Economic & Social

Environment
Prof. Dhaval Bhatt
Concept of Business
Environment
 Purpose of Business
• Business may be in simple words understood as the organized
efforts of enterprise to supply consumers with goods and
services for a profit.

• However the purpose of business is not earning profits only.

• Business is an important institution in society for the supply of

goods and services.
 Purpose of Business (Contd…)
• Business helps in Creation of job opportunities

• Business offers better quality of life

• Business contributes to the economic growth of the country.

 Business Environment
Business
Business is an organised efforts by individuals to produce goods and services in
market place, and to reap some reward for theses efforts.

Environment
The environment includes factors outside the firm which can lead to opportunities of
threats to the firm.
 Definition of Business Environment
• Definition: According to Androse “The term business environment of a
company is defined as a pattern of all external influences that effect its
life and development.
• Business environment consist of all those factors that have a bearing
on the business.

• The survival of a business firm depends on its innate strength

resources at its command and its adaptability to the environment and
the extent to which the environment is favorable to development of
the firm
Factors Influencing Business Decision
 Features of Business environment

• Totality of external forces:

• Business environment is the sum total of all things external to
business firms and, as such, is aggregative in nature.
• Dynamic nature:
• Business environment is dynamic in that it keeps on changing
whether in terms of technological improvement, shifts in consumer
preferences or entry of new competition in the market.
 Features of Business environment
(Contd…)
• Specific and general forces:
• Business environment includes both specific and general forces.
Specific forces (such as investors, customers, competitors and
suppliers) affect individual enterprises directly and immediately in
their day-to-day working. General forces (such as social, political,
legal and technological conditions) have impact on all business
enterprises and thus may affect an individual firm only indirectly.
 Features of Business environment
(Contd…)
• Uncertainty:
• Business environment is largely uncertain and difficult to predict the
future happenings. This is particularly relevant especially when
environmental changes are taking place very frequently as in the case of
information technology or fashion industries.
• Relativity:
• Business environment is a relative concept since it differs from country
to country and even region to region. Political conditions in the USA, for
instance, differ from those in China or Pakistan. Similarly, demand for
sarees may be fairly high in India whereas it may be almost non-existent
in other European countries.
 Elements /
Dimensions of
Business
Environment
  Economical Environment
• Economic Environment consists of Gross
Domestic Product, Income level at national
level and per capita level, Profit earning rate,
Productivity and Employment rate, Industrial,
monetary and fiscal policy of the government
etc.
 Some Aspects of Economic Environment
1. Role of Private and Public sector
2. Rate of growth of GDP, GNP, and Per Capita Income
3. Rate of Saving and Investment
4. Balance of Trade
5. Balance of Payment
6. Transport and Communication System
7. Money Supply in the Economy
8. International Debt
 Social Environment
• Social Environment consists of the customs and traditions of the society in
which business is existing. It includes the standard of living, taste,
preferences and education level of the people living in the society where
business exists.
 Some Aspects of Social Environment
1. Quality of life
2. Importance or place of women in workforce
3. Birth and Death rates
4. Attitude of customers towards innovation, life style etc.
5. Education and literacy rates
6. Consumption habits
7. Population
8. Tradition, customs and habits of people
 Political Environment
• Political environment constitutes all the factors related to government
affairs such as type of government in power, attitude of government
towards different groups of societies, policy changes implemented by
different governments etc. The political environment has immediate and
great impact on the business transactions so businessman must scan this
environment very carefully.
Some Aspects of Political Environment
1. Present political system
2. Constitution of the country
3. Profile of political leaders
4. Government intervention in business
5. Foreign policy of government
6. Values and ideology of political parties
 Legal Environment
• Legal environment constitutes the laws and
various legislations passed in the parliament. The
businessman cannot overlook the legislations
because he has to perform his business
transactions within the framework of legal
environment.
 Some Aspects of Legal Environment
1. Various laws and legislative acts.
2. Legal policies related to licensing.
3. Legal policies related to foreign trade.
4. Statutory warnings essential to be printed on label.
5. Foreign Exchange Regulation and Management Act.
6. Laws to keep a check on Advertisements.
 Technological Environment
• Technological environment refers to changes
taking place in the method of production, use of
new equipment and machineries to improve, the
quality of product. The businessman must closely
monitor the technological changes taking place in
his industry because he will have to implement
these changes to remain in the competitive
market.
 Michael Porter’s Five Forces Model
• Porter’s Five Forces Model is an analysis tool that uses five industry forces to
determine the intensity of the competition in an industry and its profitability levels.
• This model was created by M. Porter in 1979 to understand how five key competitive
forces are affecting an industry.
• These forces determine an industry structure and the level of competition in that
industry. The stronger competitive forces in the industry are the less profitable it is.
An industry with low barriers to enter, having few buyers and suppliers but many
substitute products and competitors will be seen as very competitive and thus, not so
attractive due to its low profitability.
 Threat of New Entrants
• This force determines how easy (or not) it is to enter a particular industry.
• It is essential for existing organizations to create high barriers to enter to deter new
entrants. Threat of new entrants is high when:
• Low amount of capital is required to enter a market;
• Existing companies can do little to retaliate;
• Existing firms do not possess patents, trademarks or do not have established brand
reputation;
• There is no government regulation;
• Customer switching costs are low;
• There is low customer loyalty;
• Products are nearly identical;
• Economies of scale can be easily achieved.
 Bargaining Power Of Suppliers
• Strong bargaining power allows suppliers to sell higher priced or low
quality raw materials to their buyers. This directly affects the buying
firms’ profits because it has to pay more for materials. Suppliers have
strong bargaining power when:
• There are few suppliers but many buyers;
• Suppliers are large and threaten to forward integrate;
• Few substitute raw materials exist;
• Suppliers hold scarce resources;
• Cost of switching raw materials is especially high.
 Bargaining Power Of Buyers
• Buyers have the power to demand lower price or higher product quality from industry
producers when their bargaining power is strong. Lower price means lower revenues for
the producer, while higher quality products usually raise production costs. Both scenarios
result in lower profits for producers. Buyers exert strong bargaining power when:
• Buying in large quantities or control many access points to the final customer;
• Only few buyers exist;
• Switching costs to other supplier are low;
• They threaten to backward integrate;
• There are many substitutes;
• Buyers are price sensitive.
 Rivalry amongst Existing Competitors
• This force is the major determinant on how competitive and profitable an industry
is. In competitive industry, firms have to compete aggressively for a market share,
which results in low profits. Rivalry among competitors is intense when:
• There are many competitors;
• Exit barriers are high;
• Industry of growth is slow or negative;
• Products are not differentiated and can be easily substituted;
• Competitors are of equal size;
• Low customer loyalty.
 Threat of Substitutes

• High threat of substitute goods or services are harmful to

businesses because they limit profit potential. Companies are
likely to experience high threat of substitute goods/services
when:
• Switching costs are low for customers
• Substitutes have superior pricing relative to the current products
• Substitutes have better attributes or performance characteristics
 Complementary Products

• This force was the sixth force, added in the revised 1990s model. It refers to
products or services that are compatible with what a particular industry sells.
• The effect of complementary goods on an industry's profitability generally
depends on how reliant the product or service is on the compatible product.
• If one cannot function without the other, the impact is high. The impact of
complementary products can be good or bad for industry profitability.
• If the complementary good is doing well within its industry this can have a
positive effect on the profitability of a given company or vice versa.
 Environmental Scanning
• The purpose of the scan is the identification of opportunities and threats
affecting the business for making strategic business decisions.
• As a part of the environmental scanning process, the organization collects
information regarding its environment and analyses it to forecast the
impact of changes in the environment.
• This eventually helps the management team to make informed decisions.
 Factors for Environmental Scanning
• Before scanning the environment, an organization must take the following
actors into consideration:
• Events – These are specific occurrences which take place in different environmental
sectors of a business. These are important for the functioning and/or success of the
business. Events can occur either in the internal or the external environment.
Organizations can observe and track them.
• Trends – As the name suggests, trends are general courses of action or tendencies along
which the events occur. They are groups of similar or related events which tend to move
in a specific direction. Further, trends can be positive or negative.
 Factors for Environmental Scanning
• Issues – In wake of the events and trends, some concerns can arise. These
are Issues. Organizations try to identify emerging issues so that they can
take corrective measures to nip them in the bud. However, identifying
emerging issues is a difficult task. Usually, emerging issues start with a
shift in values or change in which the concern is viewed.
• Expectations – Some interested groups have demands based on their
concern for issues. These demands are Expectations.
 Steps in Environmental Scanning
1. Collect Information
2. Deciding Priorities
3. Environmental Analysis
1. Environmental Evolution
1. Type of Change
2. Forces Driving Change
3. Type of Future Evolution
 Steps in Environmental Scanning
2. Process of Environmental Analysis
1. Scanning: Scanning the environment to warning signals
2. Monitoring: specific environmental trends
3. Forecasting: the direction of future environmental changes and
4. Assessing: the current and future environmental changes for their
organisational implications