Impact of economic environment on business

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Business, now-a-days is vitally affected by the economic, social, legal, technological and political factors. These factors collectively form business environment. Business environment, as such, is the total of all external forces, which affect the organization and operations of business. The environment of an organization has got internal, operational and general lives managers must be aware of these three environmental levels and their relationship and importance. The term 'business environment implies those external forces, factors and institutions that are beyond the control of individual business organizations and their management and affect the business enterprise. It implies all external forces within which a business enterprise operates. Business environment influence the functioning of the business system. Thus, business environment may be defined as all those conditions and forces which are external to the business and are beyond the individual business unit, but it operates within it. These forces are customer, creditors, competitors, government, socio-cultural organizations, political parties national and international organizations etc. some of those forces affect the business directly which some others have indirect effect on the business. Business environment as such are classified into the following three major categories, they are:

y y y

Internal environment Operational environment General/external environment Both internal and operational environment are the creation of the enterprise itself. The factors of external or general environment are broad in scope and least controlled and influenced by the management of the enterprises. Now we discuss those factors in details as below: Economic dimensions of environment Economic environment refers to the aggregate of the nature of economic system of the country, the structural anatomy of the economy to economic policies of the government the organization of the capital market, the nature of factor endowment, business cycles, the socio-economic infrastructure etc. The successful businessman visualizes the external factors affecting the business, anticipating the prospective market situations and makes suitable to get the maximum with minimize cost

Economic factors that affect the business environments are as under: y Government economic policies y rate of interest set by the centeral bank of any country y Per capita Income which has a huge impact on business environment by changing their consumption behavior y Privatization policy by the government y instablity in the economy due to bad political conditions in the county affects the business environment y Dumping y Customs duty structure y Airline air freight charges y Foreign investment in the country

Technological developments are the most manageable uncontrollable force faced by marketers. these forces are beyond the control of an organization and its managers. Technology has a tremendous effect on life-styles. the percentage of income spent on food decreases. Accordingly. Economic Environment The economic environment consists of factors that affect consumer purchasing power and spending patterns. consumption patterns. Changes in major economic variables have a significant impact on the marketplace. and the economy. For example. The managers must perforce recognize the elements. cultural. and stimulate entirely separate markets. and respond to the various opportunities and threats in its environment. state and country etc. External Macro environment The external macro environment consists of all the outside institutions and forces that have an actual or potential interest or impact on the organization's ability to achieve its objectives: competitive. Government . the water we drink. They must identify. and services. Public Sector Oil Companies in India. The successful organization will identify. radically alter or destroy existing industries. interest rates. legal. Technological Environment The technological environment refers to new technologies. Disturbances in the environment may spell profound threats or new opportunities. appraise..Generally speaking an environment includes the air we breathe. as income rises. An organization with an environmental management perspective takes aggressive actions to affect the forces in its marketing environment rather than simply watching and reacting to it. Though noncontrollable.g. Economic factors include business cycles. the world outside the boundaries of the organization). and ecosystem. An organization operates within the larger framework of the external environment that shapes opportunities and poses threats to the organization. evaluate and react to the forces triggered by the external environment. and makes them available to customers as outputs. External forces are not controlled by an organization. 1. distribute. severity and impact of these forces on the organization. money. and promote their products. Successful organizations scan their external environment so that they can respond profitably to unmet needs and trends in the targeted markets. The organization must continuously monitor and adapt to the environment if it is to survive and prosper. rapidly changing and significant interacting institutions and forces that affect the organization's ability to serve its customers. income affects consumer spending which affects sales for organizations. economic. but they may be influenced or affected by that organization. The external environment has a major impact on the determination of marketing decisions. these forces require a response in order to keep positive actions with the targeted markets. Political and Legal Environment Organizations must operate within a framework of governmental regulation and legislation. the available business. It is necessary for organizations to understand the environmental conditions because they interact with strategy decisions. while the percentage spent on housing remains constant. goods. Advances in technology can start new industries. The Organization as a System Internally. social and educational infrastructure in the locality . The rapid rate at which technology changes has forced organizations to quickly adapt in terms of how they develop. Organizations need to be aware of new technologies in order to turn these advances into opportunities and a competitive edge. materials and equipment) from the external environment (i. an organization can be viewed as a resource conversion machine that takes inputs (labor.e. More often than not. According to Engel's Laws. political. technological. 2. demographic. converts them into useful products. and income. 3. The external environment is a set of complex. unemployment. which create new product and market opportunities. the factors of the environment will need to be considered as inputs in the planning and forecasting models developed by an organization. price. It is quite possible that some large organizations themselves constitute a greater part of the business environment e. In the context of business the environment refers to the sum of internal and external forces operating on an organization. inflation.

The cultural environment is made up of forces that affect society's basic values. External Microenvironment The external microenvironment consists of forces that are part of an organization's marketing process but are external to the organization. where they are. and behaviors. new types of households. 6. An example of response by marketers to special interests is green marketing. The political environment includes governmental and special interest groups that influence and limit various organizations and individuals in a given society. and acceptance of responsibility. Goodwill can be built by voluntarily engaging in pollution prevention activities and natural resource. ethnic and educational mix. the use of recyclable or biodegradable packing materials as part of marketing strategy. location. To avoid shortages in raw materials. They are critical to an organization's marketing success and an important link in its value delivery system. individualism. Organizations can limit their energy usage by increasing efficiency. and secularism. its producer-suppliers. marketing intermediaries are an important part of the system used to deliver value to customers. mastery over the environment. The legal environment becomes more complicated as organizations expand globally and face governmental structures quite different from those within the United States. organizations can use renewable resources (such as forests) and alternatives (such as solar and wind energy) for nonrenewable resources (such as oil and coal). how to reach them and when customers' needs change in order to adjust its marketing efforts accordingly. progress. humanitarianism. tariffs. selfactualization. Changes in the demographic environment can result in significant opportunities and threats presenting themselves to the organization. freedom. Suppliers Suppliers are organizations and individuals that provide the resources needed to produce goods and services. Social / Cultural Environment Social/cultural forces are the most difficult uncontrollable variables to predict. and its marketing intermediaries. immediate gratification. Ecosystem Environment The ecosystem refers to natural systems and its resources that are needed as inputs by marketers or that are affected by marketing activities. sex. conformity. These micro environmental forces include the organization's market. Marketing intermediaries are independent organizations that aid in the flow of products from the marketing organization to its markets. U. Organizations hire lobbyists to influence legislation and run advocacy ads that state their point of view on public issues. Green marketing or environmental concern about the physical environment has intensified in recent years. Major trends for marketers in the demographic environment include worldwide explosive population growth. and deregulation of industries. and how many are likely to buy what the marketer is selling. It is imperative for an organization to know their customers. The major purposes of business legislation include protection of companies from unfair competition. a changing age. Each target market has distinct needs. race. others. which need to be monitored. efficiency. religious and moral orientation. Marketing Intermediaries Like suppliers. money to spend. protection of consumers from unfair business practices and protection of the interests of society from unbridled business behavior. and geographical shifts in population. A market is people or organizations with wants to satisfy. Demographic Environment Demographics tell marketers who current and potential customers are. occupation. 3. social interaction. 5. The market is the focal point for all marketing decisions in an organization. achievement. and the willingness to spend it. and the world around them and movement toward self-fulfillment. Demography is the study of human populations in terms of size. The Market Organizations closely monitor their customer markets in order to adjust to changing tastes and preferences.relationships with organizations encompass subsidies. 1. materialism. practicality. It is important for marketers to understand and appreciate the cultural values of the environment in which they operate. putting more constraints on marketers. Changes in social/cultural environment affect customer behavior. import quotas. courage. and other statistics. 2. The public expects organizations to be ethical and responsible. density. the organization is capable of exerting more influence over these than forces in the macro environment. While these are external. which affects sales of products. patriotism. Special interest groups have grown in number and power over the last three decades. perceptions. youthfulness. age. values and beliefs include equality. preferences. Trends in the cultural environment include individuals changing their views of themselves. The intermediaries between an organization and its markets .S. 4.

Warehouses store and protect the goods before they move to the next destination. atomic energy. Heavy investment by government in Steel plants. which was dominated by the jute and cotton textile industries. hydroelectric power and irrigation projects laid the foundation of a strong industrial edifice. India's new leaders sought to use the power of the state to direct economic growth and reduce widespread poverty. These include middlemen (wholesalers and retailers who buy and resell merchandise). For eg when the insurance and aviation industry was thrown open to the private sector . 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) . 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 public sector came to dominate heavy industry. In 1947 the country was poor and shattered by the violence and economic and physical disruption involved in the partition from Pakistan. Manufacturing. advertising agencies. and media firms. and telecommunications. Importance of understanding the environment The managers job cannot be accomplished in a vacuum within the organization. and industrial development had been restrained to preserve the area as a market for British manufacturers. c)The cost of capital and the cost of borrowing .9 percent of the gross domestic product (GDP) and for a much larger proportion of employment. f)Finally . raw materials . pesticides (damage to environment in the form of chemical residues in groundwater). The economy had stagnated since the late nineteenth century. The private sector produced most consumer goods but was controlled directly by a variety of government . In fiscal year (FY) 1950. 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 sets when consumer preference has clearly shifted to colour television sets. Financial intermediaries help finance transactions and insure against risks and include banks. d)The availability of all key inputs like skilled labour . plastic bags (choking of sewer lines) have resulted in the slow decline of some industries. e)Increasing public awareness of the negative aspects of certain industries like hand woven carpets ( use of child labour ) . Physical distribution firms help the organization to stock and move products from their points of origin to their destinations. forestry. There are a number of factors both internal as well as external which jointly affect managerial decision-making.3 percent of GDP at that time. accounted for only 10.two key financial drivers of any enterprise are impacted by the external environment . transportation. The non-aligned movement at a time when the world was divided into two power blocks with cold war between the Super-powers.constitute a channel of distribution. prevented India from becoming a satellite of any other nation and enabled it to protect Its economy and the Indian Population. the new entrant could easily build on the expectations of the public. state of competition ( Car manufacturing capacity presently in the country is far in excess of demand) etc. and fishing accounted for 58. transportation . electricity . fuel etc are a factor of the business environment. the environment offers the opportunities for growth and profits . agriculture. trained managers . Marketing service agencies help the organization target and promote its products and include marketing research firms. credit unions. and insurance companies. Indian economy has made great strides in the years since independence. Changing profile of Indian economic environment India gained independence in 1947 paving the way for national leaders of the Indian Government to build an economically independent new India. Policies between 1950-70 were implemented with a sincere belief in the efficacy of the socialist philosophy and political democracy.

India has agreed to eliminate quantitative restrictions on imports of about 1. petroleum exploration and processing. In the recent past. Automatic approvals are available for investments involving up to 100% foreign equity. Foreign investment is particularly sought after in power generation. Major U. with total inflow of U. It was high time that Indian economy became more open and entered the international market. Principal U. successive Indian governments sought to reduce state control of the economy.S. It seemed likely that India would come close to or equal the relatively impressive rate of economic growth attained in the 1980s. In the 1950s. by inadequate infrastructure. India's trade has increased significantly since reforms began in 1991.S. and strict limits on foreign capital was increasingly questioned not only by policy makers but also by most of the intelligentsia. cumbersome bureaucratic procedures. the economic outlook was mixed. Proposals for direct foreign investment are considered by the Foreign Investment Promotion Board and generally receive government approval. In the late 1980s. The need for emergency loans led the government to make a greater commitment to economic liberalization than it had up to this time. Most analysts believed that economic liberalization would continue. is India's largest investment partner. and computer hardware. India embarked on a series of economic reforms in 1991 in reaction to a severe foreign exchange crisis. but results in the 1960s and 1970s were less encouraging. The U. reform and modernization of the financial sector. and significant adjustments in government monetary and fiscal policies. bilateral trade in 1998-99 was about $10. is India's largest trading partner. Progress toward that goal was slow but steady. India relied on foreign borrowing to finance development plans to a greater extent than before. largely as a result of staged tariff reductions and elimination of non-tariff barriers. the government has imposed "additional" import duties of 5% on most products plus a surcharge of 10% over the past 2 years.S. there was steady economic growth. it seems to have paved the way for India's entry in world markets. Those reforms have included liberalized foreign investment and exchange regimes. With globalisation becoming the key word of the 90's. imports from India include textiles and ready-made garments. Government emphasized self-sufficiency rather than foreign trade and imposed strict controls on imports and exports. On the other hand. when the price of oil rose sharply in August 1990. but that the poorest sections of the population might not benefit. Significant liberalization of its investment regime since 1991 has made India an attractive place for foreign direct and portfolio investment. however. telecommunications. agricultural and related products. advanced machinery. and chemicals. however. Our quality standards were not in tune with international competition. investors also have provided an estimated 11% of the $18 billion of foreign portfolio investment that has entered India since 1992. ferrous waste and scrap metal. and high real interest rates. roads. Economic reforms have been initiated to facilitate stabilisation and structural -adjustments essential for the growth of the economy . exports to India are aircraft and parts. In the early 1990s. although there was disagreement about the speed and scale of the measures that would be implemented. The reform process has had some very beneficial effects on the Indian economy. state ownership of many large units of production. ports. Beginning in the late 1970s. fertilizers. lower inflation. including higher growth rates. As India moved into the mid-1990s. trade protectionism. India has witnessed changes in several critical factors strengthening its economy. Foreign portfolio and direct investment flows have risen significantly since reforms began in 1991 and have contributed to healthy foreign currency reserves ($32 billion in February 2000) and a moderate current account deficit of about 1% (1998-99).420 consumer goods by April 2001 to meet its WTO commitments. India's economic growth is constrained. depending on the kind of industry. the nation faced a balance of payments crisis. But too much of protection from the Government had its own disadvantages. regulation and control of private enterprise.S. India will have to address these constraints in formulating its economic policies and by pursuing the second generation reforms to maintain recent trends in economic growth. and many analysts attributed the stronger growth of the 1980s to those efforts. and significant increases in foreign investment. It had produced more traders than industrialists.regulations and financial institutions that provided major financing for large private-sector projects. direct investment estimated at $2 billion (market value) in 1999. India's postindependence development pattern of strong centralized planning. significant reductions in tariffs and other trade barriers. gems and jewelry. and mining.S.S. leather products. The U. As a result.9 billion. The outlook for further trade liberalization is mixed. U.

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