Introduction to Business and its Environment

Gary Hamel and C.K.Prahalad observe: Substantial challenges face any organization intent on getting to the future first. The first challenge, how to navigate from here to there arises as both public and pvt. institutions struggle to plot a course thro an increasingly inconstant environment where experience is rapidly devalued and familiar landmarks no longer serve as guideposts. Never before has the institutional terrain been changing so quickly or have industry boundaries been so malleable. Never before have competitors, partners, suppliers and buyers been so indistinguishable. How then does one get to the future first even when there is no map?
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 A critical challenge is to cope up with environmental dynamics of changes which may not follow a set pattern Business environment presents 2 challenges- ie to face environmental threats like competition, declining demand etc and to exploit business opportunities Hence need for environmental analysis and diagnosis in strategic mgt. process Environmental analysis is the process by which strategists monitor the economic, governmental/legal, mkt/competitive, supplier/technological, geographic and social settings to determine opportunities and threat to their firm
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Factors influencing Business Environment

1)Value System-of the founders and those at the helm of affairs eg Tatas social and moral responsibilities to consumers, employees, shareholders etc. The Murugappa group decided to sell off the liquor business when they took over EID Parry group 2)Mission and Objectives-policies, directions and decisions are based on these 3)Mgt. Structure and Nature-extent of professionalization of mgt.
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4)Internal Power Relationship-support that top mgt. enjoys from different levels of employees, shareholders and Board of Directors influence decisions and their implementation 5)Human Resources-skill, quality, morale, commitment, attitude etc could contribute to the strength and weakness of an organization -a SWOT analysis is very much essential for business policy formulation
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Internal Environment
Influenced by organizational culture, involvement, initiative, companys image and brand equity etc Also influenced by factors like physical assets and facilities, R&D and technological facilities, mktg. resources and financial factors like financial policies, capital structure etc
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External Environment
External business environment consists of a micro environment and a macro environment Micro Environment -factors that influence companys immediate environment like suppliers, mktg. intermediaries, competitors, customers and the public Macro Environment -demographic, economic conditions and policies, natural (natural resources, weather and climatic conditions, locational aspects etc), technological, political and sociocultural forces like customs, traditions, taboos, tastes, preferences etc

International Environment
It effect industries that depend on imports/exports eg a protectionist policy adopted by a foreign country affect our exports to that country and vice versa. The Great Depression in the US affected all other countries that had trade relation with the US. The oil crises is another example A company which depends on export mkt. to a considerable extent is prone to face the impact of adverse developments in foreign mkts. Environmental forces like consumerism or consumer movement, social justice, govt. regulations and competitive environment compel companies to adopt the societal marketing concept
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 Business environment is dynamic with several elements in the environment undergoing changes-technology, tastes, habits, preferences, competition, population size and composition, attitudes, values, income etc Business policy should be dynamic enough to successfully adapt to the changing environment Success of business depends on its ability to foresee the environmental changes and to modify its strategies appropriately SWOT analysis plays a very important role in the strategic mgt. process or formulation of business policy Strategic mgt. is defined as that set of decisions and actions that lead to the devt. of an effective strategy to help achieve corporate objectives
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 After identification of the environmental opportunities and threats and the organizations strengths and weaknesses, consider the various strategic alternatives that are available and choose the most appropriate one Effective implementation of the chosen strategy is equally important. There are 3 levels of strategies applicable1)corporate level strategy 2)business level unit strategy (strategy to achieve specific objectives of the strategic business unit so as to achieve the overall corporate objectives) 3)functional level strategy-strategy for mktg.,finance, R&D etc

 Evaluation of the implemented strategy is essential to determine whether it is meeting the objectives of the enterprise Thus key to business success lies in the most effective utilization of the companys resources given the companys strengths and weaknesses in the light of the environmental threats and opportunities
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Factors influencing Business Environment

Economic Factors 1)Growth rate of the economy 2)Inflation 3)Rates of savings and investment 4)Fiscal imbalance- govts in less developed countries try achieve a high rate of investment by resorting to deficit financing which, in due course of time, results in large fiscal deficit 5)BOP deficits 6)Prosperity, Recession and Stagflation 7)Financial system 8)Economic policies-trade policy, monetary & fiscal policies
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 Non-Economic Factors 1)Political environment 2)Legal environment 3)Socio-cultural environment-caste, race, ethics, religion, gender etc 4)Demography 5)Technology 6)Natural environment-availability of natural resources
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Business during the 21st Century

Large organizations with a large workforce will not exist-there will be mini organizations eg powerful organizations like HAL,HMT,BHEL,BEML etc have lost their prominence to organizations like Infosys, Wipro etc Business will be knowledge based. Mfg processes will become highly complex, jobs will become intellectual and employees will need to be intelligent
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 Tomorrows managers need not spent time on file pushing and paper-shuffling. IT will take care of most of that work Organizations will become flat- 8 to 10 layers will be replaced by 2-3 Employees will have no definite jobs. Most of the jobs will last for 2-5 years (short projects)-real growth will come from frequent changes of jobs and responsibility, acquisition of new skills and the ability to put those skills to use in entirely new environment
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Process of Environmental Analysis

The analysis consists of 4 steps: scanning (to identify early signs of possible environmental change or detect changes already under way), monitoring (tracking environmental trends, sequences of events or stream of activities), forecasting (projection of the direction, scope and intensity of environmental change) and assessment (determining implications for the organizations current and potential strategies due to environmental changes)
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Components of International Economy-WTO

The WTO is the only international body dealing with the rules of trade between nations Its main objective is to help trade flow as freely as possible by ensuring that individuals, companies and govt. know what the trade rules are around the world and giving confidence that there will be no sudden changes of policy It is a forum for trade negotiations It helps in dispute settlement-arising from differences in interpreting trade agreements
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 WTO came into existence on 1-1-95 Since 1948 the General Agreement on Tariffs and Trade (GATT) had provided the rules for the system While GATT dealt mainly with trade in goods, WTO and its agreements cover trade in services and in traded inventions, creations and designs (intellectual property)
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 WTO is based in Geneva. Its functions are 1)administering and implementing the multilateral and plurilateral trade agreements which together make up the WTO 2)acting as a forum for multilateral trade negotiations 3)seeking to resolve trade disputes 4)overseeing national trade policies 5)co-operating with other international institutions involved in global economic policy making

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 The principles of the trading system should be 1)without discrimination-between trading partners 2)freer-with barriers coming down thro negotiation 3)predictable-foreign companies, investors and govts. should be confident that trade barriers shall not be raised arbitrarily 4)more competitive-by discouraging unfair trade practices like export subsidies and dumping products at below cost to gain mkt. share 5)more beneficial to less devd. countries-giving them more time to adjust, greater flexibility and special privileges
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 WTO has more than 130 members accounting for over 90% of world trade and is based in Geneva The Uruguay Round of Negotiation (ie the 8th round of GATT) was held in 1986 at Ministerial level due to the drastic changes that world trade had undergone-a) share of agriculture in world trade decreased to 13% in 1987 from 46% in 1950 b) share of service sector in GDP of developed countries was rapidly increasing eg in USA service sector represents 2/3rd of GDP and employs 70% of work force. In commodity sector comparative cost advantage was in favour of Japan and several other newly industrialized countries
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 Thus a need was felt to bring service sectors into trade negotiation-banking, insurance, telecommunication, tour operators, hotels, transport etc looking to do business abroad can now enjoy a freer and fairer trade that originally only applied to trade in goods The WTO also offers technical assistance to developing countries Negotiation on Trade Related Aspects of Intellectual Property Rights (TRIPS) was an highlight of the Uruguay Round of negotiation it provides the norms and standards of protection of intellectual property

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 TRIPS puts the protection of private monopoly rights of the inventor as the main objective of the new international regime for protection of intellectual property rights TRIMS (Trade Related Investment Measures) which was also a part of the Uruguay negotiation was intended to bring liberalization in investment ie provide equal opportunity to all thro national treatment thereby overlooking the level playing field argument of developing countries
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Implications for India

Some of the major Advantages Benefits from reduction of tariffs on products of export interest to India Improved prospects for agricultural exports as a result of likely increase in the world prices of agricultural products due to reduction in domestic subsidies and barriers to trade Likely increase in export of textiles and clothing due to phasing out of Multi-Fibre Agreement (quota system)
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 Advantages from greater security and predictability of the international trading system due to the revamped settlement procedures and the agreements on Safeguards, Subsidies and Anti-dumping Measures Compulsion on India to be competitive in the world mkt.
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 Some of the Dis-advantages Tariff reduction on goods of export interest to India are very small Meager prospects of increase in agricultural exports Not much benefits expected for the textile sector (which is primarily labor intensive) Increased pressure to liberalize the services industries Technology dependence on foreign firms will increase due to our paucity of resources in carrying out R&D Trend towards protectionism in developed countries against our exports
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Regional Trade Blocks

In recent years there has been an accelerated movement towards regional economic integration-to reduce and ultimately remove tariff and non-tariff barriers to free flow of goods, services and factors of production between them eg the European Union became a single mkt. with 360 m consumers w.e.f. 1/1/93, Canada, Mexico and US have implemented the North American Free Trade Agreement (NAFTA). Similarly Argentina, Brazil, Paraguay and Uruguay have agreed to reduce trade barriers between themselves. ASEAN (Assoc. of South East Asian Nations) comprising of Brunei, Indonesia, Malaysia, Phillippines, Singapore, Thailand Regional economic integration can create new opportunities and well as problems There is fear in some quarters of competition between blocks and attempts to protect its own mkt. from outside competition

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 The main objectives of regional integration are 1)to explore the economic and political debate surrounding regional economic integration, paying particular attention to the economic and political benefits and costs of integration 2)to review progress towards regional economic integration around the world 3to map the important implications of regional economic integration for the purpose of international business
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Levels of Economic Integration

Free Trade Area-ie all barriers to trade of goods and services among member countries are removed Customs Union-adopt a common external trade policy eg the Andean Pact between Bolivia, Colombia, Equador and Peru to encourage free trade with a common tariff on products imported from outside Common Market-factors of production are allowed free movement between member countries which needs a significant degree of harmony and cooperation between fiscal, monetary and employment policies which may be difficult to achieve

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 Economic Union-involves free flow of products and factors of production between member countries and adoption of a common external trade policy. It also requires common currency, harmonization of countries tax rates and a common monetary and fiscal policy Political Union-to make a coordinating bureaucracy accountable to the citizens of member nations eg the European Parliament is directly elected by the citizens of the EU countries. Besides the Council of Ministers is composed of ministers from each member country

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Regional Economic Integration in Europe

There are 2 trade blocks in Europe, the EU and the European Free Trade Association (EFTA comprising of Norway, Iceland and Switzerland) The EU was the outcome of 2 political factors: 1)the devastation of the 2 world wars on Western Europe and desire for lasting peace 2) European nations desire to hold their own on the worlds political and economic stage The European Commission , headquartered in Brussels, Belgium is responsible for proposing EU legislations, implementing it and monitoring compliance by member states
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Regional Economic Integration Elsewhere

Association of Southeast Asian Nations (ASEAN) founded in 1967 by Indonesia, Malaysia, Philippines, Singapore and Thailand with the basic objective to foster freer trade between countries and to achieve cooperation in their industrial policies. However only limited progress has been achieved-the tariff reduction effected benefits only 5% of the intraASEAN trade
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 Asia Pacific Economic Cooperation (APEC) was founded in 1990 at the suggestion of Australia comprising of 18 countries including US, Japan and China South Asian Association for Regional Cooperation (SAARC) was started in 1985 at Dacca with members as India, Pakistan, Bangladesh, Nepal, Bhutan, Sri Lanka and Maldives. The objectives were 1)to achieve self reliance 2)promote welfare of people and improve life quality 3)accelerate economic growth, social progress and cultural devt. 4)provide individuals opportunity to live in dignity and realise their full potential
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 Performance not upto expectation due to lack of economic cooperation, restrictive foreign trade regime, information gap in trade opportunities eg natural gas of Pakistan and Bangladesh can be exported to India, for products like jute, cotton and tea SAARC countries are competing the world mkt. etc
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Summary-Global and National Business Environment

Rapid political and economic changes in various parts of the world Unipolar world in which the USA has a dominant position Spectra of recession haunting both developed and under-developed economies South-East Asian economies have not truly recovered from the financial crises Adoption of mkt. economy in Russia has proved to be disastrous for the people of the country In this pessimistic global scenario some developed are making regional economic arrangement and some others resorting to protectionism This uncertainty has made business environment very unpredictable

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 The Unipolar World The collapse of Eastern Europe in 1989 and the USSR in 1991 marked the end of a bi-polar world and supremacy of USA Formation of European Union w.e.f.1/1/99 is seen as a major step towards economic and political integration of the biggest economic zone Due to weakening of asian currencies, dollar and euro likely to dominate world economy as reserve and key currencies
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 Globalization Movement of the world economy towards and international economic integration ie expansion of economic activities across political boundaries of the nation-the process is driven by the lure of profit and threat of competition in the mkt. Three important dimensions of this process areinternational trade, international investment and international finance
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