Business Environment

Nature, Composition and Scope

of Business Environment
 What is a Business Environment?
Environment by definition is something
external to an individual or an
organisation.
Therefore, Business environment refers
to all external factors which have a direct
or indirect bearing on the activities of a
business.
 Some experts have used the term
business environment in a broader
sense-in terms of internal and external
environment of business.
 External environment can be sub-
divided into micro and macro
environment.
 While certain aspects of both internal
and external environment pose a threat
to business, other aspects provide
opportunities for business growth.
Internal Environment
 The Organisation’s value system, goals
and objectives, management structure,
relationship among the various
constituents, physical assets,
technological capabilities and human,
financial and marketing resources make
the internal environment of business.
External Environment
 Consists of institutions, organisations
and forces operating outside the
company. All these individually as well
as collectively exercise their influence
on the latter.
 Broadly, external environment of
business may be classified into micro
and macro environment.
Micro Environment
 Refers to such players whose decisions
and actions have a direct bearing on
the company.
 Since modern business broadly has two
aspects-production and selling of goods,
the micro environ. can be divided
accordingly.
 From the point of view of a company’s
business operations, micro environment has
great relevance.
 Usually the players in the micro environment
do not affect all the co.s in an industry in the
same way. Their decisions, and actions vis-à-
vis individual company often differ in
accordance with the size, capability and
strategies of each company.
 For eg. Suppliers of inputs are normally
more accomodating if the company is
large. However they may not give the
same concessions to relatively small co.s.
 Likewise, a competitor does not mind
starting a price war if the rival company
is small but he will be reluctant to do so
if the rival firm is large and capable of
retaliating.
 The most prominent performers in the
micro environ. exercising influence on
production are input suppliers and
workers together with their unions.
Customers, market intermediaries and
competitors affect sales operations of
the business firm. The public may
influence both production and sales.
Macro Environment
 Comprises large societal and physical forces
which affect the company and also the
players in the company’s micro environment.
 It refers to all those economic and non-
economic factors which exercise their
influence on the business activity in general
and thus determine opportunities that a
company may have to promote its business.
 The role of macro environment from the
point of view of the business may be
positive and negative.
 This implies that the larger forces in the
co.s environment do not always provide
wider space for business operations.
They often put restraints on the
business activities of the firm.
 Macroeconomic scenario refers to price
situation, levels of saving and
investment, fiscal, monetary and
balance of payments situations and
overall growth activity. These factors
broadly determine the prospects of
business activity.
 These factors not only determine
opportunities for business but also at
times, have serious constraining effects.
 Macro environment is broadly classified
into economic environment and non-
economic environ. Since business is
basically an economic activity, economic
environ.of business-both national and
global- is of strategic importance.
 In the economic environ. of the
country, the country’s economic system,
macroeconomic scenario, phase of
business cycle through which the
economy is passing, organisation of the
financial system and economic policies
of the govt. are the most important
elements.
 Economic systems of USA, Japan, Germany,
France and the UK are capitalistic.
 Economic systems of the former Soviet Union
and China are Socialist.
 Capitalism in the broad sense, is a system of
private property in both producer and
consumer goods, freedom of contract and
competition, with limited govt. intervention in
economic affairs.
 Socialism is a system of complete
collectivisation of the means of
production; there are no private profits,
but incomes may differ according to
individual skills and amount of work
done; also personal property for
consumption purposes is allowed.
 To a great extent, the economic system
of a country determines its economic
environment.
 Now because of liberalisation, from the point of
view of the co.’s business, global economic
environment is as much important as the national
economic environment.
 The notable features of present day global
environment are globalisation, deep economic
crisis in East and South-East Asia,
underdevelopment of Russia and East Europe,
the crash of Japanese economy, economic
slowdown in the USA,
 Regional Economic groupings,
protectionism, global recession and
dominance of the multinational
corporations.
 Business , despite the fact that it is an
economic activity, is also influenced by its
non-economic environment.
 The political system, ideology of the govt.,
legal framework, social system, cultural
values, demographic factors, level of
technological development, and natural and
physical environment of the country
constitute non economic environment of
business.
The Global Environment
 Radical changes in the business
environment world over during 1990s.
 Rapid economic and political changes
 Lot of uncertainty about macro
economic variables and policy measures
which diff. countries may follow.
 Unipolar world-politically, economically
in which USA has a dominant position
 Recession haunting both developed and
underdeveloped economies
 The Japanese economy which was the
2nd largest in the world is now in deep
financial crisis
 market economy in Russia -disastrous
for the people of the country.
 developed countries making regional
economic arrangements; resorting to
protectionism
 Onslaught of finance, capital and
multinationals posing a threat to
countries like India
 Crisis in the world economy is probably
the severest since the Great Depression
of the early 1930s.
 Great Depression in the United
States, worst and longest economic
collapse in the history of the modern
industrial world, lasting from the end of
1929 until the early 1940s.
 Beginning in the United States, the
depression spread to most of the
world’s industrial countries, which in the
20th century had become economically
dependent on one another.
 The Great Depression saw rapid
declines in the production and sale of
goods and a sudden, severe rise in
unemployment. Businesses and banks
closed their doors, people lost their
jobs, homes, and savings, and many
depended on charity to survive.
 In 1933, at the worst point in the
depression, more than 15 million
Americans—one-quarter of the nation’s
workforce—were unemployed.
 The depression was caused by a number of
serious weaknesses in the economy:
 Uneven income distribution
 Americans spent more than they earned
 farmers faced low prices and heavy debt
 The lingering effects of World War I (1914-
1918) caused economic problems
 the disastrous U.S. stock market crash
of 1929 , which ruined thousands of
investors and destroyed confidence in
the economy
 Continuing throughout the 1930s, the
depression ended in the United States
only when massive spending for World
War II began.
The Unipolar world
 Collapse of Eastern Europe in 1989 and
the USSR in 1991 marked the end of a
bi-polar world-demise of socialism.
 USA established supremacy over the
world economy.
 Japan -2nd largest economy by end of
1980s but couldn’t challenge political
and economic moves of USA
 Western European countries could
match collectively but not individually-
Germany, France , Italy, UK etc.
 Nuclear tests by India invited the wrath
of USA-slapped sanctions on the
country-cut off all aid except
humanitarian assistance-1998
 USA threatened South Korea of a trade
war unless it agrees to import more
American cars.
 Jan. 1st, 1999, the European Economic
and Monetary Union launched a single
European currency-’euro’.-powerful and
integrated bloc of European capital
capable of challenging USA.
Globalisation
 Marked acceleration in international
economic integration since 1950 termed
‘Globalisation’.
 It simply implies the expansion of
economic activities across political
boundaries of the nation states.
 Between early 1970s and late 1990s,
share of world trade in the world GDP
rose from one-eighth to one-fifth.
 Top 200 global corporations control
28% of world’s economic activity.
 Their combined sales of 7.1 billion
dollars surpasses the combined
economies of 182 countries.
Economic crisis in East and
south-East Asia
 East Europe and Russia abandoned socialism,
opted for capitalism 1990s-reform measures
failed miserably, GDP falling at the rate of
10% per annum or even more.
 Industrial production decreased in Russia @
11% per annum.
 Laissez faire model not appropriate for
restructuring industrial Russia under
 competitive conditions of
technologically advanced contemporary
capitalism.
Economic crisis in East and
south-East Asia
 S.Korea, Malaysia, Thailand, Indonesia,
Singapore, Hongkong-high rates of
economic growth rate till 1990 from
1970.-collapsed in 1997-98.
 Reasons:
 Massive short term borrowings from
foreign banks
 Borrowed short term externally and lent
long-term domestically-mismatch in
banks’ portfolio.
Regional Economic Groupings
 Countries all over the world became aware
about their interdependence and about the
importance of cooperating with each other.
 Result: Various organisations formed:EU:
European Union, EFTA: European Free Trade
Association, NAFTA: North American Free
Trade Agreement, LAFTA: Latin American
Free Trade Association, SAFTA: South Asia
Free Trade Agreement
Protectionism
 Since mid 1970s, industrialised
countries of the west increasingly
resorting to protectionism to avoid
competition from newly industrialising
countries in domestic markets by
creating non-tariff barriers.-standards,
testing, certification requirements, or
anti-dumping duties.
Status in 2008
 Despite a still-slumping housing market,
an escalating credit crunch and spiraling
inflationary pressures, the U.S.
economy should still manage to
advance at a 1% to 2% clip in 2008.
 U.S. economy will likely dodge the
recession that some observers have
feared.
 The emergence of a growing middle
class in such key markets as China,
India and Eastern Europe will make
global dependence on the U.S.
economy a thing of the past.
 With tens of millions of newly minted
consumers ready to spend in China,
that country could easily weather a U.S.
downturn.
 The United States is experiencing its
worst housing recession in more than
15 years.
 The United States housing bubble is the
economic bubble in many parts of the U.S.
housing market that began roughly in 2001,
especially in populous areas such as California
, Florida, New York, Michigan, the suburbs of
Chicago in the Midwest, the
BosWash megalopolis, and the Southwest
markets. It reached its peak in 2005 and then
plateaued, and started deflating in 2006 and
accelerated since.
 A housing bubble is an economic bubble
that occurs in local or global real estate
markets. It is characterized by rapid
increases in the valuations of real
property until unsustainable levels are
reached relative to incomes, price-to-
rent ratios, and other economic
indicators of affordability.
 . The housing bubble in the U.S. was
caused by historically-low interest rates,
lax lending standards, and a mania for
purchasing houses.
Growth rates of different
economies
 According to IMF, World Bank and the
Organisation for Economic Cooperation
And Development (OECD), 2006:
 World economy: 4.9% (2007)-
estimated to go down to 4.1% in 2008
 US : 3.4%
 Japan:2%
 EU economy has become less
dependent on the US.
 Growth rate:2.8%-highest since the
beginning of the 21st century.
 Developing countries:7%
 Developing Asian economies continued
to lead the world: more than 8%
 Chinese :highest growth rate:10.5%
 China followed by India-reached the
highest growth rate since economic
reforms began in 1990s.
 GDP=US$780 billion, more than 8%
over the last 2 yrs.
 African economies: 5.4%
 Russia: 7%