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