1 Components of Business Environment

Economic Environment of Business-1

INTRODUCTION TO BUSINESS ENVIRONMENT

&Components of Business Environment

1Economi Environment of Business 2/2 A.N.Charlu

ECONOMIC ENVIRONMENT OF BUSINESS-1

Meaning & Classification

EEB - Introduction

• Every business operates in a particular environment and each business unit has its own environment

• Change in Eco Env presents opportunity to some and threat to others.

• Change in tariff rates have changed the toy industry of India with the market now being dominated by Chinese products

• Slight change in RBI’s monetary policy can increase or decrease interest rates in the market

• A slight shift in the government’s fiscal policy can shift the whole demand curve towards the right or the left

EEB – Introduction..• HUL took advantage of the new takeover and merger code and acquired

brands like– Kissan from UB group– Tomco (Tata Oil Mills Co) and Lakme from Tata and – Modern Foods from Govt

• The New Moguls of Indian business are those who predicted the changes in the environment

– Azim Premzi of Wipro– Narayan Murthy of Infosys– Subhash Goyal of Zee– Ambanis of Reliance– L.N. Mittal of Mittal Steel– Sunil Mittal of Bharti– Kishore Biyani of Future Group

EEB – Introduction..• Even a small business man who plans to open a small shop as a general

merchant in his own town needs to study the environment before deciding

– Where he wants to open– Products intended to sell– Brands to stock

• Relation between a business and an environment is not one way affair.• Business also influences the external environment and bring about

changes in it.• Successful business does not look at the env on an ad hoc basis but

develops a system to study the env on a continuous basis to try and protect the business from every possible threat and to take advantage of every possible opportunity

• Turning a threat into an opportunity is also possibility if environment is keenly studied




• Relation between a business and an environment is not one way affair.• Business also influences the external environment and bring aobut







• Relation between a business and an environment is not one way affair.• Business also influences the external environment and bring about




EEB – Meaning• Env literally means the surrounds, external objects, influences or

circumstances under which some or something exists.• Environment of any organization is

– The aggregate of all conditions, events and influences and– Surround and affect it

• All external forces that have a bearing on the functioning of a business• Bus Env is not just economic env but also about the social and political

env as well• Social Env and Demographic Env is also part of Bus Env• Cultural Env and changes in it, besides the prevailing International Env

also influences the Bus Env

EEB – Classification• Internal Environment

– Culture and Value System– Mission and Objectives– Management Structure and Nature– Human Resource

• Macro Environment– Political Environment– Regulatory and Legal Environment– Demographic– Socio Culture– Technological

• Global Environment• National Competitive Advantage• Micro Environment

Introduction to Business Environment-2• Components of Business Environment

– Microeconomic Environment• Direct (Customers, Intermediaries, Suppliers, Employees, Financial

Stakeholders, Competitors)• Indirect (Government, Community, Pressure Groups etc)

– Mesoeconomic Environment• What is Mesoeconomics?• Industry Forces

– Macroeconomic environment• Economic, Social, Technological, Legal, Political, Ethical, Ecological

facilitating and/or binding the business units

• Environment Turbulence and the need for adaptation/change in business decision making


Microeconomic Environment- Direct Stakeholders

• Direct (Stakeholders-Resource Providers)– Customers– Intermediaries– Suppliers– Employees– Financial Stakeholders– Competitors

Economi Environment of Business 2/2 A.N.Charlu 11

Micro Firm –Stakeholder Relationships


Stakeholder – Suppliers (1/6)• Key determinant of availability, delivery times and quality of the product• Cost of materials are an important factor in the total cost of many

products• Supply chain may have many links back to primary producers and be

susceptible to disruption• Relative power of suppliers is often critical and depends on size,

substitutes and degree of actual competition between them• Quality of the supplier relationship is a crucial parameter in marketing

effectiveness• Suppliers can assume the stockholding function allowing maximum space

for selling operations• If partnership fails to deliver marketing benefits, backward integration

may be considered.

Stakeholder – Competitors (2/6)• Exceptions in the micro-environment. They continuously threaten rather

than contribute to the survival of the firm• No business can make decisions without reference to its competitive

environment• Even a monopoly must be concerned about potential entrants or effective

substitutes• Pricing must account for what the market will bear and the reactions of

competitors• The more competitors there are and the closer their product offering the

more sensitively will sales respond to a relative change in price• Price wars may erupt from time to time but non-price competition using

banding and other product and promotional tactics are the norm

Stakeholder – Customers (3/6)

• Customers are the final link in the input-output chain• Customers are the only source of revenue for most

organizations• If they withdraw or transfer their customer to a competitor

then survival is threatened• A dissatisfied customer tells many more of the experience

than does a satisfied one• Customer retention is normally more cost effective than

recruiting new ones due to the life-time revenue stream that is often involved

• Customers are looking for value for money.• Value: Satisfaction derived from consumption of the product

and its relative price

Stakeholder – Intermediaries/Distributors (4/6)

• Firms do not sell directly and uses marketing channel • Power and position of intermediaries is significant for survival of

the firm• Distributors who are ineffective in delivering the product to the

customer as, where and when they want it will negatively impact on the business

• Effective partners deliver advantage in the form of transport, stock management, market knowledge, merchandizing and display, together with after sales service

• The marketer must communicate with both the final customer and the distributor(s) delivering the product to this end user

• Distributors have economic leverage arising from their strategic position

• Distributors have mutual interests in common to form the basis of joint ventures and partnerships

Stakeholder – Shareholders (5/6)• Shareholders provide longer-term capital • Clear and timely communication with shareholders

based on an understanding of their needs is required• Adverse shareholder perceptions may lead to selling

which drives down the market valuation of the company relative to its net asset value. This causes risk of unwelcome take-over bids

• Trade and bank credit are critical to maintaining a healthy cash flow. Relationships with both must be nurtured and improved

• The public image of the business is largely the responsibility of marketing

Stakeholder – Employees (6/6)• Employees contribute their time and skills for monetary and other

rewards• They are affected by company activities. They represent wider society and

reflect the values and beliefs found there.• Retention of skilled staff is normally more cost effective than the

uncertainties of recruitment• Image of organization is an important determinant in the quality of

applicant attracted• Business will attract the caliber of employees it deserves• Employees is central to achievement of goals• They can unionize, adversely affect productivity, leave or have equally

positive effects on company fortune

Micro Environment – Indirect Stakeholders

• Indirect Stakeholders:– Government– Community– Pressure Groups

• Indirect or external stakeholder groups are not directly engaged in the business

• These groups exert influence on and be seriously affected their activities

• All stakeholders may not have same degree of power and influence


Indirect Stakeholders - Government – 1/3• Local Government:

– Interested in its investment– Creation of jobs by the business unit– Creation of prosperity / wealth for the society– Revenue contribution– Prestige the organization generates locally– Compliances under different laws

• Central Government:– Holds controlling influence over many public sector organizations and hence

direct stakeholders– Make, interpret and enforce laws, monitor compliance, levy taxes and

implement economic policies– Provide infrastructure, spend, protect, subsidize, rescue and restructure– Seeks influence through trade associations, lobbying, provision of information,

joint projects and even political donations


• Concerned with property values• Quality of life, jobs and prosperity• Links with local schools and charitable

activities• Can protest, mobilize the media, obstruct

planning applications etc


Indirect Stakeholders - Community – 1/3

• Consider Environment Groups– Can protest, resist development and

generate considerable media attention (eg: Protest against coastal corridor, Silent valley of Kerala)

– Demands cut in redtapism and regulations– Clamour for more jobs and improved

competitiveness


Indirect Stakeholders – Pressure Groups – 1/3

Mesoeconomic Environment- What is it?


• Mesoeconomics is used to describe the study of economic arrangements which are not based either on the microeconomics of buying and selling and supply and demand, nor on the macroeconomic reasoning of aggregate totals of demand, but on the importance of under what structures these forces play out, and how to measure these effects.

Meso Economics – Further Explained• Economics is the study of the economic system, and a market• capitalist economy is an evolutionary system.• So, why not use evolutionary and complex systems theory for

economic analysis?– Option 1: Existing framework, but with evolutionary extensions– Option 2: New framework

• Micro Meso Macro is Option 2• But a new framework means a new theory to conclude new• theoretical and empirical analysis. This is based about meso.


Relevance of Meso Economics to Business Environment

The problemHow to analyse economic coordination and change in a way that is useful for

the study of growth and development, technological and institutional change, market and price dynamics?

The problem is that micro-macro is no good. Why? Because it cannot analyse the process of change as it actually happens, through changing connections and changing populations.

Micro sums to macro is static and without structure (also without knowledge as interactions and populations). It does not deal with populations, networks, structures or processes.

For analysis of economies as evolving complex adaptive systems, we need to start with what exists and what changes


Meso Economics – Meaning • Economic systems are made of rules• Rules are the elements of meso.• A meso is a rule and its population of

actualizations.• The complexity of an economic system resides

in – the variety of the actualizations (meso population)– the micro systems (of actualizations) and – the macro systems (of meso)



Meso Economics: Example- the bicycle ‘rule’


Meso Trajectory


Complex System of Meso• Economic evolution is the process by which a novel generic

rule enters the economic systemSystems of meso rules carried by agents : micro-economicsChanging population of rule actualizations : meso-economicsThe system of meso populations of rules : macro-economics

The emergent rule and its growing population (meso trajectory)

Micro structure and dynamics of agents carrying rules (meso systems)

Macro structure and dynamics of rule populations (systems of meso)


Three-Phase Meso Trajectory• Phase 1:• Origination of a novel generic rule. The origination phase is that

where the rule enters into existence (changing the dimensionalityof the system) by entrepreneurial imagination or consumerexperimentation.

• Phase 2:• Adoption and adaptation of the rule in a population of carriers.

The adoption phase is the communication of the rule to other carriers, who then adopt the rule. The population of the rule changes from one to many.

• Phase 3:• Retention and maintenance of that rule in a population of carriers.

Retention is where the carriers stabilize the rule for ongoing use.This is where behavioural routines and social institutions form.


Meso Economics: Industry Forces• Industries may involve

– new products– new consumers– new expectations – new organizations – new interactions– new markets – new laws – new competitions– new institutions and – perhaps all of these at once.


Macroenvironment• Macro-environment is generally understood as the “far”

environment (outside an organization’s industry and markets)

Characteristics of the Macroenvironment

• Influences the micro-environment (industry and market)

• Will impact all organizations in an industry, a market, or even all organizations in an economy

• Source of competitive advantage – being able to predict changes in the macro environment and take action

The PEST Analysis

• A scan of the external macro-environment in which the firm operates can be expressed in terms of the following factors:

• Political • Economic • Social • Technological

35

Political Factors• Political factors include government

regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include:

• Tax policy • Employment laws • Environmental regulations • Trade restrictions and tariffs • Political stability

36

Political-Legal

• Organizations must operate within a framework or guideline based on national ideology.

• Regulation and policies reflect governmental ideology.

• Relating to organizations encompass subsidies, tariffs, quotas, and deregulation of industries.

37


Economic Factors• Economic factors affect the

purchasing power of potential customers and the firm's cost of capital. The following are examples of factors in the macro-economy:

• Economic growth • Interest rates • Exchange rates • Inflation rate

39

Economic Factors

• The economic environment consists of factors that affect consumer purchasing power and spending patterns

• Economic factors include inflation, income level and its distribution, unemployment, business cycles

• Changes in major economic variables have a significant impact on the marketplace.

40

Socio-cultural Factors

• Social factors include the demographic and cultural aspects of the external macro-environment. These affect customer needs and the size of potential markets. Some social factors include:

• Health consciousness • Population growth rate • Age distribution • Career attitudes • Emphasis on safety

41

Socio-Cultural Influences

• Social environment is a demographic aspect.

• Demography concerns population size, family structure, age distribution.

• Important variables indicating consumer base on which marketing firms target.

• Changes in the demographic aspects can result in significant problems for firms.

42

Technological Factors

• Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Some technological factors include:

• R&D activity • Automation • Technology incentives • Rate of technological change

43

Technological Environment

• The technological environment refers to new technologies, processes, materials, which create new or better product and market opportunities.

• Technology has a tremendous effect on life-styles, consumption patterns, and the economy.

• It is a driving force for changing every aspects of world and people at a fast pace

44


Impact of Technology


Environment TurbulenceWinds of Change Blow Through the Organisation

Organisations can be seen as systems operating in multidimensional environments.

For some organisations, the winds of change are strong, gusty, variable, swirling.

The next slide may not fully represent the possible turbulence in the external, temporal and internal environments.

47

48

THE ORGANISATION

Formal Sub-System

management

goals strategy

structure operations

technology

leadership culture politics

Informal Sub-SystemInformal Sub-System

political-legal

influences

economic influences

socio-cultural influences

technological influences INTERNAL ENVIRONMENT

EXTERNAL ENVIRONMENTEXTERNAL ENVIRONMENT

The organisational system operating in multidimensional environments

ecological influences

TEMPORAL ENVIRONMENT

49

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 (Eg.Entry of Japanese firms into US & Sony)

The greater the level of turbulence, the stronger the forces are for change

50

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

WEAK FORCES FOR CHANGE

51

Types of Change Situation

Closed change. When explaining this type of change, people involved in it would readily be able to agree on, and describe, what happened, why it happened, what the consequences were, and how the business has been affected.

Contained change. When explaining this type of change, people involved in it would only be able to say what probably happened, what the probable causes, consequences and business implications may be.

Open-ended change. When explaining this type of change, people involved in it would have different and possibly conflicting accounts and explanations of what happened, why it happened, and what its consequences and implications are.

Degree of Certainty

FAR FROM CERTAINTY

CLOSE TO CERTAINTY

52

• Organisations operate in multiple environments• The key tasks for organisations is to achieve external

adaptation and internal integration• Organisations need to be ‘quick on their feet’ to

anticipate opportunities and threats and respond wisely to unpredictable surprises

• This requires understanding how the formal organisational subsystem responds to the external, internal and temporal environments

• It also requires understanding the informal subsystem

Documents

1 Components of Business Environment