Economic environment of Business Prof(Dr.) Shalini Singh

Learning Outcomes After studying this chapter and related materials you should be able to understand: the political environment the economic environment the socio-cultural environment the technological environment and critically evaluate, explain and apply the above concepts.

WHAT IS ENVIRONMENT?

Need for Environmental Analysis?

Need for Environmental Analysis Audit of Environmental Influences Assessment of the Nature of the Environment Identification of the key environmental forces Identification of the Principal Opportunity and Treats Strategic Position

WHAT IS BUSINESS?

Definitions: Bayard O Wheeler, the total of all things external to firms & industries which affect their organization & operation

Arthur M.Weimer, business environment encompasses the climate or set of conditions,economic,social,politi cal or institutional in which business operations are conducted.

Importance of the study: It helps an organization to: Broad strategies & long term policies Analyze its competitors strategies & thereby formulate effective counter strategies,

Importance of the study: Knowledge about the changing environment-keeps the organization dynamic in its approach, Foresee the impact of socio- economic changes at the national & international level Adjust to the prevailing conditions& thus influence the environment in order to make it congenial for business

EnvironmentEnvironment All the actors and forces influencing the companys ability to transact business effectively with its target market. Includes: Microenvironment Microenvironment - forces close to the company that affect its ability to serve its customers. Macroenvironment Macroenvironment - larger societal forces that affect the whole microenvironment.

BUSINE SS DECISI ONS INTERNAL ENV. EXTERNAL ENV.

Types of environment-INTERNAL Human Resource Value system-case Mission, vision & objectives Management structure & nature Internal power relationships

Types of environment-EXTERNAL MACRO ENVIRONMENT-case Economic environment Social environment Political environment Legal environment Technical environment Global environment

SWOT ANALYSIS-CASE Raymond has been a well known fabric brand in India. The Raymond Ltd. Over time had made significant investments in process oriented businesses such as cement, steel and polyester fiber, besides textiles. Gautam Hari Singhania,36,who took over from Vijyapat Singhania as a chairman and managing director in 1998,saught to put Raymond on a strong footing,restructuring its business portfolio based on a SWOT anlysis.

So, in early 1999,says Singhania, we started looking at our business portfolio,& decided where we wanted to be as compared to where we are today. We decided there were three areas that the company did not want to be in, in our long term strategy. One was filament yarn, the 2 nd was cement,& the 3 rd, steel. These businesses were either not giving adequate returns or were making losses. The company also did not have the expertise to rum these units. Raymond, therefore, pulled

Out of these businesses and decided to focus on the core business of dressing (textiles & readymade apparel). The divestment of these 3 businesses brought in about Rs.1100crore.Out of this,Rs.291crore was used to repay outstanding debt & this helped to substantially reduce the interest burden. The company also spent around Rs.158crores for buying back shares through the open market route & this increased the Singhanias share in the Raymond from 27 to 31 %.

The company has been left with a large amount for investment-for developing the existing core business or entering new business (including acquisition).In Singhanias vision, Raymond must turn itself into a lean & efficient company, before striking out to conquer new territory overseas. While Raymond claims to be among the top 3 fabric brands in the world in integrated worsted (wool-blended) fabrics, it certainly isnt a household name anywhere except S.Asia.

The endeavor is to make it a truly global brand , says the chairman. -Do the SWOT analysis of Raymonds

The Marketing Environment Company Demographic Economic Natural Technological Political Socio- Cultural Company Customers Intermediaries Suppliers Competitors Publics

Customer Markets Company Consumer Markets International Markets Government Markets Business Markets Reseller Markets

The Macro environment Demographic Technological Socio-Cultural Economic Political Natural Forces that Shape Opportunities and Pose Threats to a Company Forces that Shape Opportunities and Pose Threats to a Company

The Companys Macroenvironment monitors population in terms of age, gender, race, occupation, location and other statistics. Demographic - monitors population in terms of age, gender, race, occupation, location and other statistics. factors that affect consumer buying power and patterns. Economic - factors that affect consumer buying power and patterns. natural resources needed as inputs by marketers or that are affected by marketing activities. Natural - natural resources needed as inputs by marketers or that are affected by marketing activities.

Demographic Trends Changing Age Structure Population is getting older Changing Family Structure Marrying later, fewer children, working women, and nonfamily households Geographic Shifts Moving to the urban areas Increased Education Increased college attendance and white-collar workers Growing Ethnic and Racial Diversity

Mobilink- Disney D 100 Mobile Phone

Population Age Groups Preschool School-age Teens 25-40 40-65 65+

Economic Environment Changes in Consumer Spending Patterns Changes in Consumer Spending Patterns Economic Development Economic Development Changes in Income Changes in Income Key Economic Concerns for Marketers Key Economic Concerns for Marketers

Natural Environment Shortage of raw materials Increased energy costs Anti-pollution pressures Governmental protections

Toyota Experienced Success with Green Cars

The Companys Macroenvironment forces that create new product and market opportunities. Technological - forces that create new product and market opportunities. laws, agencies and groups that influence or limit marketing actions. Political - laws, agencies and groups that influence or limit marketing actions. forces that affect a societys basic values, perceptions, preferences, and behaviors. Socio-Cultural - forces that affect a societys basic values, perceptions, preferences, and behaviors.

Social-Cultural Environment Views of themselves Views of others Views of nature Views of organizations Views of society Views of the universe

Technological Environment Rapid Pace of Change Rapid Pace of Change High R & D Budgets High R & D Budgets Focus on Minor Improvements Focus on Minor Improvements Increased Regulation Increased Regulation Issues in the Technological Environment Issues in the Technological Environment

Examples ?????? Numbers of examples in each sector

Political Environment Greater Concern for Ethics Greater Concern for Ethics Increased Legislation Increased Legislation Changing Enforcement Changing Enforcement Key Trends in the Political Environment Key Trends in the Political Environment

Example Tata Nano Noida Sector 16 Park (Approved by CM Mayawati)

Opportunities Examples of Opportunities Posed by Marketing Environment in India 1. The New Economic Policies of the Government of India in general. 2. The New Industrial Policy. 3. Liberalisation of industrial licensing. 4. Foreign Exchange Regulation Act (FERA) and Monopolies and Restrictive Trade Practices Act (MRTP) liberalization. 5. Curtailment of and disinvestments in public sector. 6. The New Trade Policy lowering of import tariffs, abolition of import licenses, convertibility of rupee, globalisation, etc. 7. Fiscal and monetary reforms, banking sector reforms, capital market reforms. 8. Removal or phasing out of subsidies. 9. Encouragement to foreign direct investment (FDI). 10. Dismantling of price controls and introduction of market-driven price environment.

Threats Examples of Threats Posed By Marketing Environment In India 1. Entry of Multi-National Companies (MNCs) into the Indian market on a large scale increases the competition for products and services. 2. Survival of the fittest rule forces many weaker and small-scale companies to close down due to non-viability. 3. Big players start buying smaller players through mergers and acquisitions. 4. Removal of subsidy affects profitability and viability of many industries. (Fertiliser industry is one such affected sector where units had to close down or stop products of certain products). 5. Banks and insurance sector came under competitive environment and were compelled to operate viably, at par with the private sector. 6. In general, many industrial units across India faced a destabilization consequent to the economic reforms. Their markets, market shares and profits came under severe pressure and viability became a big question.

Strategic Analysis Strategic analysis utilises techniques for situational analysis. This involves reporting on the current and future opportunities and threats and strengths and weaknesses facing the organisation. Opportunities and threats summarise the external environmental factors. The key elements of the external environment may be summarised as C-PEST factors which refer to the competitive political economic socio-cultural, and, technological environments. Of these, PEST factors are analysed in chapter 4, whilst the competitive environment is considered in chapter 5. Strengths and weaknesses analysis summarises the state of the internal resources of an organisation. Resource analysis is undertaken in chapter 6. All these factors are brought together in a comprehensive SWOT analysis

Case Study: Tourism and the 2008 Economic Crisis 2008 can be added to the list of significant economic crises which include the Great Depression (1929-35) and the Asian Economic Crisis of 1997-8. By 2007 an unsustainable set of economic conditions were developing. Two quarters of falling output in 2008 confirmed the arrival of a recession in both the UK and the US. For tourism, the UNWTO predicted stagnation (0% growth) or even slight decline (-1% to -2%) throughout 2009. Amongst those most affected were the Americas and Europe as most of their source markets were affected by recession.

Case Study Tourism and the 2008 Economic Crisis

The political environment Since tourism entities are affected by current and new government legislation, it is important to understand the location of political power, how political power may change in the future and the likely effects of this on policy (Burns & Novelli, 2009).

Opportunities and threats in the changing political Competition policy Health and safety Transport and infrastructure Global carbon agreements and targets Taxation and spending plans Disability and access legislation Foreign policy Visa policy and home security Regulation and deregulation Regeneration plans Employment and training policy Travel advisories Minimum wages

Political Environment: Aftermath of Kenyan unrest 2008

The Economic Environment The economic environment (Tribe, 2005) affects different types of tourism entities in different ways. The success of an international tourism destination such as Mallorca, Spain, will be affected by economic fluctuations in those countries which supply the majority of its visitors (tourism generating countries), as well as its economic attractiveness compared to competitive resorts. Tour operators such as Kuoni (Switzerland ) and TUI (Germany/UK), face a number of economic environments. First, domestic economic environments affect the expenditure patterns of their clients. Second, the variety of different international economic environments in which their tourism product is located affects the supply of the tourism package. Providers of tourism services will find the international economic environment affects the demand for their services and the costs of supplying those services.

What are the key variables? The economic environment affects organizations in the leisure and tourism sector in two main ways. Changes in the economic environment can affect the demand for an organizations products Changes may affect an organizations costs. Additionally background factors such as share and property prices may affect organizations.

BorrowingEmploymentTaxes ExpectationsDisposable Income Benefits Government Expenditure Household Consumption Savings ExportsDemandImports InvestmentTourism Organisation The economic environment and demand

The key macroeconomic factors affecting demand for tourism industries are: household consumption export and import demand government expenditure investment

What determines the level of household consumption? BorrowingEmploymentTaxes ExpectationsDisposable Income Benefits Household Consumption Savings Imports

What determines the level of household consumption? real households disposable income employment benefits and taxes borrowing and savings expectations

Export and import demand Some household consumption is spent on imports. For the recreation, leisure and tourism sector this can be a significant amount. The demand for imports is affected by overseas costs, quality and uniqueness and the exchange rate. On the other hand some demand for the goods and services of domestic firms arises from overseas customers in the form of imports. The demand for exports is similarly affected by relative costs, quality and uniqueness, the exchange rate and the prosperity of overseas economies.

Government expenditure Tourism organizations which are sensitive to changes in government expenditure are those which depend upon government for their income. Examples of these include arts organisations including museums and Visit Britain The level and detail of government expenditure tend to reflect two things. the state of government finance the political party in power.

Investment Some organizations do not supply goods and services to consumers, but specialize in supplying capital goods to other firms. For example, the aircraft manufacturer Airbus, selling to airlines and tour operators, finds demand for its products is sensitive to the level of investment in the economy

The economic environment and costs Interest Rates Exchange Rate Inflation Rate R,L & T Organization Indirect Taxes

The economic environment and costs The key macroeconomic factors affecting costs of recreation, leisure and tourism goods and services are: interest rates inflation the exchange rate indirect taxes

Opportunities and Threats in the Economic Environment OpportunitiesThreats Low interest ratesHigh interest rates Low unemploymentHigh unemployment High consumer expenditureLow consumer expenditure Low oil and other commodity prices High oil and other commodity prices Low TaxesHigh Taxes Favorable exchange rateUnfavorable exchange rate Stable pricesInflation Optimistic expectationsPessimistic Expectations

The Economic Environment for an airline VariableCommentsOpportunityThreat Interest Rates Employment Exchange Rate Taxes Economic Growth

The sociocultural environment Factors in the socio-cultural environment of tourism entities include the size and structure of the population lifestyles and inter-cultural differences other factors (including attitudes and values about travel, availability of paid leave and unemployment) tourist motivations

The technological environment The technological environment offers both opportunities and threats: Opportunities may be found in cheaper provision, or improvements in goods and services, in better marketing or easier distribution. However technology may result in an organisation's product or service becoming obsolete, or subject to new forms of competition. The technological environment may be divided into Information Communication Technology and other technology.

Information Communication Technology ICT relevant to tourism encompasses information search, purchase of services, post travel engagement and networking. It includes information and reservation systems for airlines, hotels and attractions, timetables for transport systems, search engines (e.g. Google) online travel services (e.g. Expedia, Orbitz, Lastminute.com, Opodo, Travelocity and edreams), destination management systems (e.g. visitbritain.com), networking and web 2.0 portals (e.g. tripadvisor.com) and price comparison sites (e.g. travelsupermarket.com).

Other Technology Other areas where technologies have had a significant impact on tourism include: Construction techniques - allowing faster erection of buildings. Bridge technology extending access and cutting journey times. Materials lighter and more durable materials. Glass especially with better insulation properties. Fuels e.g. biofuels. Energy especially alternative sources of energy such as wind and solar power. Security scanning which enables quicker and more accurate passenger checking at airports.

Review of Key Terms Political analysis: The effects of government policy and laws. Economic analysis: Understanding what economic factors will affect tourism entities and how these economic factors are changing. Consumers' expenditure: The amount of money consumers actually spend. Exchange rates: The value of a country's currency in terms of other currencies. Interest rates - The cost of borrowing. Expectations: The way people feel about future economic prospects (optimistic or pessimistic). Socio-cultural analysis: Understanding changes in population size and structure as well as changes in consumer tastes, preferences and broader cultural shifts. Technological analysis: Analysing changes in science and technology to understand how these will impact on tourism entities. ICT: Information and Communication Technology

Discussion Questions.. 1. Explain how changes in government or government policy might affect a named FMG firm. 2. Evaluate the economic environment for Nokia phones in India. 3. Explain how changes in exchange rates consumers' expenditure taxation, and interest rates may affect the business of Maruti Suzuki in India. What other economic factors might be relevant to your analysis? 4. What opportunities and threats are facing RIL from the merger with BP? 5. Provide a PEST analysis for the provider of a major Disney Land, distinguishing between opportunities and threats.

1-64 The Global Business Environment The Global Marketplace is complex, interdependent, and dynamic Challenges include politics, culture, and technology Managers must find a balance between social responsibility, company image, and competitive strategies More focused on Global ManagementGlobal Management

1-65 The Global Business Environment Global competition is characterized by networks that bind countries to one another Globalism trends A borderless world Increase in exports Increase in direct foreign investment Dominance of trading blocs

1-66 Regional Trading Blocs The dominance of the United States is already over. What is emerging is a world economy of blocs represented by NAFTA, The European Union, and ASEAN. Theres no one center in this world economy. - Peter Drucker Fortune, January 12, 2004

1-67 Regional Trading Blocs TRIAD Market European Union Asian Market China, Japan, South Asia NAFTA CAFTA

1-68 The TRIAD Three regional free-trade blocs Western Europe, Asia, and North America Grouped around three dominant currencies Euro, Yen, and Dollar In 2004, these trade blocs were expanding their boarders to include neighboring countries

1-69 Comparative Management in Focus - India India has witnessed a change in values, habits and options during the last decade The economy, second fastest growing in the world, is expected to grow close to 7% this year Fastest growing telecom market with more than one million new mobile phone subscriptions per month

1-70 Comparative Management in Focus - India Indians are buying 10,000 motorcycles a day India had 192 million households in 2001 Only 31.6% have a television Only 2.5% have a car, jeep or van Foreign investors have invested $5 billion into the Indian stock market

1-71 Information Technology Information Technology is transforming the international managers agenda more than any other item Information is no longer centrally or secretly controlled by governments Information technology is boosting productivity and electronic commerce around the world

The Globalization of Human Capital Globalization means we share jobs as well as goods. - FINANCIAL TIMES, August 27, 2003

The Globalization of Human Capital Forrester Research predicts that 3.3 Million US jobs will move offshore by 2015 45% of the 500 US companies surveyed state that they use a global sourcing model

The Global Managers Role

The Political and Economic Environment One important aspect is the phenomenon of ethnicity Driving force behind political instability Firms must assess political risks Government actions that could adversely affect the long- run profitability or value of a firm

Political Risk 7 Typical risk events Expropriation of corporate assets without prompt and adequate compensation Forced sale of equity to host-country nationals, usually at or below depreciated book value Discriminatory treatment against foreign firms in the application of regulations or laws Barriers to repatriation of funds (profits or equity)

Political Risk 7 Typical risk events Loss of technology or other intellectual property (such as patents, trademarks, or trade names) Interference in managerial decision making Dishonesty by government officials, including canceling or altering contractual agreements, extortion demands, and so forth

1-78 Managing Political Risk Avoidance either the avoidance or withdrawal of investment in a particular country Adaptation adjust to the political environment Adaptation Dependency keeping the host nation dependent on the parent corporation Dependency Hedging minimizing the losses associated with political risk events Hedging

1-79 Economic Risk A countrys level of economic development generally determines its economic stability Economic risk falls into 2 categories Government changes its fiscal policies Government modifies its foreign-investment policies Managers are constantly reassessing economic risk

1-80 The Legal Environment Managers will comply with the host countrys legal system Common Law past court decisions act as precedents to the interpretation of the law Civil Law comprehensive set of laws organized into codes, interpretation is based on reference to codes and statues Muslim law based on religious beliefs, it dominates all aspects of life

1-81 The Legal Environment Commenting on Contract Law In China, the old joke goes, a contract is a pause in the negotiation. - VANESSA CHANG, KPMG PEAT MARWICK

1-82 The Technological Environment Corporations must consider the accelerating macro- environmental phenomenon of technoglobalism (rapid developments in information and communication technologies) Corporations must consider the appropriability of technology

1-83 Global E-Business E-business the integration of systems, processes, organizations, value chains and entire markets using Internet-based and related technologies and concepts. E-commerce - refers directly to the marketing and sales process via the Internet

1-84 Global E-Business Convenience in conducting business worldwide; facilitating communication across borders contributes to the shift toward globalization and a global market. An electronic meeting and trading place, which adds efficiency in conducting business sales. A corporate Intranet service, merging internal and external information for enterprises worldwide. Power to consumers as they gain access to limitless options and price differentials. A link and efficiency in distribution.

1-85 Looking Ahead Chapter 2 Social Responsibility and Ethics The Social Responsibility of MNCs Ethics in Global Management Managing Interdependence

1-86 Global Management The process of developing strategies, designing and operating systems, and working with people around the world to ensure sustained competitive advantage Return

1-87 European Union Comprised of 25 nations 400 million people Elimination of tariffs has not eliminated national pride Global Managers face two major tasks Strategic how to deal with the EU as an non-European company Cultural How to deal with multiple sets of national cultures, traditions and customs Return

1-88 Asia Japan and the Four Tigers - Singapore, Hong Kong, Taiwan, and South Korea, Each has an abundance of natural resources and labor China A new east Asian economy is emerging, focused on greatly increased trade within the region and based on China rather than Japan. Return

1-89 North America The goal of NAFTA was to bring the US, Canada, and Mexico together to create more jobs, better working conditions and a cleaner environment 421 Million Consumers Has been very beneficial to Mexico Return

1-90 Adaptation Equity sharing includes the initiation of joint ventures with nationals (individuals or those in firms, labor unions, or government) to reduce political risks. Participative management requires that the firm actively involve nationals, including those in labor organizations or government, in the management of the subsidiary. Localization of the operation includes the modification of the subsidiarys name, management style, and so forth, to suit local tastes. Localization seeks to transform the subsidiary from a foreign firm to a national firm. Development assistance includes the firms active involvement in infrastructure development (foreign- exchange generation, local sourcing of materials or parts, management training, technology transfer, securing external debt, and so forth)

1-91 Dependency Input control means that the firm maintains control over key inputs, such as raw materials, components, technology, and know-how. Market control requires that the firm keep control of the means of distribution Position control involves keeping certain key subsidiary management positions in the hands of expatriate or home-office managers. Staged contribution strategies mean that the firm plans to increase, in each successive year, the subsidiarys contributions to the host nation

1-92 Hedging Political risk insurance is offered by most industrialized countries. Insurance minimizes losses arising from specific riskssuch as the inability to repatriate profits, expropriation, nationalization, or confiscation and from damage as a result of war, terrorism, and so forth. The Foreign Credit Insurance Association (FCIA) also covers political risks caused by war, revolution, currency inconvertibility, and the cancellation of import or export licenses. Local debt financing (money borrowed in the host country), where available, helps a firm hedge against being forced out of operation without adequate compensation. In such instances, the firm withholds debt repayment in lieu of sufficient compensation for its business losses.

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Economic environment of Business Prof(Dr.) Shalini Singh