Business environment

Business environment is the aggregate

of all conditions, events and influence
that surrounds and affect it.
The environment includes factors
outside the firm, which can lead to
opportunities or treats to the firm.
Although there are many factors, the
most important of these factors are
socio-economic, technological, supplier,
competition and government.

NATURE OF BUSINESS
ENVIRONMENT

COMPLEX
INTERDEPENCE
DYNAMIC
INTER-RELATEDNESS
IMPACT
UNCERTAINTY
RELATIVITY
SPECIFIC AND GENERAL FORCES
TOTALITY OF EXTERNAL FACTORS

OBJECTIVES OF
BUSINESS ENVIRONMENT

KNOWLEDGE OF INFORMATION
BASIS OF DECISIONS
HELPFUL IN MAKING OF POLICIES
TECHNOLOGICAL PLANNING
SURVIVE IN BUSINESS

SCOPE OF BUSINESS
ENVIRONMENT

STRATEGIES ANF POLICIES

COMPETITORS ANALYSIS
DYNAMISM
IMPACT
ADJUSTMENT

SIGNIFICANCE OF
BUSINESS ENVIRONMENT

FIRST MOVER ADVANTAGE

EARLY WARNING SIGNAL
CUSTOMER FOCUS
STRATEGY FORMULATION
CHANGE AGENT
PUBLIC IMAGE
CONTINOUS LEARNING
GIVING DIRECTION FOR GROWTH
IMAGE BUILDING

CHALLENGES OF
BUSINESS ENVIRONMENT
ECONOMIC AND MARKET
CONDITIONS
COMPETITORS
CUSTOMERS NEED AND DEMAND
NEW OPPORTUNITIES OR THREATS

TYPES OF ENVIRONMENT
1) INTERNAL ENVIRONMENT
2) EXTERNAL ENVIRONMENT
INTERNAL
FACTORS

BUSINESS
DECISION

EXTERNAL
FACTORS

INTERNAL ENVIRONMENT
Important internal factors are
1) Value System

The value system of founders and those at the helm of affairs

has important bearing on the choice of business, the mission
and objectives of the organization, business policies and
practices.

2) Mission and Objectives

The business domain of the company , priorities , direction of
development, business philosophy, business policy etc. are
guided by the mission and objectives of the company

INTERNAL ENVIRONMENT
3) Management Structure and Nature
The organizational structure, the
composition of the Board of Directors,
extent of professionalization of
management etc. are important factors
influencing business decisions.
4) Internal Power Relationship
Factors like the amount of support the top

INTERNAL ENVIRONMENT
5) Human Resources
The characteristics of the human
resources like skill, quality, morale,
commitment, attitudes etc. could
contribute to the strength and weakness
of the organization.
The involvement, initiative etc. of the
people at different levels may vary from
organization to organization.

INTERNAL ENVIRONMENT
OTHER FACTORS
1.
2.
3.
4.

Physical Assets and Facilities

R&D and Technological Capabilities
Marketing Resources
Financial Factors

EXTERNAL ENVIRONMENT
Two Types
a) Micro Environment

Consists of actors in the companys immediate

environment, that affects the performance of the
company.

b) Macro Environment

Consists of larger societal forces that affect all

the actors in companys micro environment.

MICROENVIRONMENT
Also known as task environment and

operating environment

Include
The suppliers
Marketing intermediaries
Competitors
Customers
Publics

More intimately linked with the company

suppliers
Those who supply the inputs to the
company.
Source/Sources should be Reliable
Uncertainty regarding the supply or other
supply constraints compel companies to
maintain high inventories causing cost
increases.
Very risky to depend on a single supplier
The purchasing department should

customers
Major task of business is to create and sustain
customers
Different categories of consumers
Individuals
Households
Industries and other commercial establishments
Government and other institutions

Depending on single customer is too risky

Choice of customer should be done by considering
Relative profitability
dependability
stability of demand
growth prospectus
extent of competition

competitors
A firms competitors include not only the
other firms which market the same or
similar product but also all those who
compete for the income of the consumers
Desire competition
Generic competition
Product form competition
Brand competition

Marketing intermediaries
Firms that aid the company in promoting, selling and
distributing its goods to final buyers.
Include

the middlemen and merchants who help the company find

customers or close sales with them
Physical distribution firms which assist the company in stocking
and moving goods from their origin to their destinations
Marketing service agencies which assist the company in
targeting and promoting its products to the right markets
Financial intermediaries which finance marketing activities and
insure business risks

Vital links between the company and the final consumers.

publics
Any group that has an actual or potential
interest in or impact on an organizations
ability to achieve its interests
E.g. Media publics, citizens action publics,
local publics

Media attack on any company can

influence the government decisions
affecting the company.

MACRO ENVIRONMENT
Consists of larger societal forces that affect all the
actors in companys micro environment-namely
the demographic,
economic,
natural,
technological,
political and
cultural forces

Also known as Societal Environment

The Societal Environment includes general forces
that do not directly touch on short-run activities

Economic Environment
Important factors are:
Economic conditions
Economic policies
Economic systems

Economic condition

The economic conditions of a country for

example, the nature of the economy, the stage
of development of the economy, economic
resources, the level of income, the distribution
of income and assets, etc.- are among the very

Economic Environment
Economic policies

Some types or categories of business are favourably

affected by government policy, some adversely
affected, while it is neutral to some others.
E.g. a restrictive import policy may greatly help the
import competing industries, while a liberalisation of
the import policy may create difficulties for such
industries

Economic System

The scope of the private business depends on the

economic system.

Political & Government

Environment
Has close relationship with the economic
system and economic policy.
In many countries regulations to protect
consumer interests have become stronger.
Some governments specify certain
standards for the products to be marketed
in the country; some even prohibit the
marketing of certain products.
Promotional activities are subject to various

socio-cultural environment
Major factors are:

the buying and consumption habits of people,

their language beliefs and values,
customs and traditions,
tastes and preferences,
Education

Strategy should be appropriate in the

socio-cultural environment.

Eg: nestle brews a very large variety of instant

Even when people of different cultures use

the same product; the mod of
consumption, conditions of use, purpose of
use or the perceptions of the product
attributes may vary so much so that the
product attributes, method of presentation,
positioning or method of promoting the
product may have to be varied to suit the
characteristics of different markets.
E.g.: Vicks Vaporub, the popular pain balm is

 Language difference pose a serious problem.

e.g.

Preet-> Prestige for overseas market

In Japanese, General Motors body by Fisher means Corpse by fisher

Colour

Blue: feminine and warm in Holland ; but masculine and cold in

Sweden
Green: favourite in Muslim world; but represents illness in
Malaysia
Red: popular in communist countries; but represents disaster in
Africa
White: death and mourning in China and Korea; but it expresses
happiness in some countries. Also it is the colour of bridal dress.

Demographic environment
Factors:
Size, growth rate, age composition, sex
composition of population, family size,
educational levels, economic stratification
of the population, language, caste, religion,
etc.
E.g.
Decline in birth rates in USA have affected
the demand for baby products. So Johnson

Natural environment
Geological and ecological factors, such as natural resources
endowments, weather and climatic conditions, topographical
factors, location aspects in the global context, port facilities
etc., are relevant to business.
Differences in geographical conditions between markets may
some times call for changes in the marketing mix.
Geographical and Ecological factors also influence the
location of certain industries. E.g. industries with high
material index tend to be located near the raw material
sources.
Topographical factors may affect the demand pattern
E.g.. In hilly areas with difficult terrain, jeeps may be in a
greater demand than cars.

Ecological factors have recently assumed great importance.

The depletion of natural resources, environmental pollution
and the disturbance of ecological balance have caused great
concern.

Physical & technological

environment
Business prospects demands availability of certain physical facilities
E.g. demand for electrical appliances is affected by the extent of
electrification and the reliability of power supply.
Demand for LPG stoves depend on rate of growth of gas connections

differing technological environment of different markets may call for

product modifications
E.g. Many appliances are designed for 110 V in USA. They should be
converted for 240v in India

Technological developments may increase or decrease the demand for

some existing products
E.g. voltage stabilizers help increase in sale of electrical appliances in
markets characterised by frequent voltage fluctuations
Introduction of TVs, Refrigerators, etc. with in-built stabilizers adversely
affects the demand for voltage stabilizers.

International Environment
Particularly important for the industries
directly depending on imports or exports
and import-competing industries
Recession, economic boom, liberalization
Major international developments have
their spread effects on domestic business.

E.g. Oil price hikes increased the cost of

production and the prices of certain products
such as fertilizers , synthetic fibres. So usually,
the demand for natural fibres and manures

The oil crisis also promoted some

companies to resort to demarketing
demarketing refers to the process of
cutting consumer demand for a product
back to the level that can be supplied by
the firm.
E.g. The Indian Oil Corporation have
publicised tips on how to cut oil
consumption

Economic environment

This analysis is primarily concerned with remote

factors, such as economic conditions, the consumer
price index, productivity, personal income and wage
rate.
Now a days, it includes environmental concerns , such
as sales, market share, price trends, investments and
output trends etc.
This forecast serves as the framework for the industry.
And organizational forecasts.

Components of economic environment

Economic conditions
a)
b)
c)
d)
e)

Stages of business cycle

National income, per capita income and distribution of income
Rate of capital formation
Demand and supply trends
Inflation rate in the economy

Economic policies
International economic environment
Economic legislation
Economic system

Economic factors affecting

business operations and growth

Factors
Demand &
supply

Money &
banking

General price
level

Income &
employment

Marginal &
total utility

Economic
growth &
development

Trade cycles

Social environment

The economic indicators neglects social trends

but these social factors have profound impact
on the business environment.
Therefore, it is very essential to forecast the
possible changes in the relevant social
variables.
This forecasting is very complex.
Social factors include population, housing,
social security and welfare, education and
training, health and nutrition, income, wealth
and expenditure.

Components
Demographic characteristics
Social concerns such as the role of
business in society
Social attitudes and values
Family structures and changes in them
Role of women in society
Education levels
Awareness and work ethics

Social factors affecting business

operations and growth

Political factors

Political forecasts/analysis is equally

important as the political risks increase
the threat to business.
Eg. Size of government budget, tariffs,
tax rates, defense expenditure, etc
have the profound impact on the
business success.

Political forces affecting

business operations & growth
Government laws

Foreign
policy

Political
stability

National
defense
posture
Political
organization

ENVIRONMENTAL
SCANNING

Definition of Environmental scanning.

Environmental Scanning is the process by
which organizations monitor their relevant
environment
to
identify
opportunities
available and threats affecting their
business
It is important in evaluating the present
strategy, setting strategic objectives and
formulating future strategies.

Nature of environmental
scanning
1. Continuous process
2. Exploratory process.
3. Holistic exercise. (relation between
parts and the whole)

Scope of environmental
scanning

Factors affecting the environmental

scanning.
1)
2)
3)
4)
5)
6)
7)
8)

Strategist related factors

Age of the organization
Size and power of the organization
Geographic dimensions of the organization
Type of business
Influence of business organization
Volatility of environment
Managerial caliber

Objectives of Environmental Analysis

1)

To keep oneself dynamic in the management of the organization.

2)

To develop the action plans to deal with the technological changes

which can affects the organizational performance.

3)

To anticipate the present and future threats and opportunities for an

organization.

4)

To understand the transformation of the industry environment.

5)

To analyze the competitors strategies and hence it helps in

formulating effective counter policies.

6)

To develop the broad strategies and to make long term policies of the
firm.

Approaches to Environmental Scanning.

Systematic
approach

Processedform
approach

Adhoc
Approach

1)

Systematic approach:-

Under this, information for environmental scanning is collected in a

systematic way.
Information which have a direct impact on an organizations activity
like changes in legislations and regulations, markets, customers,
government policy etc should be collected regularly to monitor
changes and to act accordingly.

2)

3)

Adhoc Approach:Under this approach, instead of regular updating, an organization

may conduct special surveys and studies to deal with specific
events.
Impact of unforeseen developments and changes may also be
investigated as and when required.
processed- form approach:The processed information available either from primary or
secondary sources is used under this approach.
Guidelines received directly from government is the primary
information whereas information collected from newspaper,
periodicals etc is a secondary information.

Sources of information for Environmental

Scanning.
1)

2)

Verbal information:This source is very useful and quite important.

Higher level managers generally reliance more on the verbal
information.
They interact with the various groups of the people outside the
organization and gather the general feeling about their environment.

Written information or documentary or secondary information:This is one which is written in the forma and available through
published or unpublished sources.
There are many matters on which only published information is
available and one has to rely on them.
Eg. Information related with government, like policies, rules etc are
available on in the form of published form.

3)

4)

Internal sources:When an organization uses the information about the environment

through its own records then it is called as internal sources of
information.
Large companies are setting up their own corporate planning
departments in order to collect and retrieve the relevant
information.
The internal sources includes companys own files and
documents, company employees and management information
system (MIS) which is specially designed to serve the needs of
strategic planners.
External sources:The managers can use various publications and can take the help
of various outside agencies for collecting relevant information for
environmental analysis. These are called external sources.
Eg. Suppliers, customers, government publication agencies, trade
associations etc.

5)

Industrial espionage (spying) and surveillance:-

Organizations collects the information about their competitors

through spying.
The spying can be done by contacting customers of competitors,
dealers, employees etc.
The spying agencies provides more relevant information about
competitors strategies.

6)

Formal studies:-

These may be undertaken by employees, consultants, market

research agencies and researchers.
These studies are generally fund to be objective oriented.

PROCESS OF
ENVIRONMENTAL
SCANNING

Significance of
environmental scanning

Effective utilization of resources

Helps in converting treats into opportunities
Changing color of environment
Narrowing down the alternatives
Strategic management starts with
environmental scanning
Constant monitoring of the environment
Useful for the managers
Prediction of future.

Techniques of
environmental scanning
SWOT Analysis
ETOP

RISK IN BUSINESS
ENVIORNMENT

Meaning of risk
risk is a concept that denotes a potential
negative impact to some characteristics of
value that may arise from a future event
risk are events or conditions that may
occur and whose occurrence, if does take
place, has a harmful or negative effect.

Types of risk
1.

Legal risk:- arising from legal challenges or changes in law.

2.

Economic risk:- ability to attract and retain staff in the labor market, exchange rates
affect costs of international transactions, effect of global economy etc.
Regulatory risk:- changing of rules, regulations and laws.

3.
4.

Socio-cultural:- demographic change affects demand for services, stakeholder

expectations change.

5.

Natural risk:- associated with natural disasters like floods, earthquakes,

storms and fires etc.

6.

Political risk:- arises due to change of government, cross cutting policy etc.

7.

Environmental:- buildings need to comply with changing standards, disposal

of rubbish and surplus equipment needs to comply with changing standards.

Methods of assessing environment

risk

1.

Checklist method:-

It consist of systematically monitoring of economic, social, political and legal variables that affect
corporate performance.
This method gives clear view about the business environment risk and impact of these variables
on the future outlook of the business.
This method can also be used to measure the same country at different time period and also the
different countries at the same point of time.
Variables can be change in national income, inflation rate, fluctuations in the rate of interest,
change in foreign exchange reserve etc.
questionnaire/survey/structured expert opinion/ delphi technique:This technique includes the use of questionnaire, interviews and surveys.
The questionnaire are designed to assess the enviornment risk and are sent to experts for
obtaining their opiniions.
Each question is assigned with a particular score.
These scores are tabulated and then averaged to get a risk index.
Sometimes these questions are send to executives, social leaders, banks etc for obtaining their
views
Delphi technique is similar to this.
In this panel of experts from whom the opinion are gathered, is used but they do not interact face
to face.
Questionnaire is given to them and they give their response through mail.
In this method questionnaire is designed by small group and this is filled by large number of
people.
After getting the response again the questionnaire is refined and again sent to large number of
people and this process continues until consensus is arrived at.

2.

3.

Econometric techniques:-

Its means science of economic measurement as it is composed from two words. Econo
and metric.
Under this method mathematical models are used to express relationship among
variables.
These models take the form of a set of equations.
A large number of equations may be needed may be needed to arrive at a particular
econometric model, since the variables affecting the business are many.
Eg. Multiple regression analysis with the help of which we can establish relationship
between two or more variables.

4.

Rating and ranking system:-

Similar to expert based scoring system.

Ratings are crucial assessment tool for investors and business seeking information
about the financial risks in developed and emerging markets worldwide.
Countries rating is done on the basis of parameters like economic, social financial
and political.
Each parameter is assigned with a weight according to its importance in the total
environment risk and then scores are assigned and ranked on a scale.

5.

Risk benchmarking:-

This is a process used in management.

In this the acceptable range of different environmental factors in a normally
functioning healthy economy is ascertained and set as benchmark.
Then environment risk of some other countries are calculated by using same criteria
and compared with the benchmarked risk level.
The difference between the actual and the benchmarked risk level is considered as
an indicator of the relative risk ness of the environment of the country.
Reference or the benchmark country can be changed in the subsequent years if the
level of the business environment risk of that country increases in the subsequent
year.

7.

Assessment of country credit worthiness:-

Credit worthiness simply means to be worthy of credit

It is the condition in which the risk of default on a debt obligation by that entity is deemed low.
Credit worthiness means the capacity to repay the new debt.
Credit worthiness of the country is the leading indicator of its business environment risk.
Countries which have sufficient flow of future revenues and with small internal and external debts
are considered as good destinations for investment.
High external debt calls for restriction on outward remittances, exchange controls, restrictions on
import.
For accessing the credit worthiness following indicators are to be considered:socio-economic indicators:Unemployment
GDP per head
Diversification of local economy
Adequacy of current infrastructure
Demographic trends.
Political indicators:Reputation of government
Participatory governance
Relationships with employees.
Financial indicators:Financial ratios, capability to service current debt and repay new debt.
Decentralisation framework:Clear responsibility between state and central government.
Fiscal and tariff autonomy.

a.

b.

c.

d.

DEFINITION OF COUNTRY
RISK
Country risk relates to the likelihood that
changes in the business environment
will occur that reduce the profitability of
doing business in a country. These
changes can adversely affect operating
profits as well as the value of assets.

Sources/types of country risks

1.

Political sources/types:-

Government stability
Socio-economic conditions.
Internal conflict.
Corruption.
Military in politics.
Religion in politics
Law and order.
Bureaucracy quality.
Democratic accountability.

2.

Financial sources:-

Exchange rate stability.

Net international liquidity as months of import cover.
Current account as a percentage of exports of goods & services.
Foreign debt as a percentage of GDP.
Foreign debt service as a percentage of export of goods.

3.

Economic sources:-

GDP per head

Real GDP growth
Annual inflation rate.

Country risk analysis

A collection of risks associated with investing in a

foreign country is called country risk

These risks include political risk, exchange rate risks, economic risks
etc.
Country risk varies from one country to another country.
Some countries have high enough risk to discourage much foreign
investment.
This can reduce expected rate of return on an investment and should be
taken into consideration when investing in an other country.
Country risk analysis examines the economic strategy of a country.
It gives a picture how the government of the country has behaved, is
behaving and may behave in future.
Foreign companies do country analysis before making the investment in
a particular country to gauge the risk to the extent possible level.

Uses of country analysis

Country risk analysis has been practiced by

government officials as a way to interpret or
anticipate the behavior of other governments.
It is an indispensable tool for senior managers in
all MNCs. they use the analysis to evaluate and
compare countries before they make their
decisions.

Impact of country risk factors

1.

Changes in fiscal policy:-

Fiscal policy cab be said as a measure which deals directly with those matters which
immediately influence the consumption and investment expenditure and hence, the
income, output and employment in the economy.
Main objective of the government is to have balanced budget.
Mostly expenditure exceeds the revenue.
In order to meet expenditure government imposes new taxes, takes loan which can
be internal & external etc.
Fiscal policy is directed by macroeconomic objectives, like economic stabilization,
economic growth, employment, equitable distribution of income and wealth etc.
Government will impose new taxes or increase existing taxes when they want to
reduce the consumption of goods eg tax on tobacco.
low taxes will increase the consumption power of the consumer.

2.

change in monetary policy:-

The process through which government, central bank or monetary authority of a

country controls the supply of money, availability of money and rate of interest.
Expansionary of monetary policy increases the supply of money in the economy.
Such policy is used to combat unemployment in a recession by lowering rate of
interest, while contractionary monetary policy involves raising interest rates in order to
deal with inflation.
During inflation government may raise rate of interest to bring down inflation.

When government follows, expansionary monetary policy, low rate of interest

encourages consumer and investment demand, which is favourable for firms
manufacturing goods for consumer and industries.

3.

impact of price control:-

Price control is exercised on those goods which are generally used by masses or has
substantial public interest.
Such goods include petroleum, sugar, cement etc.
Main aim of price control is to make available good at reasonable and fair price to the
consumers.
Sometimes it is complimented with subsidies, support prices and distribution
controls. Subsidies are given on sugar, wheat, rice etc.
In india government has put some medicines under the umbrella of life saving drugs,
the prices of which are control by it through Drug price control order.
Thus if the firm is doing business in this area then he has to adjust the price of the
drugs according to government orders.

4.

Impact of import control:-

Import control is applied when the balance of payment position is negative and there
is a decline in foreign exchange reserves.
Higher import duties, import quota, import restrictions, import licensing take place to
control the imports.
Sometimes import restrictions are imposed to encourage domestic industry against
the competition from cheap imports.

Another method for controlling import is import licensing.

This restrict the entry of new importers in the trade.
This will encourage the industries who are producing import substitutes.
Protection of domestic industries reduces competition, reduces motives for
technological advancement and thereby increases inefficiency in the domestic
market.

5.

Impact of exchange control:-

It means any form of interference by the state, central bank or any other agency
specially created for the purpose with the free play of the forces that affect the
foreign exchange rate.
It involves restrictions on foreign payments, transfers of domestic balances among
non-residents etc.
Through this residents could be effectively prevented from exporting and foriegners
from withdrawing their capital out of the country.
These are designed to suppress the market forces in the foreign exchange market.
All the international and financial transactions need to get prior permission of the
controlling authority under this system.
Countries having balance of payments deficits, increasing external debts,
diminishing foreign exchange reserves and difficulty in external debt servicing can
apply exchange control measure.
Under this it is difficult to purchase good from the cheapest market and sell good in
the best markets of the country.

6.

Impact of labour and legislation:-

Labour legislation is very important factor that shapes the labour enviornment.
Protection of the labour interest is one of the most important responsibilities of the
democratic countries.
Such policies affect wages, working conditions and productivity and industrial peace.
Such laws helps government to intervene in areas such as lay off, retrenchment and
clousers.
Firms usually are reluctant to establish their business where labour unions are very
strong and government intervention in the form of labour policy is intense.

7.

Trade related investment Measures:-

It refers to certain conditions or restrictions imposed by a government in respect of

foreign investment in the country.
These measures affect the foreign companies.
These companies faces two problems which are as follows:The problem of dividend balancing requirement provides that the dividend outflow of
an MNC must be equal to the inflow of foreign exchange through exports or in the
shape of foreign investment.
The firms should use minimum specified percentage of value of raw-material,
components or intermediates in their production under LCRs.
First measure is taken for stopping the drainage of foreign exchange reserves.
Second measure is taken by host country save its own industry and products.

a.

b.

POLITICAL RISK ANALYSIS

 The risk that an investments returns could suffer as a

result of political changes or instability in a country.
Inability affecting investments returns could stem
from a change in government, legislative bodies, other
foreign policy makers or military control.
Some political risk can be insured through
government bodies.
Political risk can be seen in both developing and
developed nations.
Macro-political risk:- anti-globalization, wars etc.
This affects the value of the firm in a country.
Micro-level risk:- rules, laws for the regulation of a
particular industry.
This affects only those firms who comes under the
orbit of such of that particular industry.

Nature of political risk

1.

Non convertibility of currency and non-repatriation of profits:-

Convertibility can be fully convertible, partial convertible and non-convertible.

Fully convertible:- means that currency of the nation can be converted in the
currency of other nation without restrictions.
Eg uk, usa and their citizens are free to make investments abroad and the
foriegners are free to buy assets in us and uk.
Partial convertibility:- in this only exports and imports are allowed but the purchase
of assets in abroad is not allowed. Eg india.
Non-convertibility:- when capital account transactions are disallowed.

2.

National and inadequacy of compensation:-

The process of transferring the ownership of the particular industry to government is

known as nationalization.
Another reason for this step is security.
Later private sector was allowed to enter in certain areas due to this competition
increased which benefited customers. Eg is banking sector.

3.

Domestic political violence:-

Damaged caused by terrorist attacks:-

This means the acts of violence by certain political affiliations to promote their
political, economic or social unrest. Eg reliance fresh stores were attacked and
forced to close the business in UP.

Types of political risk

1.

General instability risk:-

The risk arises due to the political system of the host country.
There may be change in the system due to change in the government.
Such problem is more in poor countries as compared to developed or developing
countries. This is due to poor governance, poverty, exploitation, weak and inefficient
governments.

2.

Ownership risk:-

3.

Operation risk:-

The risk arises from the possibility that the government may restrict the operations of
the firm in production, marketing, finance, HRM.
This could be result of new law or specific disciplinary action as a specific firm.

4.

Transfer risk:

The risk applies to those MNCs which have their affiliates in foreign countries.
The risk arises from the possible actions of a government which might affect
transactions, remittances, or transfer of profits, funds or assets between the parent
company and its affiliates whether in the same country or abroad.
Many companies transfer cash in order to save tax.

Sources/indicators of political risk.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Radical regime change through coups, revolutions, army takeovers or

regular elections .
Negative media reports.
Pressures from business community for concessions.
Unfair, unethical or exploitative business practices.
Economic crises and bankruptcies.
Widespread strikes, lockouts and boycotts.
Law and order problems and terriorism.
Border tension, conflicts and international war.
Rising business disputes.
Flood of counterfeit and unsafe products.
Fasical crisis and administrative failure.
Consumer movements.

Risk Avoiding Strategies

1.

2.

3.

4.

Avoid politically sensitive products:

Firms can avoid products which affect national security and public health of the
people of the country.
Alcoholic drinks for ladies, firearms and explosives, late night clubs are most likely to
attract public criticism and government attention in developing economies.
Avoiding sensitive regions:Firms can avoid politically sensitive regions and choose safer or more peaceful
locations.

Contractual agreements:Another way to avoid risk is to conduct and transact business, as far as possible on
contractual terms.
It is not possible in every sphere of business activity but there exist a number of
ways like purchase and sale contracts.
Through this risk can be avoided.
tie-up with other firms:Firms can avoid risk by not standing alone.
This strategy can be adopted where any government is having hostile attitude
towards foreign enterprise.

Risk Reducing Strategies

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Establishing a risk assessment system:A firm should develop its risk assessment system to identify and evaluate environment
risks relevant to it.
It requires the establishment of market intelligence and early warning system.
For this through analysis of the economic and political developments in the country is
needed.
Developing local economy:We should avoid local criticism and confrontation and try to contribute maximum for the
development of the local economy.
This can be done by purchasing locally from the market, employing local people, or
giving sub-contracts to local companies.
Facilities like schools, roads dispensary, parks etc should be developed for the welfare
of the society.
Local equity participation:This strategy enhances the acceptability of an MNC in the host country.
Good corporate citizenship:This is amongst the best strategies to deal with the political risk.
Maintaining good political relations:-