Economic Environment of Business-1

INTRODUCTION TO BUSINESS
ENVIRONMENT
&
Components of Business Environment

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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
 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 aobut
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
 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
 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

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

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Micro Firm –Stakeholder
Relationships

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 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
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 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

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 Indirect Stakeholders - Community – 1/3

• 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

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Indirect Stakeholders – Pressure Groups – 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

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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.

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 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.

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 Relevance of Meso Economics to Business
Environment
The problem
How 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

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 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)

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Meso Economics: Example- the bicycle ‘rule’

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Meso Trajectory

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 Complex System of Meso
• Economic evolution is the process by which a novel generic
rule enters the economic system
Systems of meso rules carried by agents : micro-economics
Changing population of rule actualizations : meso-economics
The 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)

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 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 dimensionality
of the system) by entrepreneurial imagination or consumer
experimentation.
• 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.

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 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.
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 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
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 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
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 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.

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 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
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 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.

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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

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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.

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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
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 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

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Impact of Technology

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 Environment Turbulence
Winds 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.

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 The organisational system operating in multidimensional environments

EXTERNAL ENVIRONMENT

THE ORGANISATION

socio- Formal Sub-System political-legal

cultural
management influences
influences
goals strategy
structure operations
technology

leadership economic
culture influences
politics

Informal Sub-System

technological ecological
influences INTERNAL ENVIRONMENT influences

TEMPORAL ENVIRONMENT
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 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

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 Levels of Environmental Turbulence
WEAK FORCES  Level 1. Predictable. Stable markets. Pace of
FOR CHANGE 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
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 Types of Change Situation
 Closed change. When explaining this type of change,
LOSE TO CERTAINTY
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
FAR FROM consequences and implications are.
CERTAINTY
Degree of
Certainty

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 • 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

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