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Today's Thought
Beauty doesnt last
forever..
But a Beautiful
Personality Does!!!!
ECONOMIC ENVIRONMENT OF
BUSINESS
INTRODUCTION
Every business organization has to interact and transact with
its environment.
Business environment has a direct relation with the business
organization.
Effectiveness of interaction of an enterprise with its
environment primarily determines the success or failure of a
business.
Identify the environment in which it operates
Formulate its policies in accordance with the forces
Business organization has to tackle its internal and external
environment.
The economic activities are still considerably controlled by the
government.
Concept of business
environment
Business environment is the aggregate of
all conditions, influences that affect its life
and development.
Business environment consist of all those
factors that have a bearing on the business.

Survival and success of any individual depend upon
his capability as to cope with environment
Survival and success of an individual firm depend upon -
Innate strength resources at its command ( Financial and human
resources)
Survival and success of the firm depend on
two sets of factors

Internal factors
External Factors
Business
Decision
External
Environment
Internal
Environment
Business decision
Co. image/brand equity
Human resources
Financial capabilities
Technological capabilities
Marketing capabilities
Macro (General/Remote) Environment
Political/Govt. environment Legal Environment
Micro (Task/Operating) Environment
Financiers
Demographic
Environment
Suppliers
Publics
Marketing intermediaries
Customers
Competitors
Global
Environment
Social/Cultural environment Technological/Natural environment
Promoters/shareholders values
Mission/Objectives
management Structure
Internal power relationship
Physical assets & facilities
Internal Environment




INTERNAL ENVIRONMENT
Important Internal factors
1. Value System
2. Mission and objectives
3. Management Structure and Nature
4. Internal Power Relationship
5. Human Resources
6. Miscellaneous Factors
EXTERNAL ENVIRONMENT
External environment consists of
1. Micro environment
The microenvironment consists of factors in the
companies immediate environment that affects
the performance of the company.
Factors
1. Suppliers
2. Marketing intermediaries
3. Competitors
4. Customers
5. Public

Macro environment consists of
larger societal forces that affect all
the factors in the companys micro-
environment

1. Demographic environment
2. Economic environment
3. Political and Government environment
4. Natural environment
5. Physical and Technological environment
6. International environment
7. Socio-cultural environment

Importance of the study of business environment
To adjust according to the changes takes place in the external
environment .
Development of action plans to deal with technology
advancement.
To adjust to prevailing conditions and influence the
environment to make it suitable for the firm.
To see the impact of the socio-economic changes at the
National and International level.
To analyze the competitors strategy and to formulate counter
strategies.
To help the organization to develop its broad strategies.
To help to prepare the long term policies.

Need of the study of business environment
It is essential for the business firm to keep all the
information about its surrounding environment
because
One should care about the environmental changes if
disregard for environmental changes proves very costly.
If the environmental changes are favorable a business
enterprise can expand itself according to changing
environment.
The success of the business enterprise depends on its
awareness surrounding environment.
The business enterprise can become dynamic if she has
the knowledge about change in the environment.
Need of the study of business environment
The business enterprise adjust itself according to
the information about changes taking place in the
environment .
If a business enterprise is aware of the fact that
environment is getting hostile it individually or
along with other business enterprises can make
efforts to make the environment hospitable
according to the requirement of the business.
Nature of Business Environment
Aggregative: B E is the totality of all the
external forces which influence the working
and decision making of enterprises
Inter Related : Different elements of B E are closely
inter related and inter dependent . A change in
one element affects the other elements . Economic
environment affects non economic environment
which in turns affect the economic conditions. Ex
economic liberalization in India since 1991has
opened up new opportunities for private sector and
foreign entrepreneurs . Social pressures against
pollution led enactment of anti pollution act.

Relative : Business environment is a relative
concept . It differs from country to country and
even region to region. Capitalist economies like
those of US A have a different kind of
environment than communist economies . The
economic system in a country affects the
business environment.
Inter-Temporal: B.E. is also an inter-temporal
concept as it change over time. For business
environment in India today is much different
from that prevailing before 1991. In short run
business environment may remain static .But in
long run ,it does change.
Uncertain : B.E.is largely uncertain because it is
very difficult to forecast the future environment .
When environment is volatile ,i.e. .changes very
fast , uncertainty increases .
Contextual : B.E. provides the macro frame work
within which the business firm (micro unit)operates. The
environmental forces are those given within which an
individual enterprises and its management must
function.
B.E. exercises tremendous influence on working
environment. The change taking place in environment
must be continuously monitored to judge on business .
Appropriate and timely steps must be taken to face E
.changes
Coping with environmental
changes
1. Buffering : Buffering techniques are used to
soften the impact of environment on the
organization. Stocking materials , Preventive
maintenance , employee training . These
precautionary measures enable the
organization to avoid damage due to changes
in environment .


Levelling : Whereas buffering absorbs environmental
fluctuations , levelling or smoothing attempts to reduces
fluctuations in environment . E.g. retail firms faced
seasonal fluctuations offers price cuts in order to spread
sales more evenly throughout the year . Special air fares
for night flights is another example of levelling .
Anticipation: It means acquiring information about
probable changes in the environment . Manufacturing
firm tries to anticipate demand for its product before
deciding production schedule and related matters.
Other areas in which firm can anticipated changes are
customer needs , competition , technology and
availability of human resource
Rationing: Allocation of organizational resource
according to a system of priorities . Rationing is
resorted to when an org. is unable to meet all
demand. E.g demand exceed supplies

Dominating: The organization attempts to
control event in the environment and reduces its
dependencies on them.
Changing: an organization may change itself ,its
operations and output. May change product line
as per changing preferences of customer.
It is difficult changing strategy
21
ENVIRONMENTAL
SCANNING (ANALYSIS)
22
CONCEPT OF ENVIRONMENT
Environment literally means surroundings which
influence the body or organization.
The environment of any organization is the aggregate
of all conditions, events and influences that surround
and affect it.
Since the environment influences an organization in
many ways, its understanding is of crucial
importance.
23
Characteristics of Environment
Environment is complex
Environment is dynamic
Environment is multifaceted
Environment has a far-reaching
impact.
Since the environment is
complex, dynamic, multi-faceted
and has a far reaching impact,
dividing it into external and
internal components enables us
to understand it better.
24
Meaning of environmental Scanning

Environmental analysis ( scanning ) is the
process by which corporate planners monitor the
economic, governmental, supplier, technological
and market environment to determine the
opportunities and threats to their enterprise.

The fortunes of organizations is determined by
changes in social, economic, political, business
and industrial conditions.
25
Influence of environment
Opportunity
Threat
Strength
Weakness
26
Approaches to Environmental Scanning
Systematic approach
Formats for various
issues are developed
and scanning is done
systematically in a step
by step Faison.
Process Information
Approach
Information is available
from trade papers, trade
magazines, internet and
such data is summarized
and used in strategic
management
Ad Hoc Approach
Specific information on selected environmental
factors is collected by conducting special studies
27
Need /Importance/Benefit of Environmental
Analysis
Technological forecasting indicative of future
opportunities and challenges
Risk Identification
Strategic Planning
Opportunities forecasting
Environmental organization linkage identification
28
Role of environmental Scanning in
Organizations
Function-Oriented Role
To improve organizational performance by providing
environmental information concerning effective
performance of specific organizational functions
Integrated Strategic Planning Role
To make top mangement aware of the issues that arise in
the firms environment and having a impact on planning.
Policy Oriented Role
To make top management informed about major trends
emerging in the environment
29
Sources of information for environmental
scanning
Documentary or secondary sources of information
Mass Media
Internal Sources
External agencies
Formal Studies
Spying and surveillance
30
Factors affecting environmental appraisal
Strategy-related factors
Age of the organization
Size and power of the organization
Geographic dimension of the organization
Type of business
Influence of business organization
Volatility of environment
Managerial caliber
Environmental Scanning & Monitoring
Techniques
Environmental Scanning &
Monitoring
Environmental scanning is a concept from business
management by which businesses gather information from the
environment, to better achieve a sustainable competitive
advantage.

To sustain competitive advantage the company must also
respond to the information gathered from environmental
scanning by altering its strategies and plans when the need
arises.
Environmental Scanning & Monitoring-
Techniques

SWOT

Industry Analysis
Techniques

Competitor Analysis


PEST

ETOP
SWOT
(Strength-Weakness-Opportunity-Threat)
Identification of threats and Opportunities in the
environment (External) and strengths and
Weaknesses of the firm (Internal) is the
cornerstone of business policy formulation; it is
these factors which determine the course of
action to ensure the survival and growth of the
firm.
SWOT Analysis


The SWOT analysis is an extremely useful tool for
understanding and decision-making for all sorts of situations
in business and organizations. SWOT is an acronym for
Strengths, Weaknesses, Opportunities, Threats.

SWOT analysis came from the research conducted at
Stanford Research Institute from 1960-1970. The background
to SWOT stemmed from the need to find out why corporate
planning failed. The research was funded by the fortune 500
companies to find out what could be done about this failure.
The Research Team were Marion Dosher, Dr Otis Benepe,
Albert Humphrey, Robert Stewart, Birger Lie.


SWOT: Studying Internal & External Environment
The aim of any SWOT analysis is to identify the key
internal and external factors that are important to
achieving the objective. SWOT analysis groups key
pieces of information into two main categories:

Internal factors The strengths and
weaknesses internal to the organization.
External factors The opportunities and
threats presented by the external environment.

Examples of SWOTs
Strengths and Weaknesses
Resources: financial, intellectual, location
Cost advantages from proprietary know-how
Creativity / ability to develop new products
Valuable intangible assets: intellectual capital
Competitive capabilities
Big campus selection

Opportunities and Threats
Takeovers
Market Trends
Economic condition
Mergers
Joint ventures
Strategic alliances
Expectations of stakeholders
Technology
Public expectations
Competitors and competitive actions
Poor Public Relations Development
Criticism (Editorial)
Global Markets
Environmental conditions

Uses of SWOT Analysis
Corporate planning

Set objectives defining what the organization is intending to do

Environmental scanning
Internal appraisals of the organizations SWOT, this needs to include an
assessment of the present situation as well as a portfolio of
products/services and an analysis of the product/service life cycle

Analysis of existing strategies, this should determine
relevance from the results of an internal/external appraisal.
This may include gap analysis (compare its actual
performance with its potential performance which will look at
environmental factors)


Strategic Issues defined key factors in the development of
a corporate plan which needs to be addressed by the
organisation


Develop new/revised strategies revised analysis of
strategic issues may mean the objectives need to change

Establish critical success factors the achievement of
objectives and strategy implementation

Preparation of operational, resource, projects plans for
strategy implementation

Monitoring results mapping against plans, taking
corrective action which may mean amending
objectives/strategies.

Also;
Use SWOT analysis for business planning,
strategic planning, competitor evaluation,
marketing, business and product development
and research reports.

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

The acronym PEST (or sometimes rearranged as "STEP") is used to
describe a framework for the analysis of these macro environmental
factors. A PEST analysis fits into an overall environmental scan as shown
in the following diagram:
Environmental Scan
/ \
External Analysis Internal Analysis
/ \
Macroenvironment

Microenvironment
|
P.E.S.T.


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


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:


Social Factors

Social factors include the demographic and cultural aspects
of the external macro-environment. These factors 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


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

Industry Analysis
An industry is a group of firms producing a similar
product or service
An examination of the important stakeholders group
in a particular corporations task environment is a
part of industry analysis
Porters approach to Industry Analysis
A corporation is most concerned with the intensity of
competition within its industry
The level of this intensity is determined by basic
competitive forces
In scanning its industry, the corporation must
assess the importance to its success of each of the
six forces

Forces Driving Industry Competition
Threat
of New
Entrants
Bargaining
Power
of Suppliers
Bargaining
Power
of Buyers
Relative
Power
of Unions,
Governments,
etc.
Potential
Entrants
Threat of
Substitute
Products
or Services
Industry
Competitors

Rivalry Among
Existing Firms
Other
Stakeholders
Buyers
Substitutes
Suppliers
Threat of New Entrants:
Some Barriers to Entry
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Size
Government Policy

Properties of Entry Barriers
Entry barriers can and do change as the conditions
change
Entry barriers can change for reasons inside the
firm : impact of the firms strategic decisions
Some firms may possess resources or skills which
allow them to overcome entry barriers into an
industry more cheaply than most other firms
Rivalry Among Existing Firms
Intense Rivalry is Related To:

Number of Competitors: numerous or equally
balanced competitors
Rate of Industry Growth: slow industry growth
Product or Service Characteristics: Lack of
differentiation or switching costs
Amount of Fixed Costs : high fixed or storage costs

High fixed or storage costs
Lack of differentiation or switching costs
Capacity augmented in large increments (leading to
overcapacity and price cuttings)
Diverse competitors
High strategic stakes
High exit barriers (specialized assets, fixed costs of
exit, strategic interrelationships, emotional
barriers, government and social restrictions)
Shifting Rivalry
The factors that determine the intensity of
competitive rivalry can and do change
As an industry matures, its growth rate declines,
resulting in intensified rivalry, declining profits
An acquisition can introduce a different personality
to an industry
Focusing selling efforts on the fastest growing
segments can reduce the impact of industry rivalry
Entry Barriers and Exit Barriers
When entry barriers are high and exit barriers are
low, entry will be deterred, and unsuccessful
competitors will leave the industry
When both entry and exit barriers are high, profit
potential is high, but is usually accompanied by
more risks, and unsuccessful firms will fight to stay
The worst case is when entry barriers are low and
exit barriers are high (overcapacity, poor
profitability)
Pressure from Substitute Products
Substitutes limit the potential return of an industry
by placing a ceiling on the prices firms in the
industry can profitably charge
Identifying substitute is searching for other products
that can perform the same function as the product
of the industry
The impact of substitutes can be summarized as
the industrys overall elasticity of demand
Bargaining Power of Buyers
Buyers compete by forcing down prices, bargaining
for higher quality or more services, and playing
competitors against each other
A buyers group is powerful if:
1. It purchases large volumes relative to seller sales
2. The products it purchases from the industry
represent a significant fraction of the buyers cost of
purchase (shop for good price)


3. The products it purchases from the industry are
standard or undifferentiated
4. It faces few switching costs
5. It earns low profits (thus sensitive to costs)
6. Buyers pose a credible threat of backward
integration
7. The industrys product is unimportant to the quality
of the buyers products or services
8. The buyer has full information
Bargaining Power of Suppliers
Suppliers can exert bargaining power over participants in
an industry by threatening to raise prices or reduce the
quality of purchased goods and services
A supplier group is powerful if:
1. It is dominated by a few companies
2. It is not obliged to contend with other substitute products for
sale to the industry
3. The industry is not an important customer
4. The suppliers product is an important input to the buyers
business
5. The suppliers group products are differentiated or it
has built up switching costs
6. The supplier group poses a credible threat of
forward integration
7. Labor must be considered as a supplier that exerts
great power in many industries
Government as a force in industry
competition
Government role as supplier and buyer can be
influenced by political factors
Government regulations can set limits on the
behavior of firms as suppliers or buyers
Government can affect the position of an industry
with substitutes through regulations, subsidies, or
other means
Government can affect rivalry among competitors
by influencing industry growth
Stages of Environmental Analysis
1. Environmental Scanning : Scanning means the process
of analyzing the environment for identifying the factors
which may influence the business . Its purpose is to
identify the emerging trends or early warning signals .
Such trends may have evolved over time or may
appeared suddenly . E.S. alters the organization to
potentially significant forces in E E so that suitable
strategic initiative can be taken before these forces
become critical for the organization. Scanning is
basically exploratory in nature . There are so many E.F.
which influences the operation of a business .All These
factors may not be relevant . Therefore critical and high
priority factors must be identified .
2. Environmental Monitoring : At this stage
information from the relevant environment is
collected. Monitoring is a follow up and deeper
analysis of relevant environmental forces
identified through scanning . Several techniques
are used to collect the relevant facts about
environmental factors . i.e. company records ,
publications , spying and verbal talks with
employees , customer dealers ,suppliers and
competitors are the main sources of data.
3. Environmental Forecasting : Forecasting is the
process of estimating the relevant events of
future based on the analysis of their past and
present behaviour . It is necessary to anticipate
future events before any strategic plans are
formulated . Forecasting can focus on future
aspects of environment which affects the
organization . Forecasts are made for economic ,
social, political and technological element of
environment . Several techniques like Time
series analysis, Delphi method ,etc are used for
the purpose of forecasting .
4.Diagnosis (Assessment) : Environmental factors
are assessed in terms of their impact on the
organization.
ECONOMIC SYSTEMS
There is a great connection between
political ideology and economic systems
TYPES OF ECONOMIC SYSTEMS
TYPES OF ECONOMY
On the
basis of
ownership of
means of production
On the
basis of
levelOf
development
CAPITALISM
DEVELOPED
COUNTRIES
SOCIALISM
MIXED
ECONOMY
DEVELOPING
COUNTRIES
CAPITALIST ECONOMY
In a capitalist economy, households and firms are
the basic production units.
Also known as free enterprise economy and
market economy
Characterised by private ownership of the means
of production, individual decision making and use
of the market mechanism to carry out the
decision of individual participants and facilitate
the flow of goods and services in markets.
TYPES OF CAPITALISM
1. Laissez-faire capitalism
2. Regulated capitalism
Characteristics of Capitalism
Free Enterprise
Private ownership
Limited Role of Government
Absence of a Central Plan
Consumers Sovereignty
Competetion
Freedom to Save and Invest
Freedom of Choice of Occupation
The Market System
Capitalism
MERITS
Enterpreneurs get an
incentive to search for
better ways of serving
consumer needs.
Constant improvement in
products and processes
DEMERITS

Insufficient investment in low
profit areas.
Resource allocation not optimal
Leads to concentration of income
and wealth
Unemployment
Monopolistic growth
SOCIALIST ECONOMY
Means of production are either
owned or controlled by the state
and the resource allocation,
investment pattern,
consumption, income distribution
etc are directed and regulated by
the state.
There are two types of socialist
economy
Socialist command economy
There is no individual freedom of
choice of consumption and
employment.
Market socialism
Decisions regarding allocation of
resources are made both
collectively and individually
SOCIALIST ECONOMY
contd
In a socialist state there is no place for private
property and private enterprise.
The entire national income is distributed as wages
among the workers.
Found in communist countries.
Collective goal was given priority over individual
goals.
SOCIALIST ECONOMY
contd
While the objective of a socialist economy is to
mobilize economic resources for the public good, the
opposite seems to have occurred. State owned
enterprises have little incentive to control costs and
be efficient, because they cannot go out of business.
Dynamism and innovation are absent.
Stagnation : A period of little or no growth in the
economy. Economic growth of less than 2-3% is
considered stagnation


Characteristics of Socialism

Government ownership
Distribution of income
Restriction of occupation
Central Authority
Restriction of consumption
Social welfare
Peaceful and Democratic evaluation

Socialism
MERITS


Less exploitation
Price Control
Social welfare
Class less society
Importance of labour
Regulation of government over
property and means of production
DEMERITS

Too much government
intervention.
Job security leads to inefficiency
Talents not fully utilized
No consumer sovereignty
Central planning need not be
always right
MIXED ECONOMY
Mixed economy is characterised by the co-
existence of public and private sectors.
In a mixed economy certain sectors of the
economy are left to private ownership and
free market mechanisms while other
sectors have significant state ownership
and government planning.
MIXED ECONOMY
contd
The primary difference between the mixed
economy and market socialism is the relatively
greater importance of individual decision
making , private property and the reliance on
market determined prices, to guide the
allocation of resouces.
MIXED ECONOMY
contd
In mixed economy, government tend to take
into state ownership troubled firms whose
continued operation is thought to be vital to
national interests.
India has a mixed economy.
CHARACTERISTICS OF MIXED ECONOMY
Public Sector
Private ownership of the means of production
and profit induced commodity production.
Decisive role of market mechansim

MERITS OF MIXED ECONOMY
Mixed economy framework is a feasible
proposition for a developing country as it
allows for at least a modest rate of growth,
which is both steady and less subject to
fluctuations in economic activity at the
international level.

DEMERITS OF MIXED ECONOMY
Concentration of economic power.
Built in tendency to slide back
Bureaucratic inefficiency and corruption
Less firm framework of the mixed economy
Denial of social justice.


Capitalism, Socialism and Communism Compared

Characteristic
s Capitalism Socialism Communism
1 2 3 4
Economic
Market
Freedom to compete
with the right to
invest
Limited competition
with
State-owned
industries.
Absence of
Competition with
State-owned
markets and
industries.
Individual
Incentives
Profits and wages in
relation
to one's ability and
willingness
to work
Profits recognised.
Wages
fairly in relation to
efforts.
Profits not allowed.
Workers
urged to work for
the glory of
the State.
Capital
Sources
Capital invested by
owners
who may also
borrow on credit.
Capital may be
reinvested from
profits. Depreciation
is legal.
Obtained from
owners and from
state-issued bonds
for State-owned
industrie.
State provides all
resources to
start business
owned by the
State. No
depreciation.
Capitalism, Socialism and Communism Compared

Characteristics Capitalism Socialism Communism
1 2 3 4
Labour Workers are free
to select
an employer and
an occupation
Workers allowed to select
occupation. State Planning
encourages employment.
The State determines
one's
employer and
employment.
Management Managers are
selected on
basis of ability.
Managers
have freedom to
make decisions
Managers in State-owned
industries are answerable to
the State. Non-monetary
rewards emphasised.
Key managers must
be party
members. Absence of
freedom
to make decisions.
Business
Ownership
Individuals have
the right to
own a business
and to contract
with others.
State owns the basic
industries. Other business
may exist.
State owned all
productive
capacity including
communes.
Risk
Assumption
Losses assumed
by owners.
May transfer
business risks
to other
businesses
through
insurance.
People assume risks of
State-owned industries.
Losses taken from taxes.
Economic production
owned
by the State. Risks
assumed by
the State. Losses
reduce
standard of living.
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