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Dr. U.B. Raju
*Compiled from different published sources
*Strictly for academic purpose and for restricted private circulation
Economic Environment of Business
Credit: 1
What is a Business?Actually facing challenges
Transformation of a set of inputs into a set of outputs thereby creating economic value.
Input(s) Transformation Output(s)
Typology of Businesses
• ‘FORM’ based economic value
• ‘PLACE’ based economic value
• ‘POSSESSION’ based economic value
• ‘STATE’ based economic value
Transformation Process
Sources Resources Outputs Outcomes
Human
System
Eco System
Durability of products
Service intensity of Goods and Services
Lifecycle approach and evaluation of C-Bs.
Material intensity
Energy intensity
Use of renewable sources
3Rs
Reduce
Reuse
Recycle
© ubrajuConcept of Extended-Business
Sink
wastes Seekers
Definition of business
The term business is understood and explained in different ways by different people.
For some, business is an activity, for some it is a method of transacting, for some others, it is a method of money making and some people argue that business is an organized activity to achieve certain pre-determined goals or objectives
Dictionary meaning of business is: the act of buying and selling of goods and services, commerce and trade.
Based on all these meanings of justness, we may define business as: gainful activity through which various elements of society conduct exchanges of the desirable things.
But now a days, business is viewed more as a profession or occupation.
From the days of family owned business, we have reached a stage of professionals and experts starting and running business. It could also be noted that business administration and business management have emerged as the most prospective field of study and occupation. Unlike the olden days, a number of interests are involved in business today, viz. owners, investors in business, suppliers, customers, employees, government, stake holders, administrators, managers, strategists, executives, and so many others. Hence, every business activity has to meet the goals or aims or objectives of these various groups of people. That in fact, has made business a most complicated activity.
•Business is an economic activity•A business organization is an economic unit•Business decisions making is essentially an economic process •Changing concept of business
BUSINESS ENVIRONMENT
Business involves activities, which links an organization with outside world. Within an organization, a business is governed by the behaviour of its employees, management or decision makers. But externally a business is influenced by a score of factors, which range from customers to competitors and government. Therefore, a business cannot be independent of the influence of these external factors. It should also be noted that a business has absolute control over all the internal factors, it has no control over the external factors. So often it becomes necessary for business houses to modify their internal decisions and policies, on the basis of the pressure from external factors This highlights the need to be ever-cognizant of changes and influences of external factors so as to conduct business on healthy lines. It is in this context that business environment assumes all significance. Business environment therefore refers to the influences and pressures exerted by external factors on the business. The following Figure would help to understand the various factors which constitute the business environment.
What Is Business Environment?
Meaning: - The term Business Environment is composed of two words ‘Business’ and ‘Environment’.
In simple terms, the state in which a person remains busy is known as Business. The word ‘Business’ in its economic sense means human activities like production, extraction or purchase or sales of goods that are performed for earning profits.
On the other hand, the word ‘Environment’ refers to the aspects of surroundings.
Therefore, Business Environment may be defined as a set of conditions – Social, Legal, Economical, Political or Institutional that are uncontrollable in nature and affects the functioning of organization.
BE-Classification Overview
Time Space Market Forces Influencing Factors
Past Local Demand Economic
Present Regional Supply Non-economic
Future National
International
Macro/Meso/Micro
Internal/External
Business Environment has two components:1. Internal Environment2. External Environment
Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management, usually within the control of business. Business can make changes in these factors according to the change in the functioning of enterprise.
External Environment: Those factors which are beyond the control of business enterprise are included in external environment. These factors are: Government and Legal factors, Geo-Physical Factors, Political Factors, Socio-Cultural Factors, Demo-Graphical factors etc.
It is of two Types:1. Micro/Operating Environment2. Macro/General Environment
Micro/Operating Environment: The environment which is close to business and affects its capacity to work is known as Micro or Operating Environment. It consists of Suppliers, Customers, Market Intermediaries, Competitors and Public.(1) Suppliers: – They are the persons who supply raw material and required components to the company. They must be reliable and business must have multiple suppliers i.e. they should not depend upon only one supplier.(2) Customers: - Customers are regarded as the king of the market. Success of every business depends upon the level of their customer’s satisfaction. Types of Customers:(i) Wholesalers(ii) Retailers(iii) Industries(iv) Government and Other Institutions(v) Foreigners(3) Market Intermediaries: - They work as a link between business and final consumers. Types:-(i) Middleman(ii) Marketing Agencies (iii) Financial Intermediaries(iv) Physical Intermediaries(4) Competitors: - Every move of the competitors affects the business. Business has to adjust itself according to the strategies of the Competitors.(5) Public: - Any group who has actual interest in business enterprise is termed as public e.g. media and local public. They may be the users or non-users of the product.
Macro/General Environment: – It includes factors that create opportunities and threats to business units. Following are the elements of Macro Environment:
(1) Economic Environment: - It is very complex and dynamic in nature that keeps on changing with the change in policies or political situations. It has three elements:(i) Economic Conditions of Public(ii) Economic Policies of the country(iii)Economic System(iv) Other Economic Factors: – Infrastructural Facilities, Banking, Insurance companies, money markets, capital markets etc.
(2) Non-Economic Environment: - Following are included in non-economic environment:-(i) Political Environment: - It affects different business units extensively. Components:(a) Political Belief of Government(b) Political Strength of the Country(c) Relation with other countries(d) Defense and Military Policies(e) Centre State Relationship in the Country(f) Thinking Opposition Parties towards Business Unit
(iii) Technological Environment: - A systematic application of scientific knowledge to practical task is known as technology. Everyday there has been vast changes in products, services, lifestyles and living conditions, these changes must be analysed by every business unit and should adapt these changes.
(iv) Natural Environment: - It includes natural resources, weather, climatic conditions, port facilities, topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors before choosing the location for their business.
(v) Demographic Environment :- It is a study of perspective of population i.e. its size, standard of living, growth rate, age-sex composition, family size, income level (upper level, middle level and lower level), education level etc. Every business unit must see these features of population and recongnise their various need and produce accordingly.
(vi) International Environment: - It is particularly important for industries directly depending on import or exports.
The factors that affect the business are: Globalisation, Liberalisation, foreign business policies, cultural exchange.
Characteristics:-1. Business environment is compound in nature.2. Business environment is constantly changing process.3. Business environment is different for different business units.4. It has both long term and short term impact.5. Unlimited influence of external environment factors.6. It is very uncertain.7. Inter-related components.8. It includes both internal and external environment.
The Organization in its Environment
Business Decision
Internal Environment
Mission / ObjectivesManagement StructureInternal Power RelationshipPhysical Assets & facilities
Company imageHuman resourcesFinancial CapabilitiesTechnological CapabilitiesMarketing Capabilities
FinanciersSuppliersCustomersCompetitorsPublicMktg Intermediaries
Micro Environment
EconomicTechnologicalGlobalDemographicSocio-CulturalPolitical
Macro Environment
BUSINESS ENVIRONMENT
Internal Environment
• Any business has certain vision, mission and objectives and a strategy to achieve them. Formulation of strategy is defined as establishing a proper firm-environment fit. Indeed the objectives should be based on an assessment of the external environment and the organizational factors (internal environment).
• Vision• Mission• Objectives• Management Structure• Human Resources• Financial Factors• Company Image and Brand Equity
• The macro environment consists of factors which are beyond the control of the business. There is a symbiotic relationship between business and the environmental factors, environmental factors are dynamic and a particular business firm, by itself, may not be in a position to change it’s environment. Macro Environment includes:
• Political Environment• Economic Environment• Technological Environment• Socio-cultural Environment• Global Environment.
Macro Environment
Micro Environment
The Micro environment consists of different types of stakeholders - customers, employees, suppliers, marketing intermediaries, competitors. It is also known as the Task Environment and Operating Environment and has a direct bearing on the operations of the firm. Changes in the micro environment will directly affect and impinge on the firm's activities.
PESTEL – LoNGPESTEL Analysis
LOCAL NATIONAL GLOBAL
POLITICAL Provision of services by local council
Government policy on subsidies
World trade agreements e.g. free trade agreements
ECONOMIC Local income Interest rates Overseas economic growth
SOCIAL Local population growth Demographic change (e.g. ageing population)
Migration flows
TECHNO-LOGICAL Improvements in local technologies e.g. availability of Digital TV
Country-wide technology International technological breakthroughs e.g. internet
ENVIRON-MENTAL Local waste issues Environmental Laws,weather
Global climate change
LEGAL Local licences/planning permission
Changes in law International agreements on human rights/IPRs
Technological Environment
• Technological is the systematic application of scientific or other organized knowledge to practical tasks.
• Technological environment hold new technological innovation, new products, the state of technology, the utilization of technology for maximum inputs and outputs, the obsolescence of technology and the dynamic changes that frequently occur in technologies which enable firms to get a competitive advantage
• Technology reaches people through business • Helps in increased productivity• Business needs to spend on R & D and keep up with the technological
advances around them• Technology leads to introduction of new products and older products
becoming outdated and redundant.• Technological advances leads to high expectations of consumers in terms of
quality• Leads to system complexity• Demand for capital
Political EnvironmentPolitical Environment refers to the influence exerted by the three political
institutions ie. legislature, executive and judiciary in shaping, directing, developing and controlling business activities.
• The constitution of a country
• Political Organisation
• Political Stability
• Image of the country and its leaders
• Foreign Policy
• Laws governing business
• Flexibility and adaptability of laws
• The Judicial System
AN ORGANIZATION’S ENVIRONMENT
Industry SectorCompetitors,
Industry size and Characteristics, Related
Industries
Raw Materials Sector
Suppliers, Manufacturers, Real Estate
Human Resources Sector
Labor Market, Employment Agencies, Universities, Training Schools, Employees in Other Companies, Unionization
Financial Resources Sector
Stock Markets, Banks,
Savings and Loans,
Private InvestorsMarket Sector
Customers, Clients, Potential Users of Products and Services
Technology Sector
Techniques of Production, Science, Research Centers, Automation, New Materials
Economic Conditions Sector
Recession, Unemployment Rate, Inflation rate, Rate of
Investment, Economics, Growth
Government Sector
City, State, Federal Laws and Regulations, Taxes, Services, Court System, Political Processes
Socio-Cultural sector
Age, Values, Beliefs, Education, Religion, Work Ethic, Urban vs. Rural, Birth Rate
ORGANIZATION
DOMAIN
Task Environment
Macro Environment
Economic Environment
Economic Environment refers to all forces which have an economic impact on Business.
The economic environment consists of the demand dynamics, supply situation, pricing factors, degree of competitiveness, and impact of profitability. It includes the fiscal policy, monetary policy and the taxation policy, the FDI norms, the investment criterion and financing decisions. Economic environment includes:
Growth strategy Industry Agriculture Infrastructure Money and Capital Markets Per capita and national income Population New Economic Policy
.
Global Environment: The global environment refers to those factors which are relevant to business,
such as the WTO principles and agreements; other international conventions/ treaties / agreements / sentiments in other countries etc. For eg hike in crude oil prices has a global impact etc.
• World is becoming one market• Improving quality• Competition from MNCs• Capital and technology transfers• Deciding which markets to enter and what products to manufacture• Adjusting the management process
Socio-Cultural Environment:• Culture creates people• Culture and globalization• Culture determines people’s attitude to business and work.• Caste system• Spirit of collectivism• Education• Ethics in business• Social responsibility• Social audit• Corporate governance
External Environmental AnalysisEnvironmental Analysis has three goals: Provides an understanding of current and potential changes taking place Environmental Analysis should provide input for strategic decision making. Facilitate and lead to strategic decisions within an organization.
Environmental Analysis and diagnosis give strategists time to anticipate opportunities and to plan to take optional responses to these opportunities. It also helps strategists to develop an early warning system to prevent threats or to develop strategies which can turn a threat to a firm’s advantage”. Firms which systematically analyse and diagnose the environment are more effective than those which do not.
Process of Environmental Analysis:The analysis consists of four steps: Scanning : Detect early signals of possible environmental change and detect
environmental change already underway. Monitoring : Purpose of monitoring is to assemble sufficient data to discern whether
certain trends are emerging, identification of the trends and identification of areas for further scanning.
Forecasting : It is concerned with developing projections of the direction, scope and intensity of environmental change.
Assessment : To determine implications for the organisation’s current and potential strategy.
Environmental Analysis and Strategic Management
Defining Business Mission and Objectives
SWOT AnalysisEnvironmental Analysis + Self Appraisal
Strategic Alternatives and Choice of Strategy
Implementation of Strategy
Evaluation and Control of Strategy
POSITIVE/ HELPFULto achieving the goal
NEGATIVE/ HARMFULto achieving the goal
INTERNAL Originfacts/ factors of the
organization
StrengthsThings that are good
now, maintain them, build on them and use as leverage
WeaknessesThings that are bad now,
remedy, change or stop them.
EXTERNAL Originfacts/ factors of the environment in which
the organization operates
OpportunitiesThings that are good for
the future, prioritize them, capture them, build on them and
optimize
ThreatsThings that are bad for
the future, put in plans to manage them or counter
them
Strengths
•Huge pool of skilled/labor force (Highly educated , skilled ,young, capable & dynamic human resources - English speaking & analytical students -World class business-social-spiritual –political leader, Professor, Scientist, Manager-Doctor-Engineer-Civil servants etc•High percentage of cultivable land/abundance of natural resources•Diversified nature of the economy•Extensive higher education system•High growth rate of economy•Rapid growth of IT / ITes Sector•High savings/investment , forex reserves, broad based and growing entrepreneurial class, market size, macro economic and financial stability, language, democracy and political system stability•Biodiversity & Traditional knowledge base •Ideas-Innovation-Integration •Powerful spiritual strength (yoga-Ayurvada-Healing-therapy services)•Geographical location (whole markets are shifting toward Asian nations)•India Strategic position at various platforms•Big democracy, Big market & free media •Range of emerging professional champions
Weaknesses
•High percentage of workforce involved in agriculture•Approx a quarter of population below the poverty line•High unemployment rate•Inequality in prevailing socio economic conditions, rural – urban divide•Low productivity•Huge population leading to scarcity of resources•Low level of mechanization•Red-tapism, Bureaucracy•Low literacy rates•Physical infrastructure, human development indicators, agriculture, shortage of skilled manpower•Lack of trained & skill work force •Small supply of specialize professional•Lack of spirits of entrepreneurship, patriotism and leadership skill •Lack of effective & execution framework•Lack of Indian management models•Lack of transparency-Trust-Responsibility•Lack of Team work spirit•Fear of sharing knowledge & taking risk •Thinking Win-Lose, Lose-Win and Look-outside mentality•Slow absorption of Innovation & change •Absence of greater technology impetus
Opportunities
•Scope for entry of private firms in various sectors of business•Inflow of FDI•Huge foreign exchange prospects in IT / ITeS•Investment in R & D•Area of infrastructure•Huge domestic market : Opportunity for MNCs•Huge agricultural resources•Demographic dividend, knowledge based growth , increased integration with world economy, urbanisation•Big potential market in education Sector & emerging new market Segment in services •General Agreement of trade on Services•Research & Development capability•Generate intellectual property •Resource Building capacity •Competition- cost – Quality service•Collaboration : win-win thinking •Hybrid solution–balancing & blending•Tourism, health sector, food processing•Rural economy development & social transformation ( PURA model )•Need modernization of infrastructure , Library and laboratory
Threats
•High fiscal deficit•Threat of government intervention in some states•Growing import bill•Population explosion, rate of growth of population•Agriculture excessively dependent on monsoon•Global Uncertainty, fiscal deficit, climate change – energy and food security, regional and social inequalities•A feeling of unstable government•Self centered political leadership•Slow & Dysfunctional judiciary and corrupt law enforcers •Regulation, protection and restriction•Mechanistic -stable-Layered-complex system•Corruption, Ignorance & Complacency• High competitive & marketing forces•To patent Indian intellectual property by outsider (unawareness about own research/resources)•Fast change Internet-information technology & new Inventions-Technology-Innovations •Diversity vs. Imbalance- clashes•Regional-Religion-caste-culture conflicts •Migration of all branches to software jobs•Job seeking mind sets, not job creator•Unnecessary social pressure on students
5 Important Characteristics of
Current Business scenario
• Radical, discontinuous and non-linear change
• Doing Right Things
• New Business Models defying traditional boundaries, structures etc.
• Sustainable Organisational competence driven by innovation and Creativity
• Organisational stock of knowledge
Environmental Turbulence
•Environmental turbulence refers to the amount of change and complexity in the environment of a company. •The greater the amount of change in environmental factors, such as technology and governmental regulations, and/or the greater the number of environmental factors that must be considered, the higher the level of environmental turbulence.•For many reasons environmental volatility and instability have been increasing for the past 100 years.
•ENVIRONMENTAL TURBULENCE is characterized by the complexity and novelty of challenges in the business environment, as well as, the rapidity and visibility of upcoming changes.
Responding to Levels of Environmental Turbulence
It has been claimed (Ansoff & McDonnell) that the degree of aggressiveness and responsiveness of an organisation should match the level of turbulence of the organisation’s environment
The greater the level of turbulence, the stronger the forces are for change
Levels of Environmental Turbulence Level 1. Predictable. Stable markets. Pace of
change is slow. Future will be like the past. Level 2. Some complexity, but the environment is
Forecastable by extrapolation. Level 3. More complexity, but at least there are
predictable threats and opportunities. Level 4. Complexity is further increased by the
winds of global and social-political changes, but nonetheless there are partially predictable opportunities.
Level 5. Unpredictable surprises. Unexpected events and situations occur more frequently that the organisation can respond to them.
Amount of Aggressiveness & responsiveness required
STRONG FORCES FOR CHANGE
WEAK FORCES FOR CHANGE
Placid, Placid
Randomised Clustered
Disturbed Turbulent
Randomised Field
The environment of an organisation is ( Emery and Trist) classified in four different categories, where each category has an increased complexity.
The first category is placid and randomised, which is the simplest form and where the organisation can operate without having to adjust to its environment. This category resembles a monopolistic situation.
The second category is the placid and clustered group. In this the organisation needs to consider its environment, but there are hardly any problems in forecasting what is going to happen.
These first two categories describe environments that are non-dynamic, whereas the next two categories characterise the environments as dynamic.
The third category is the disturbed and randomised environment. The organisation has to recognise that there are other actors in its environment. This category can be compared to the oligopolistic market and be exemplified by the early industrial society. This environment is more complex and therefore requires a higher degree of flexibility.
The fourth category is the turbulent field. This field is characterised by high complexity and rapid changes.
UNCERTAINTY IN THE ENVIRONMENT
Stable Dynamic DEGREE OF CHANGE
DEGREE OFHOMOGENEITY
Simple
Complex
Small number of external elements.Elements remain thesame or change slowly
Small number ofexternal elements.Elements are in continuous change
Large number of external elements.Element remain thesame or change slowly
Large number of external elements.Elements are incontinuous change.
UNCERTAINTY IN THE ENVIRONMENT
Stable Dynamic DEGREE OF CHANGE
DEGREE OFHOMOGENEITY
Simple
Complex
LEASTUNCERTAINTY
MODERATEUNCERTAINTY
MODERATEUNCERTAINTY
MOSTUNCERTAINTY
UNCERTAINTY IN THE ENVIRONMENT
Stable Dynamic DEGREE OF CHANGE
DEGREE OFHOMOGENEITY
Simple
Complex
Soft drink bottlers,beer distributors,container manuf.,local utilities
Personal computers,fashion clothing, music industry, toymanufacturers
Universities, hospitals,Insurance companies
Airlines,oil companies, electronic firms, aerospace firms
"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change." - Charles Darwin
Basic Strategies to Cope with Environmental Changes
• Inactive Strategy– Do nothing
• Reactive Strategy– Environment changes first ant then organization
responds to it
• Proactive Strategy– Organization initiates changes and than
environment altered
• Interactive Strategy– Organization and environment are changing
simultaneously in the same direction
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