economic environment.docx

7/29/2019 economic environment.docx

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Generally speaking an environment includes the air we breathe, the water we drink, the

available business, social and educational infrastructure in the locality , state and

country etc. In the context of business the environment refers to the sum of internal and

external forces operating on an organization. The managers must perforce recognize the

elements, severity and impact of these forces on the organization. They must identify,

evaluate and react to the forces triggered by the external environment.

More often than not, these forces are beyond the control of an organization and its

managers. Accordingly, the factors of the environment will need to be considered as

inputs in the planning and forecasting models developed by an organization.

It is quite possible that some large organizations themselves constitute a greater part of

the business environment e.g. Public Sector Oil Companies in India.

An organization operates within the larger framework of the external environment that

shapes opportunities and poses threats to the organization. The external environment isa set of complex, rapidly changing and significant interacting institutions and forces that

affect the organization's ability to serve its customers. External forces are not controlled

by an organization, but they may be influenced or affected by that organization. It is

necessary for organizations to understand the environmental conditions because they

interact with strategy decisions. The external environment has a major impact on the

determination of marketing decisions. Successful organizations scan their external

environment so that they can respond profitably to unmet needs and trends in the

targeted markets.

The Organization as a System

Internally, an organization can be viewed as a resource conversion machine that takes

inputs (labor, money, materials and equipment) from the external environment (i.e., the

world outside the boundaries of the organization), converts them into useful products,

goods, and services, and makes them available to customers as outputs. The

organization must continuously monitor and adapt to the environment if it is to survive

and prosper. Disturbances in the environment may spell profound threats or new

opportunities. The successful organization will identify, appraise, and respond to the

various opportunities and threats in its environment.

External Macro environment

The external macro environment consists of all the outside institutions and forces thathave an actual or potential interest or impact on the organization's ability to achieve its


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objectives: competitive, economic, technological, political, legal, demographic, cultural,and ecosystem. Though noncontrollable, these forces require a response in order to

keep positive actions with the targeted markets. An organization with an environmentalmanagement perspective takes aggressive actions to affect the forces in its marketing

environment rather than simply watching and reacting to it.

Types of environment

1. Economic EnvironmentThe economic environment consists of factors that affect consumer purchasing

power and spending patterns. Economic factors include business cycles, inflation,unemployment, interest rates, and income. Changes in major economic variables

have a significant impact on the marketplace.

2. Technological EnvironmentThe technological environment refers to new technologies, which create new

product and market opportunities. Technological developments are the mostmanageable uncontrollable force faced by marketers. Organizations need to be

aware of new technologies in order to turn these advances into opportunities and acompetitive edge. Technology has a tremendous effect on life-styles, consumption

patterns, and the economy.

3. Political and Legal EnvironmentOrganizations must operate within a framework of governmental regulation and

legislation. Government 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 various organizations and individuals in a given society.

4. Demographic Environment

Demographics tell marketers who current and potential customers are; where theyare; and how many are likely to buy what the marketer is selling. Demography isthe study of human populations in terms of size, density, location, age, sex, race,occupation, and other statistics. Changes in the demographic environment can

result in significant opportunities and threats presenting themselves to theorganization.

5. Social / Cultural Environment

Social/cultural forces are the most difficult uncontrollable variables to predict. It is

important for marketers to understand and appreciate the cultural values of theenvironment in which they operate.

6. Ecosystem EnvironmentThe ecosystem refers to natural systems and its resources that are needed as

inputs by marketers or that are affected by marketing activities. Green marketingor environmental concern about the physical environment has intensified in recent

years. To avoid shortages in raw materials, organizations can use renewable


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resources (such as forests) and alternatives (such as solar and wind energy) fornonrenewable resources (such as oil and coal). Organizations can limit their

energy usage by increasing efficiency.

External Microenvironment

The external microenvironment consists of forces that are part of an organization'smarketing process but are external to the organization. These micro environmentalforces include the organization's market, its producer-suppliers, and its marketing

intermediaries. While these are external, the organization is capable of exerting moreinfluence over these than forces in the macro environment.

1. The Market

Organizations closely monitor their customer markets in order to adjust to changingtastes and preferences. A market is people or organizations with wants to satisfy, money

to spend, and the willingness to spend it. Each target market has distinct needs, whichneed to be monitored. It is imperative for an organization to know their customers, how

to reach them and when customers' needs change in order to adjust its marketingefforts accordingly. The market is the focal point for all marketing decisions in an

organization.2. Suppliers

Suppliers are organizations and individuals that provide the resources needed to producegoods and services. They are critical to an organization's marketing success and an

important link in its value delivery system.3. Marketing Intermediaries

Like suppliers, marketing intermediaries are an important part of the system used todeliver value to customers. Marketing intermediaries are independent organizations that

aid in the flow of products from the marketing organization to its markets. Theintermediaries between an organization and its markets constitute a channel ofdistribution. These include middlemen (wholesalers and retailers who buy and resell

merchandise). Physical distribution firms help the organization to stock and moveproducts from their points of origin to their destinations. Warehouses store and protectthe goods before they move to the next destination. Marketing service agencies help theorganization target and promote its products and include marketing research firms,

advertising agencies, and media firms. Financial intermediaries help finance transactionsand insure against risks and include banks, credit unions, and insurance companies.

Business Environment DefinedBusiness environment is a set of political, economic, social and technological (PEST) forces that are largely outside the control andinfluence of a business, and that can potentially have both a positive and a negative impact on the business.

BUSINESS AND ITS ENVIRONMENT

NATURE OF BUSINESS

Business may be understood as the organized efforts of enterprise to


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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."That is the nature of the business" is a term that means that something happens because it is common experience

for the event you are performing or doing. It usually implies that a bad experience.

Meaning of Business EnvironmentEnvironment of a business means the external forces influencing the business decisions. They can be forces of

economic, social, political and technological factors. These factors are outside the control of the business. The

business can do little to change them.

Following features:

1. Totality of external forces: Business environment is the sum total of all things external to business firms

and, as such, is aggregative in nature.2. (Specific and general forces: Business environment includes both specific and general forces. Specific

forces (such as investors, customers, competitors and suppliers) affect individual enterprises directly and

immediately in their day-to-day working. General forces (such as social, political, legal and technological

conditions) have impact on all business enterprises and thus may affect an individual firm only indirectly.

3. Dynamic nature: Business environment is dynamic in that it keeps on changing whether in terms of

technological improvement, shifts in consumer preferences or entry of new competition in the market.

4. Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings,

especially when environment changes are taking place too frequently as in the case of information

technology or fashion industries.

5. Relativity: Business environment is a relative concept since it differs from country to country and even

region to region. Political conditions in the USA, for instance, differ from those in China or PakistanSimilarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France.

Importance of Business Environment

1. firm to identify opportunities and getting the first mover advantage: Early identification of

opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors. For


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example, Maruti Udyog became the leader in the small car market because it was the first to recognize the

need for small cars in India.

2. firm to identify threats and early warning signals: If an Indian firm finds that a foreign multinational is

entering the Indian market it should gives a warning signal and Indian firms can meet the threat by adopting

by improving the quality of the product, reducing cost of the production, engaging in aggressive advertising,

and so on.

3. Coping with rapid changes: All sizes and all types of enterprises are facing increasingly dynamicenvironment. In order to effectively cope with these significant changes, managers must understand and

examine the environment and develop suitable courses of action.Improving performance: the enterprises that continuously monitor their environment and adopt suitable business

practices are the ones which not only improve their present performance but also continue to succeed in the market for a

longer period.

Importance of understanding the environment

The 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 very important for the manager to understand and

evaluate the impact of the business environment due to the following reasons :

a)Businesses may be doomed to be non starters due to restrictive business environment

which may take the form of rigid government laws ( no polluting industry can ever be

located in around 50 Km radius of the Taj) , state of competition ( Car 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 For

eg no TV manufacturer can be expected to survive by making only B&W television setswhen consumer preference has 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 by the external environment . For eg the ability of a business to

fund its expansion plan by raising money from the 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.

f)Finally , the environment offers the opportunities for growth and profits . For eg when

the insurance and aviation industry was thrown open to the private sector , the new

entrant could easily build on the expectations of the public.




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More often than not, these forces are beyond the control of an organization and itsmanagers. Accordingly, the factors of the environment will need to be considered as





shapes opportunities and poses threats to the organization. The external environment is

a set of complex, rapidly changing and significant interacting institutions and forces that

affect the organization's ability to serve its customers. External forces are not controlledby an organization, but they may be influenced or affected by that organization. It is


interact with strategy decisions. The external environment has a major impact on the



targeted markets.


Internally, an organization can be viewed as a resource conversion machine that takesinputs (labor, money, materials and equipment) from the external environment (i.e., the


goods, and services, and makes them available to customers as outputs. The






The external macro environment consists of all the outside institutions and forces thathave an actual or potential interest or impact on the organization's ability to achieve itsobjectives: competitive, economic, technological, political, legal, demographic, cultural,

and ecosystem. Though noncontrollable, these forces require a response in order tokeep positive actions with the targeted markets. An organization with an environmental


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management perspective takes aggressive actions to affect the forces in its marketingenvironment rather than simply watching and reacting to it.


7. Economic Environment

The economic environment consists of factors that affect consumer purchasingpower and spending patterns. Economic factors include business cycles, inflation,

unemployment, interest rates, and income. Changes in major economic variableshave a significant impact on the marketplace.

8. Technological Environment

The technological environment refers to new technologies, which create newproduct and market opportunities. Technological developments are the mostmanageable uncontrollable force faced by marketers. Organizations need to beaware of new technologies in order to turn these advances into opportunities and a

competitive edge. Technology has a tremendous effect on life-styles, consumptionpatterns, and the economy.

9. Political and Legal Environment

Organizations must operate within a framework of governmental regulation andlegislation. Government relationships with organizations encompass subsidies,tariffs, import quotas, and deregulation of industries.The political environment includes governmental and special interest groups that


10. Demographic EnvironmentDemographics tell marketers who current and potential customers are; where they

are; and how many are likely to buy what the marketer is selling. Demography isthe study of human populations in terms of size, density, location, age, sex, race,

occupation, and other statistics. Changes in the demographic environment canresult in significant opportunities and threats presenting themselves to theorganization.

11. Social / Cultural EnvironmentSocial/cultural forces are the most difficult uncontrollable variables to predict. It is

important for marketers to understand and appreciate the cultural values of theenvironment in which they operate.

12. Ecosystem Environment

The ecosystem refers to natural systems and its resources that are needed asinputs by marketers or that are affected by marketing activities. Green marketing

or environmental concern about the physical environment has intensified in recentyears. To avoid shortages in raw materials, organizations can use renewable

resources (such as forests) and alternatives (such as solar and wind energy) fornonrenewable resources (such as oil and coal). Organizations can limit their

energy usage by increasing efficiency.


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External MicroenvironmentThe external microenvironment consists of forces that are part of an organization's

marketing process but are external to the organization. These micro environmentalforces include the organization's market, its producer-suppliers, and its marketing

intermediaries. While these are external, the organization is capable of exerting more

influence over these than forces in the macro environment.

1. The Market



to reach them and when customers' needs change in order to adjust its marketingefforts 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 producegoods and services. They are critical to an organization's marketing success and an

important link in its value delivery system.

3. Marketing IntermediariesLike suppliers, marketing intermediaries are an important part of the system used todeliver value to customers. Marketing intermediaries are independent organizations thataid in the flow of products from the marketing organization to its markets. The

intermediaries between an organization and its markets constitute a channel ofdistribution. These include middlemen (wholesalers and retailers who buy and resell

merchandise). Physical distribution firms help the organization to stock and moveproducts from their points of origin to their destinations. Warehouses store and protect

the goods before they move to the next destination. Marketing service agencies help theorganization target and promote its products and include marketing research firms,




NATURE OF BUSINESS





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do without business. It needs no emphasis that business needs society as much.

"That is the nature of the business" is a term that means that something happens because it is common experience


Meaning of Business Environment

Environment of a business means the external forces influencing the business decisions. They can be forces of



Following features:

6. Totality of external forces: Business environment is the sum total of all things external to business firms

and, as such, is aggregative in nature.

7. (Specific and general forces: Business environment includes both specific and general forces. Specific


immediately in their day-to-day working. General forces (such as social, political, legal and technologicalconditions) have impact on all business enterprises and thus may affect an individual firm only indirectly.

8. Dynamic nature: Business environment is dynamic in that it keeps on changing whether in terms of


9. Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings,



10.Relativity: Business environment is a relative concept since it differs from country to country and even

region to region. Political conditions in the USA, for instance, differ from those in China or Pakistan

Similarly, demand for sarees may be fairly high in India whereas it may be almost non-existent in France.









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and so on.

6. Coping with rapid changes: All sizes and all types of enterprises are facing increasingly dynamic

environment. In order to effectively cope with these significant changes, managers must understand and


practices are the ones which not only improve their present performance but also continue to succeed in the market for alonger period.






a)Businesses may be doomed to be non starters due to restrictive business environmentwhich may take the form of rigid government laws ( no polluting industry can ever be




eg no TV manufacturer can be expected to survive by making only B&W television sets

when consumer preference has clearly shifted to colour television sets.

c)The cost of capital and the cost of borrowing - two key financial drivers of anyenterprise are impacted by the external environment . For eg the ability of a business to

fund its expansion plan by raising money from the stock markets depends on the

prevalent public mood towards investment in stock markets.




the insurance and aviation industry was thrown open to the private sector , the newentrant could easily build on the expectations of the public.






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necessary for organizations to understand the environmental conditions because theyinteract with strategy decisions. The external environment has a major impact on the



targeted markets.




world outside the boundaries of the organization), converts them into useful products,goods, and services, and makes them available to customers as outputs. The








keep positive actions with the targeted markets. An organization with an environmentalmanagement perspective takes aggressive actions to affect the forces in its marketingenvironment rather than simply watching and reacting to it.


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power and spending patterns. Economic factors include business cycles, inflation,unemployment, interest rates, and income. Changes in major economic variableshave a significant impact on the marketplace.



aware of new technologies in order to turn these advances into opportunities and a

competitive edge. Technology has a tremendous effect on life-styles, consumptionpatterns, and the economy.

15. Political and Legal EnvironmentOrganizations must operate within a framework of governmental regulation and

legislation. Government relationships with organizations encompass subsidies,tariffs, import quotas, and deregulation of industries.

The political environment includes governmental and special interest groups that



Demographics tell marketers who current and potential customers are; where theyare; and how many are likely to buy what the marketer is selling. Demography is

the study of human populations in terms of size, density, location, age, sex, race,

occupation, and other statistics. Changes in the demographic environment canresult in significant opportunities and threats presenting themselves to theorganization.

17. Social / Cultural EnvironmentSocial/cultural forces are the most difficult uncontrollable variables to predict. It isimportant for marketers to understand and appreciate the cultural values of the

environment in which they operate.


inputs by marketers or that are affected by marketing activities. Green marketing

or environmental concern about the physical environment has intensified in recentyears. To avoid shortages in raw materials, organizations can use renewableresources (such as forests) and alternatives (such as solar and wind energy) for

nonrenewable resources (such as oil and coal). Organizations can limit theirenergy usage by increasing efficiency.


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External MicroenvironmentThe external microenvironment consists of forces that are part of an organization's



1. The Market


to spend, and the willingness to spend it. Each target market has distinct needs, whichneed to be monitored. It is imperative for an organization to know their customers, howto reach them and when customers' needs change in order to adjust its marketing

efforts accordingly. The market is the focal point for all marketing decisions in an

organization.2. Suppliers



Like suppliers, marketing intermediaries are an important part of the system used to

deliver value to customers. Marketing intermediaries are independent organizations thataid in the flow of products from the marketing organization to its markets. The







NATURE OF BUSINESS






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Following features:

11.Totality of external forces: Business environment is the sum total of all things external to business firms


12.(Specific and general forces: Business environment includes both specific and general forces. Specific




13.Dynamic nature: Business environment is dynamic in that it keeps on changing whether in terms oftechnological improvement, shifts in consumer preferences or entry of new competition in the market.

14.Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings,














and so on.


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9. Coping with rapid changes: All sizes and all types of enterprises are facing increasingly dynamic




longer period.















fund its expansion plan by raising money from the stock markets depends on theprevalent public mood towards investment in stock markets.












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interact with strategy decisions. The external environment has a major impact on thedetermination of marketing decisions. Successful organizations scan their external


targeted markets.





goods, and services, and makes them available to customers as outputs. Theorganization must continuously monitor and adapt to the environment if it is to survive







keep positive actions with the targeted markets. An organization with an environmental



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power and spending patterns. Economic factors include business cycles, inflation,







Organizations must operate within a framework of governmental regulation andlegislation. Government relationships with organizations encompass subsidies,tariffs, import quotas, and deregulation of industries.

The political environment includes governmental and special interest groups thatinfluence and limit various organizations and individuals in a given society.



the study of human populations in terms of size, density, location, age, sex, race,occupation, and other statistics. Changes in the demographic environment can



Social/cultural forces are the most difficult uncontrollable variables to predict. It isimportant for marketers to understand and appreciate the cultural values of the




years. To avoid shortages in raw materials, organizations can use renewableresources (such as forests) and alternatives (such as solar and wind energy) for



The external microenvironment consists of forces that are part of an organization's


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1. The Market



to reach them and when customers' needs change in order to adjust its marketingefforts accordingly. The market is the focal point for all marketing decisions in anorganization.

2. Suppliers




aid in the flow of products from the marketing organization to its markets. The







NATURE OF BUSINESS







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Following features:







18.Dynamic nature: Business environment is dynamic in that it keeps on changing whether in terms of


19.Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings,especially when environment changes are taking place too frequently as in the case of information






10.firm to identify opportunities and getting the first mover advantage: Early identification of

opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors. Forexample, Maruti Udyog became the leader in the small car market because it was the first to recognize the


11.firm to identify threats and early warning signals: If an Indian firm finds that a foreign multinational is



and so on.


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12.Coping with rapid changes: All sizes and all types of enterprises are facing increasingly dynamic




longer period.



























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targeted markets.















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1. The Market




2. Suppliers











NATURE OF BUSINESS







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Following features:





















and so on.


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targeted markets.















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1. The Market




2. Suppliers











NATURE OF BUSINESS







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Following features:





















and so on.


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18.Coping with rapid changes: All sizes and all types of enterprises are facing increasingly dynamic




longer period.



























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targeted markets.















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inputs by marketers or that are affected by marketing activities. Green marketingor environmental concern about the physical environment h

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economic environment.docx