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Unit 1.1 business env

Lesson for MBA course on the Economic environment of business.

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Unit 1.1 business env

  1. 1. INTRODUCTION TOBUSINESS ENVIRONMENT Prof. Prabha Panth, Osmania University
  2. 2. Microeconomics• Pure Microeconomics assumes that a firm works in the best possible environment conducive to it.• By assuming ceteris paribus, it keeps away all non-economic factors that would affect the firm’s behaviour.• Assumes a ‘free market’ system, with no government, social, or other pressures.24-Dec-11 P.Panth 2
  3. 3. • Perfect competition, in which the firm has full knowledge about demand, production factors, technology, prices, etc. But actual market is usually an imperfect market.• Micro economics assumes that the only motive directing a firm is “profit motive”.• Only ‘economic factors’ affect the working of a firm – such as changes in costs (wages, rent, interest, taxes), prices due to change in demand and supply conditions.24-Dec-11 P.Panth 3
  4. 4. What is “Business Environment”• But a Business firm does not work in a vacuum,• It functions in a particular environment or setting.• Many external factors affect its working and strategies.• This is known as “Business Environment”• Business environment includes all the external influences that a firm is subjected to, and which affect its functioning.• Pure Economic theory ignores these outside influences on a firm’s behaviour.24-Dec-11 P.Panth 4
  5. 5. Why study Business Environment• The success of every business depends on how it can adapt itself to the environment within which it functions,• Working conditions, consumer behaviour, technology, laws, behaviour of other firms, etc may all change over time.• A successful business cannot remain static, it has to change its goals, its strategies, its products, etc to meet the new challenges.24-Dec-11 P.Panth 5
  6. 6. External Environment:Business environment refers to external forces, factors and institutions that are beyond the control of the business, but which affect its functioning. Social and Legal Religious Political Demographic Ecological Technological Business Environment 24-Dec-11 P.Panth 6
  7. 7. Political Factors P E Economic Factors S Social Factors T Technological Factors24-Dec-11 P.Panth 7
  8. 8. 1. Political Environment: The political situation in a country affects the working of firms.a) Political ideology – capitalist, mixed economy, or socialist. Any change in the ideology affects the firm. E.g. Coca cola in former Soviet Union, China,b) Political Stability – and peace, no wars, unrest, agitations, e.g. in Iraq, Afghanistan – not conducive for private business firms.c) Relation with other countries, international bodies. Burma isolated, earlier China, USSR. Are the countries members of UN, WB, etc.24-Dec-11 P.Panth 8
  9. 9. a) Centre State Relationship in the country – clash in Federal set up. Centre agrees, States do not, or vice versa.b) Trade union movements – strikes, agitations encouraged by various political parties.c) Level of political morality (corruption) – how much and what type of bribes or kick backs to establish and run the firms?d) Opposition Parties towards Business Units – any change in the ruling party, the opposition may not agree to the earlier policies.24-Dec-11 P.Panth 9
  10. 10. 2. Economic Environment: a) Economic Conditions: (i) Level of economic development, (ii) Size of the economy, (iii) Growth (iv) Population b) Economic Policies of the country: (i) Industrial policy, (ii) Monetary and Fiscal policies, (iii) International trade policy c) Other Economic Factors: i. Infrastructural Facilities, ii. Banking, Insurance companies, money markets, iii. capital markets24-Dec-11 P.Panth 10
  11. 11. 3. Socio-Cultural Environment: • attitude of people to work, to consumption • family system, • caste system, • Customs, religion, education, etc.4. Technological Environment: - • Changes in technology, • Inhouse research and development, • Changes in capital, inputs, labour requirements, skills, training, etc.24-Dec-11 P.Panth 11
  12. 12. 5. Geographical and Natural factors: - demand in hilly regions differ from the plains, - demand in tropical areas differ from cold regions, - input availability differs in different geographical regions. - Conservation policies of natural habitats, - Pollution and other ecological problems.24-Dec-11 P.Panth 12
  13. 13. COMPONENTS OF BUSINESS ENVIRONMENT1. Microeconomic: Factors that affect the individual firm. Internal environment. These include: – consumer behaviour, change in tastes, fashions, – Supply and availability of inputs, – Labour and employee behaviour, – Financial stakeholders – behaviour in the stock market, – Competitors and their reactions.24-Dec-11 13
  14. 14. 2. Meso economic: Industry level factors • lies between Micro and Macro levels. • competition between firms within an industry, • Change in price, product or technology strategy of other firms, 3. Macro economic: These include the “External environment” discussed earlier – PEST. These cover: Economic , social, technological, legal, political, ethical, ecolo gical factors that affect a firm’s behaviour.24-Dec-11 14
  15. 15. FEATURES OF BUSINESS ENVIRONMENTa) External: Business environment is the sum of all factors external to the business firms that greatly influence their functioning.b) Dynamic: The business environment is dynamic in nature, i.e. it keeps changing.c) Unpredictable: The changes in business environment are unpredictable.d) Regional differences: Business Environment differs from place to place, region to region and country to country.24-Dec-11 15
  16. 16. IMPORTANCE OF BUSINESS ENVIRONMENT1. Determining Opportunities and Threats:Firms would be able to identify opportunities for and threats to their business, and to meet the challenges successfully. “First mover advantage”2. Giving Direction for Growth: It enables the business to identify the areas for growth and expansion of its activities, by knowing the customers’ tastes, government policies, etc.24-Dec-11 16
  17. 17. c) Continuous Learning: to update knowledge, skills to meet the predicted changes in business. E.g. latest computer technology, or pollution control measures, renewable energyd) Image Building: CSR activities help to improve firms’ image by showing sensitivity to the environment within which they work. Insensitivity to the public and the environment works against the firm. E.g. Nano project in Singur, or mining in Orissa, pesticides in Coca cola and Pepsi cola.24-Dec-11 17
  18. 18. e) Meeting Competition: helps firms to analyse the competitors’ strategies and formulate their own strategies accordingly. In oligopoly markets, firms have to be alert to changes in business rivals’ schemes – new products, new inputs, new ad schemes, or pricing policy.f) Identifying Firm’s Strength and Weakness: Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments. If you can’t keep up, you drop down.24-Dec-11 P.Panth 18
  19. 19. Internal Environment: 5 Ms:• Can broadly be classified under five factors: – man, (labour) – material, (inputs) – money, (finance) – Machinery (technology) – Management. Unlike External Environment, the Business firm can make changes in these factors according to its requirements.24-Dec-11 P.Panth 19