950-70 were implemented with a sincere belief inthe efficacy of the socialist philosophy and political democracy. Heavy investment by government in Steelplants, atomic energy, hydroelectric power and irrigation projects laid the foundation of a strong industrialedifice. The non-aligned movement at a time when the world was divided into two power blocks with coldwar between the Super-powers, prevented India from becoming a satellite of any other nation and enabledit to protect Its economy and the Indian
opulation.Indian economy has made great strides in the years since independence. In 1947 the country was poor andshattered by the violence and economic and physical disruption involved in the partition from
akistan. Theeconomy had stagnated since the late nineteenth century, and industrial development had been restrainedto preserve the area as a market for British manufacturers. In fiscal year (
1950, agriculture, forestry,and fishing accounted for 58.9 percent of the gross domestic product (
GDP
and for a much largerproportion of employment. Manufacturing, which was dominated by the jute and cotton textile industries,accounted for only 10.3 percent of
GDP
at that time.India's new leaders sought to use the power of the state to direct economic growth and reduce widespreadpoverty. The public sector came to dominate heavy industry, transportation, and telecommunications. Theprivate sector produced most consumer goods but was controlled directly by a variety of government
regulations and financial institutions that provided major financing for large private-sector projects.
overnment emphasized self-sufficiency rather than foreign trade and imposed strict controls on importsand exports. In the 1950s, there was steady economic growth, but results in the 1960s and 1970s were lessencouraging.Beginning in the late 1970s, successive Indian governments sought to reduce state control of the economy.
rogress toward that goal was slow but steady, and many analysts attributed the stronger growth of the1980s to those efforts. In the late 1980s, however, India relied on foreign borrowing to finance developmentplans to a greater extent than before.
s a result, when the price of oil rose sharply in
ugust 1990, thenation faced a balance of payments crisis. The need for emergency loans led the government to make agreater commitment to economic liberalization than it had up to this time. In the early 1990s, India's post-independence development pattern of strong centralized planning, regulation and control of privateenterprise, state ownership of many large units of production, trade protectionism, and strict limits onforeign capital was increasingly questioned not only by policy makers but also by most of the intelligentsia.But too much of protection from the
overnment had its own disadvantages. Our quality standards were notin tune with international competition. It had produced more traders than industrialists. It was high timethat Indian economy became more open and entered the international market.India embarked on a series of economic reforms in 1991 in reaction to a severe foreign exchange crisis.Those reforms have included liberalized foreign investment and exchange regimes, significant reductions intariffs and other trade barriers, reform and modernization of the financial sector, and significant adjustmentsin government monetary and fiscal policies.The reform process has had some very beneficial effects on the Indian economy, including higher growthrates, lower inflation, and significant increases in foreign investment.
oreign portfolio and direct investmentflows have risen significantly since reforms began in 1991 and have contributed to healthy foreign currencyreserves ($32 billion in
ebruary 2000) and a moderate current account deficit of about 1% (1998-99).India's economic growth is constrained, however, by inadequate infrastructure, cumbersome bureaucraticprocedures, and high real interest rates. India will have to address these constraints in formulating itseconomic policies and by pursuing the second generation reforms to maintain recent trends in economicgrowth.India's trade has increased significantly since reforms began in 1991, largely as a result of staged tariff reductions and elimination of non-tariff barriers. The outlook for further trade liberalization is mixed. Indiahas agreed to eliminate quantitative restrictions on imports of about 1,420 consumer goods by
pril 2001 tomeet its WTO commitments. On the other hand, the government has imposed "additional" import duties of 5% on most products plus a surcharge of 10% over the past 2 years. The U.S. is India's largest tradingpartner; bilateral trade in 1998-99 was about $10.9 billion.
rincipal U.S. exports to India are aircraft andparts, advanced machinery, fertilizers, ferrous waste and scrap metal, and computer hardware. Major U.S.imports from India include textiles and ready-made garments, agricultural and related products, gems and jewelry, leather products, and chemicals.Significant liberalization of its investment regime since 1991 has made India an attractive place for foreigndirect and portfolio investment. The U.S. is India's largest investment partner, with total inflow of U.S. directinvestment estimated at $2 billion (market value) in 1999. U.S. investors also have provided an estimated11% of the $18 billion of foreign portfolio investment that has entered India since 1992.
roposals for directforeign investment are considered by the
oreign Investment
romotion Board and generally receivegovernment approval.
utomatic approvals are available for investments involving up to 100% foreignequity, depending on the kind of industry.
oreign investment is particularly sought after in powergeneration, telecommunications, ports, roads, petroleum exploration and processing, and mining.
s India moved into the mid-1990s, the economic outlook was mixed. Most analysts believed that economicliberalization would continue, although there was disagreement about the speed and scale of the measuresthat would be implemented. It seemed likely that India would come close to or equal the relativelyimpressive rate of economic growth attained in the 1980s, but that the poorest sections of the populationmight not benefit.In the recent past, India has witnessed changes in several critical factors strengthening its economy. Withglobalisation becoming the key word of the 90's, it seems to have paved the way for India's entry in worldmarkets. Economic reforms have been initiated to facilitate stabilisation and structural -adjustmentsessential for the growth of the economy