notes on bus environment

7/31/2019 Notes on Bus Environment

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Meaning: - The term Business Environment is composed of two words Business and Environment. In

simple terms, the state in which a person remains busy is known as Business. The word Business in its

economic sense means human activities like production, extraction or purchase or sales of goods that areperformed for earning profits.

On the other hand, the word Environment refers to the aspects of surroundings. Therefore, Business

Environment may be defined as a set of conditionsSocial, Legal, Economical, Political or Institutional

that are uncontrollable in nature and affects the functioning of organization. Business Environment has

two components:

1. Internal Environment

2. External Environment

Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management, usually

within the control of business. Business can make changes in these factors according to the change in

the functioning of enterprise.

External Environment: Those factors which are beyond the control of business enterprise are included in

external environment. These factors are: Government and Legal factors, Geo-Physical Factors, Political

Factors, Socio-Cultural Factors, Demo-Graphical factors etc. It is of two Types:

1. Micro/Operating Environment

2. Macro/General Environment

Micro/Operating Environment: The environment which is close to business and affects its capacity to work

is known as Micro or Operating Environment. It consists of Suppliers, Customers, Market Intermediaries,

Competitors and Public.

(1) Suppliers:They are the persons who supply raw material and required components to the company.

They must be reliable and business must have multiple suppliers i.e. they should not depend upon only

one supplier.


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(2) Customers: - Customers are regarded as the king of the market. Success of every business depends

upon the level of their customers satisfaction. Types of Customers:

(i) Wholesalers

(ii) Retailers

(iii) Industries

(iv) Government and Other Institutions

(v) Foreigners

(3) Market Intermediaries: - They work as a link between business and final consumers. Types:-

(i) Middleman

(ii) Marketing Agencies

(iii) Financial Intermediaries

(iv) Physical Intermediaries

(4) Competitors: - Every move of the competitors affects the business. Business has to adjust itself

according to the strategies of the Competitors.

(5) Public: - Any group who has actual interest in business enterprise is termed as public e.g. media and

local public. They may be the users or non-users of the product.

:It includes factors that create opportunities and threats to business units.

Following are the elements of Macro Environment:

(1) : - It is very complex and dynamic in nature that keeps on changing with the

change in policies or political situations. It has three elements:

(i) Economic Conditions of Public

(ii) Economic Policies of the country


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(iii)Economic System

(iv) Other Economic Factors:Infrastructural Facilities, Banking, Insurance companies, money markets,

capital markets etc.

(2) : - Following are included in non-economic environment:-

(i) Political Environment: - It affects different business units extensively. Components:

(a) Political Belief of Government

(b) Political Strength of the Country

(c) Relation with other countries

(d) Defense and Military Policies

(e) Centre State Relationship in the Country

(f) Thinking Opposition Parties towards Business Unit

(ii) : - Influence exercised by social and cultural factors, not within the control

of business, is known as Socio-Cultural Environment. These factors include: attitude of people to work,

family system, caste system, religion, education, marriage etc.

(iii) - A systematic application of scientific knowledge to practical task is

known as technology. Everyday there has been vast changes in products, services, lifestyles and living

conditions, these changes must be analysed by every business unit and should adapt these changes.

(iv) : - It includes natural resources, weather, climatic conditions, port facilities,topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors

before choosing the location for their business.

(v) :- It is a study of perspective of population i.e. its size, standard of living,

growth rate, age-sex composition, family size, income level (upper level, middle level and lower level),


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education level etc. Every business unit must see these features of population and recongnise their

various need and produce accordingly.

(vi) - It is particularly important for industries directly depending on import or

exports. The factors that affect the business are: Globalisation, Liberalisation, foreign business policies,cultural exchange.

1. Business environment is compound in nature.

2. Business environment is constantly changing process.

3. Business environment is different for different business units.

4. It has both long term and short term impact.

5. Unlimited influence of external environment factors.

6. It is very uncertain.

7. Inter-related components.

8. It includes both internal and external environmentWhat Is Business Environment?

Main Factors

The main factor that affects most business is the degree of competition how fiercely other businessescompete with the products that another business makes.

The other factors that can affect the business are:

Social how consumers, households and communities behave and their beliefs. For instance,changes in attitude towards health, or a greater number of pensioners in a population.

Legal the way in which legislation in society affects the business. E.g. changes in employmentlaws on working hours.

Economic how the economy affects a business in terms of taxation, government spending,general demand, interest rates, exchange rates and European and global economic factors.

Political how changes in government policy might affect the business e.g. a decision tosubsidise building new houses in an area could be good for a local brick works.

Technological how the rapid pace of change in production processes and product innovationaffect a business.

Ethical what is regarded as morally right or wrong for a business to do. For instance should ittrade with countries which have a poor record on human rights.


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Changing External Environment

Markets are changing all the time. It does depend on the type of product the business produces, howevera business needs to react or lose customers.

Some of the main reasons why markets change rapidly:

Customers develop new needs and wants.

New competitors enter a market. New technologies mean that new products can be made.

A world or countrywide event happens e.g. Gulf War or foot and mouth disease. Government introduces new legislation e.g. increases minimum wage

PESTEL analysis

The six environmental factors of the PESTEL analysis are the following:

Political factors

Taxation Policy

Trade regulations

Governmental stability

Unemployment Policy etc.

Economical factors

Inflation rate

Growth in spending power

Rate of people in a pensionable age etc.

Technological factors

Technological changes

New or improved distribution channels

Improved communication and knowledge transfer etc.

moral factor

Environmental factors

Laws on

Waste disposal

Energy consumption

Pollution monitoring etc.

Legal factors

Unemployment law


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Health and safety

Product safety

Advertising regulations

Product labelling etc.[5]

Ecology

affects customer's buying habits.

affect the firm production process.

] Socio-cultural

age distribution.

education levels.

income level.

consumerism.

diet & nutrition. population growth

life expectancies

Religion

Potential supplies

labour supply

o quantity of labour available.

o quality of labour available.

material suppliers.

o

delivery delay.o level of competition to supplers,

service provider.

o special requirement.

Microenvironment

The meso-level is settled between the macro- and the micro-level. This field deals with the

design of the specific environment of the enterprises. It is of decisive importance that the layoutof the physical infrastructure (transport, communication and power distribution systems) and of

the sector policies, especially of the education, research and technology policy, are oriented

towards competitiveness. In addition the design of the trade policy and systems of rules (forexample environmental norms and technical safety standards), which contributes to thedevelopment of national advantages of competition, is relevant. Like on the micro-level, on the

meso-level new patterns of organisation and steering must be developed. The state shall giveimpulses and mediate between enterprises, associations, science and intermediate institutions."The design of locations becomes like that a continuous process on the basis of the efforts of

enterprises, science and state as well as of the determined cooperation of private and public

agents"
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The Economic Environment

Chapter ObjectivesStructure Of The ChapterOverviewThe global economyChapter SummaryKey TermsReview QuestionsReview Question AnswersReferences

Much was said in the first chapter about the necessity to take into account the global

"environmental" factors. These factors are those so called "uncontrollables", unlike the"controllable" factors of price, promotion, place and product. They include market tastes,economic, socio cultural, legal, technological, competitive and political factors to name but afew. Failure to account for these factors can lead to dire consequences. As can be seen later,the failure by Tanzania to take account of the market changes and demand shift topolypopylenes from sisal, led to a demise in that country's sisal industry.

Chapter Objectives

The objectives of this chapter are:

To describe and demonstrate the importance of the "economic" environment factor in planningand carrying out global marketing

To show the importance of the "economic" factor in global marketing

To describe and give an understanding of the major world regional economic blocs withparticular emphasis on developing countries

Structure Of The Chapter

The chapter starts off with a review of the global economy, the composition of world trade and

the World Trade Institutions. Regionalism is a major phenomenon of the late 80s and early 90sand so the chapter describes in detail a number of major regional economic blocs. Veryimportant in any discussion on economic factors is the size of market, and more specifically, themarket ability to purchase, which depends on levels of income. The chapter finishes by lookingat the nature of economic activity including the stages of market development, urbanisation andinfrastructure as important precursors to the degree of economic activity.

Note that a comprehensive case study covering the "environmental" aspects of global marketingoccurs at the end of chapter four.
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Overview

In the past fifty years the global economy has changed rapidly. Particularly marked has beenthe development of world economic integration and standardised products. Coca Cola, Nissanand Marlboro cigarettes are examples of products which serve nearly every market. Generallythere have been four major changes:

capital movements rather than trade have become the driving force of the global economy

production has become "uncoupled" from employment

primary products have become "uncoupled" from the industrial economy and,

the world economy is in control - individual nations are not, despite the large world economicshare of the USA and Japan.

Taking each of these changes in turn, world trade is about some US$ 3 trillion, however, capital

movements are much higher. The London Eurodollar market is worth about US$ 75 trillion perannum and foreign exchange transactions are US$ 35 trillion per annum.

Another change is the decoupling of employment from production. Employment is in declinewhilst manufacturing output is growing or remaining static at 20-25% of GNP. Sectors such asagriculture, are achieving higher productivity through mechanisation but this is at the expense ofemployment.

Still another change is the decoupling of the primary product market from the industrialeconomy. Many commodity prices have collapsed, for example tea, yet industrial economieshave been relatively affected. Unfortunately the prime producers have been dramaticallyaffected.

Finally, the most significant change is the change of focus from domestic to the world economyas the chief economic unit. This has been grasped by Japan and Germany, but not really by theUSA, or Africa. These factors have repercussions on exporting by developing countries. Firstlywith developing countries' emphasis on the export of primary products, they are at the mercy ofworld supply and demand movements, with the resultant fluctuations in prices. Depressed worldmarket prices can have a deleterious effect on developing economies. Secondly the rapidglobalisation and focus away from domestic economies has created global competition and inturn, this has pushed up quality. Generally speaking, unless developing countries can break intonon-comittally based products they are being further left behind in the global economic stakes.However positively, whilst developed worlds concentrate on industrial and service products itleaves opportunities for developing countries to export more food based products.

The global economy

The development of the global economy can be traced back many hundreds of years whentraders from the east and west came together to exchange goods. However, the growth of themodern global economy is marked by a number of features as follows:

The legacy of mercantilism 1500-1750


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The prevalent wisdom was one of nationalism, that is, that one nation prospered at the expenseof another. Nations like the UK, Netherlands and later France and Germany, with powerfulnavies which ruled the waves in the West, and the traders of the East, dominated that area.Over time, nationalism gave way to bullionism, where gold and silver, rather than other rawmaterials, became the basis of wealth. Still later, domination took another form, where countrieswere believed to be powerful if they had a favourable balance of trade - an excess of exports

over imports. Mercantilism died with the development of the United Nations (UN) and theGeneral Agreement on Tariffs and Trade (GATT), along with Adam Smith's tome on the "Wealthof Nations" which advocated market forces as the principal driving force to development andwealth.

World trade

Economic progress is linked to world trade and those who preach trade restrictions are denyingthis fact. Countries like the old communist bloc (Russia, East Germany, etc.) have notdeveloped as fast as those with more outward orientation. The same can be said of Africannations, where the inability to industrialise and export in volume has locked them into, generally,primary product producers. Economic Structural Adjustment Programmes (ESAP) are supposed

to remedy this situation by giveng "command economies" a market oriented focus.

Another argument concerns whether marketing has relevance to the process of economicdevelopment. Less developed countries (LDCs) have traditionally focused on production anddomestic income generation. Also, marketing addresses itself to needs and wants and it couldbe argued that where LDCs' productive capabilities are far less than unsatisfied needs andwants, then marketing is superfluous. However, adopting "marketing" could lead to the moreefficient and effective use of productive and marketing resources and it may be able to focus oncurrent needs and find better solutions. For example, techniques developed in the West foroptimising transport resources could well be transferred to effect. Similarly, adopting newmethods of marketing may give better results. A good example is the Cold Storage Company ofZimbabwe (CSC). By changing from the current system of marketing cattle (the CSC takes in

cattle, at fixed prices and slaughters) to an auction system by description, all actors in thesystem could benefit.

Decisions in product, price, communications and merchandising can stimulate economicdevelopment. Changing from fixed price systems to market based pricing could lead to thefaster achievement of development objectives (for example "higher incomes"). In currentdrought conditions in Africa, governments could well benefit from advertising other forms ofnutritious food, for example, fish, rather than let the populace be left uninformed and disgruntledabout the lack of maize.

Composition of world trade

Agriculture, minerals, fuels and manufactured goods figure most in world trade. However shiftsare occurring (see table 2.1)6.

Table 2.1 Shift in commodity trade - % of world trade

Product 1980 1985% 1988%

Agriculture 22.5 1 14


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Minerals 14 -5 14

Fuel 41 -3.5 1

Manufactures 17 4.5 1

Interestingly enough, those economies which have divested themselves of agriculture (or made

it more efficient) and invested in manufacturing are those which have shown spectaculargrowth. Table 2.2 compares Zimbabwe with Thailand6.

Patterns of trade

Most industrialised nations trade with each other. This had led to their continued domination.particularly the USA, Western Europe and Japan which between them have 66% of world GNPand trade. In 1985 industrialised trade to other industrialised countries accounted for 47% oftrade, next came developing countries to industrialised (15%), and finally industrialised todeveloping countries (13%). Political influences can also be seen between trading partners, forexample Zimbabwe's trade with China. Marketers need to identify trading patterns betweennations and product trading patterns. East-West trade and West to the former communist bloc islikely to grow at the expense of North-South trade.

Table 2.2 Structure of production

Distribution of GDP %

Country GDP $ m Agriculture Industry Manufacturing Services

1970 1992 1970 1992 1970 1992 1970 1992 1970 1992

Zimbabwe 1415 5350 15 22 36 35 21 30 49 43

Thailand 7087 110337 26 12 25 39 16 28 49 49

This pattern is repeated throughout Africa and Asia in general.

Comparative costs - comparative advantage

As discussed in chapter one, price has been called the immediate basis for international trade -cheaper prices based on different cost structures, especially labour. Countries trade becausethey produce and export goods in which they enjoy a greater comparative advantage and importgoods in which they have a least comparative advantage. A further refinement of this is theinternational product cycle discussed fully in chapter one.

Balance of payments

This is the measure of all economic transactions between one nation and another. The balanceof payments is made up of the current account, showing trade in goods and services; and thecapital account, which shows financial transactions. In 1989, after official transfers, the USA hada US$ 109,242 million deficit on its current account, Japan had a $ 131,400 million surplus,Tanzania a $ 778,5 million deficit and Zimbabwe a $ 2,783 million deficit.

The balance of payments account helps marketers select the location of supply for foreignmarkets and the selection of markets. The capital account may show the nations which have


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control restrictions and hence be difficult to deal with. In this regard, African nations aregenerally disadvantaged.

Government policy

This refers to the government measures and regulations which have a bearing on trade - tariffs,quotas, exchange controls and invisible tariffs. These can cause formidable barriers tomarketers and will be dealt with at length later.

World Institutions

Institutions like GATT and the United Nations Conference on Trade and Development(UNCTAD) have been of help to countries in their development. GATT had over 120 membersand associated and accounted for 80% of world trade. Its intention was to create a generalsystem of preferences and negotiate tariffs for members' products on a nondiscriminant basisand provide a forum for consultation. The Kennedy Round of the 1960s was superseded by theTokyo round of the 1970s and that by the current Uruguay round signed in 1994.

UNCTAD furthers the development of emerging nations. It seeks to improve the prices ofprimary goods exports through commodity agreements. It also established a tariff preferencesystem favouring developing nations.

Regionalism

Regionalism is a major and important trade development. Some regional groupings have eithermarket (EU) or command (China) or mixed economies (former communist countries and ThePreferential Trade Area (PTA) and The Southern African Development Community (SADC).With these developments, free trade zones have occurred (all internal barriers abolished)economic unions (the EU), export pricing zones (Mauritius) and other schemes. The major

regional economic organisations are: Acuerdo de Cartegna (Andean Group), Association ofSouth East Nations (ASEAN), Asian Pacific Rim countries (APC), Caribbean Community andCommon Market (CARICOM), Central American Common Market (Mercado Comn Centro

Americano), Council of Arab Economic Unity, Economic Community of West African States(ECOWAS), the European Union (EU), Latin American Integration Association, OrganisationCommune Africane et Mauricienne, Preferential Trade Area (PTA) and the Southern AfricanDevelopment Conference (SADC). A principal collapse has been the Council for Economic

Assistance (COMECON) with the disappearance of the communist bloc in Eastern Europe. Ofthese blocs, the EU (reporting 33% of world trade) and EFTA are very important. To counteractthe growing power of the EU, the USA and Canada have entered into an agreement withMexico as a willing partner and created the North American Free Trade Agreement (NAFTA).

These blocs are of various form, power, influence and success. ASEAN is a collaboration ofindustry and agriculture, PTA in tariffs. SADC and PTA have had historically little impact but arenow beginning to grow in importance in view of the normalisation of South Africa. The EU, North

American Union and the Pacific Rim Union will pose the greatest power blocs in future years.Many developing countries have entered into trading blocks as a reaction against loss ofdeveloped country markets or as a base to build economic integration and markets.

The development of trading blocs can bring headaches and advantages to trade. It is worthcomparing the European Union, a relatively well developed bloc, with SADC and the PTA which


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are well developed. SADC and PTA are described in a little detail in appendix one and two ofthis chapter.

The international financial system

Global financing operations based on the gold standard gave rise to instability, so BrettonWoods, post World War II, saw the nascence of the International Monetary Fund (IMF) andWorld Bank.

The IMF deals with the International Monetary System. Involved countries joined IMF toestablish a par value for other countries in terms of the US dollar and maintain it with +/- onepercent of that value. The system fell down because large corporations were holding morefunds than banks and so a "float" set in. IMF began to fade somewhat. However it still lends, ona short term basis, to countries with payment problems to help them continue trading.

The World Bank, or International Bank for Reconstruction and Development (IBRD) deals withinternational capital. It provides long term capital to aid economic development. Currently it hasabout US$ 22 billion annually for this operation. The role of the World Bank has often beencriticised especially on its conditionalities for loans to Africa in funding structural adjustment andtrade liberalisation programmes. However many developing countries require institutionalfunding to help them with trade and balance payment problems.

Other major lenders include the EU and bilateral donors and agencies who have providedmoney for developmental projects. A principal donor is the United States Agency forInternational Development (USAID).

The United States of America

Since the Gulf War of 1991, the USA has played an increasingly important role in the economic

affairs of the world. Since that time, itself, and its agency USAID, have increasingly flexed theirmuscles. However, the balance of economic power in recent years, has shifted towards thePacific rim, especially Japan and the Asian Tigers.

Individual economies

Whilst the global factors listed above have aided the development of a world economy,marketers must consider carefully individual economies. A study of these helps answer thequestions - how big is the market and what is it like? Currently there are over 200 individualcountries in the world.

Size of market

General indications of market size include population (growth rates and distribution) and income(distribution, per capita, GNP).

a) Population: In general, the larger the population, the bigger the market. However there is nocorrelation between income level and population. China has 2 billion plus people, India 1 billion,Zimbabwe 8 million. However, they do not have the same income per capita as the USA or UK.In 1993 the USA population of 252.2 million, the UK 57.4 million and Africa 400 million, were


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respectively 6%, 1.5% and 9% of the world's population. However the USA and UK had aninfinitely higher GNP per capita income than Africa, US$ 22,520, UK $17,300 and Africa $ 270respectively (1989).

Different countries experience different population growth rates. In the early 90s, the UK had anannual growth rate of 0.1%, the Ivory Coast 6%, and Africa in general, 3% per annum. Low

income countries and oil rich countries have the largest growth rates. Growth rates have a dualedge - they are good for sales but bad for world resources. The world population, currentlystanding at 5 billion is experiencing a rapid growth rate. It is expected to reach 7 billion by theend of the century. The strain on world resources is likely to be very large. The distribution ofthe population is also important. Different age groups have different needs and populationdensity should mean good market potential, the higher the better. The Netherlands have 1000persons per square mile, Bangladesh 1,791 but the USA only 65 persons per square mile.However, the USA spends more per capita than Bangladesh

b) Income: No one has yet been able to assess accurately the impact of the AIDS pandemic onworld population and economic activity. South Africa estimates AIDS will cost South Africanindustry R16.7 billion by the year 2000 (Business Herald - Nov. 24.1994). Suffice to say, unless

a cure or prevention is found, it could be serious, especially in Africa and South East Asia, theworld's "hot spots"

Income is the most important variable affecting market potential. Markets are not marketswithout money to spend. Interestingly, there is an inverse correlation between GNP per capitaand income elasticity of demand for food. Asia has a 0.9 income elasticity of demand and theUSA 0.16.

The distribution of income is very uneven. In Kenya the lowest 20% of the population receiveless then 3% of national resource. This bimodal distribution of income means marketers mustanalyse two economies in a country. Per capita measures have therefore, many limitations. Percapita judges a country's level of economic development and its degree of modernisation andprogress in health, education and welfare. Half of the world's population lives with an averageper capita income of only US$ 270. Per capita is usually reflected in US dollars and is only validfor comparison if exchange rates are equal. Exchange rates reflect international goods andservices in a country but not domestic consumption.

Another limitation of per capita measures is the lack of comparability with the figuresthemselves. The US budget contains food, clothing and shelter. In many of the less developednations these items may be largely self provided and therefore not reflected in national incometables. Also in the UK, snow equipment is included, and this is not, obviously, in Africa and partsof Asia. Other limitations are that sales of goods are not well correlated with per capita incomeand if there is great unevenness in income distribution, per capita figures are less meaningful.Product saturation can be equally troublesome in affecting market potential. A vacuum cleanerin the Netherlands has a 95% household penetration rate, but only 7% in Italy.

Gross National Product is a better indicator of potential than Gross Domestic Product as GDPincludes more than "product". World GNP figures reveal the concentration of wealth in the threenations, the USA, Japan and Western Europe. Africa trails far behind (see table 2.3)3.


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However, when evaluating markets it is wise to consider individual product areas. For example,Belgium's GNP is better than India's but India's, consumption of steel is 3 times that ofBelgium's.

Table 2.3 GDP and GNP of selected countries

GDPUS$ bn

%of World

GNPUS$ bn

%of World

USA 5670 35 3000 29

UK 903 6 540 5

Africa 322 3 220 3

The United Nations International Comparison Project (ICP) developed a sophisticated methodfor measuring total expenditure, which has been used to derive more reliable and directlycomparable estimates of per capita income. The World Bank has published a comparison ofICP findings with its own Atlas figures based on the exchange rate conversion. The use of

exchange rates tends to distort real income or standard of living measures.

The nature of economy

More than money makes up an economy's economic environment. Natural resources -rawmaterials now and in the future are important. If synthetic gold or tobacco were developed or, inthe case of the latter, became unfashionable, Zimbabwe's economy would be ruined.

Topography may produce two, three or more submarkets in a country. Zambia, for example, has"rural" and "urban" areas with different needs and wants.

Extremes of climate - like the Southern African drought in 1992 can devastate economies and

derail any economic development plans and exports. Simply, products are not available toexport, because they are being consumed by the domestic economy.

The nature of economic activity

Economic activity is often correlated to the type of economic activity. Various methods havebeen derived to classify economies. These are:

Stages of market development

Global markets are at different stages of development which can be divided into five categoriesbased on the criterion of gross national product per capita.

i) Preindustrial countries -incomes less than US$ 400 GNP per capita. Limited industrialisation,low literacy rates, high birth rates, heavy reliance on foreign aid, political instability. Parts ofSub-Saharan Africa. Little market potential.

ii) Less developed countries -per capita between US$ 401 and US$ 1,635. Early stages ofindustrialisation, growing domestic market, mature product markets, increasing competitivethreat.


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iii) Developing countries -per capita income between US$ 1,636 and US $ 5,500. Decrease inpercentage of agricultural workers, industrialisation, rising wages, high literacy rates, lowerwage rates than developed countries, formidable competitors.

iv) Industrialised countries -per capita income between US$ 5,501 and US$ 10,000. Movingtowards post industrialisation, high standard of living.

v) Advanced countries -per capita income in excess of US$ 10,000. Post industrialisation,information processors, knowledge based, less machine based. Product opportunities are innew products, innovations and raw materials plus fresh foods.

The World Bank classification

The World Bank has drawn up a classification of economies based on GNP per capita.

i) Low income economies, China and India, other low-income-GNP per capita income ofbetween US$ 675 or less, 41 nations including Tanzania, Kenya, Zambia and Malawi.

ii) Middle income economies, lower middle income, GNP per capita of between US$ 676 andUS$ 2,695, 40 nations including Zimbabwe, Mexico and Thailand.

iii) Upper middle income, GNP per capita of between US$ 2,676 and US$ 8,355, 17 nationsincluding Brazil, Portugal and Greece.

iv) High income economies, OECD members and others, GNP per capita of between US$ 8,356or more, 24 nations including UK and the USA.

v) Other economies - communist bloc.

Mozambique and Switzerland are the two extreme ends of the spectrum with US$ 80 per capitaand US$ 29,880 per capita respectively.

Rostow: Whilst economic in nature, Rostow (1971) produced a five stage model of economictakeoff:

Stage 1 traditional society, little increase in productivity, no modern science applicationsystematically, low level of literacy

Stage 2 the preconditions of takeoff, modern techniques in agriculture and production,developments in infrastructure and social institutions

Stage 3 the takeoff, normal growth patterns, rapid agricultural and industrial modernisation,good social environment.

Stage 4 the drive to maturity, modern technology applied to all fronts, internationalinvolvement, can produce anything

Stage 5 the age of high mass consumption, production of durable goods and services, largeamounts of


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These classifications enable marketers to assess where and how to operate in countries whichmay display the stage characteristics. For example African exporters would look to stage 4 and5 economies to obtain the greatest revenue opportunities for other produce.

Another way to assess the market alternatives to a potential global marketer is to look at theorigin of its national product - is it farm or factory generated? Farm workers tend to have low

incomes. Input-output tables provide other insights into a country's potential, that is, what inputsgo into a particular industry's output? What combination of labour, materials and equipment?

Infrastructure

Infrastructure is a very important element in considering whether to market in a country or not.

Transportation, for example, is vital. Zambia and Zimbabwe are landlocked and have relativelypoor transport facilities. Tanzania, whilst having direct access to the coast, has also a relativelypoor internal rural infrastructure. Chaos can therefore ensue, especially during the rainy season.Without being able to get produce to the point of exportation, countries will suffer poor exportperformance accordingly.

Energy consumption shows the overall industrialisation of a society as does its infrastructure.The less energy is consumed, the less likely the development of the market resulting in a nottoo attractive market proposition.

Communications are essential. India has only some 10 million telephones to a population of 1billion people. Media availability is important. Zambia has 680 radios per 1000 population,France 2,059 per 1000. Malawi has no domestic television service but access to satellitetelevision.

Commercial infrastructure is also vital - banks, accountants, advertising agencies and other

services. Without these " transaction " facilities, exporting cannot take place.

Urbanisation

Differences exist between "urban" and "country" dwellers. City dwellers may have more income,more developed communications and access to new products. Developing countries tend tosuffer from rural drift, but without the accompanying incomes characteristic of developedcountries. So when assessing market opportunities widespread urbanisation is no guarantee ofa good market potential.

Other

Inflation causes havoc with economies and foreign exchange. For example Zambia has anunofficial inflation rate of over 100%, which makes it difficult and expensive to access capital forinvestment and obtain pre-export finance.

The role of Government is essential. Some encourage joint ventures and investment, others donot. The number of international companies operating in an economy can be both good andbad. Japan's investment in the USA and UK is high, creating jobs, but gives rise to negativefeelings because access to Japan is not so easy. This has led to calls for protectionism.


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Similarly, flows from developed countries to less developed ones are generally one way. Thisleads to instability in the underdeveloped country because it has no "hostage" leverage.

Repatriation or transfer of dividends can be an issue which can detract from investment ifnegative facilities exist. This can seriously undermine economic development and trade.

Many African countries are undergoing structural adjustment and trade liberalisationprogrammes. In some cases, these have met with limited success. They can create marketopportunities, but they also can cause internal economic upheavals for long periods of time,detracting from investment by outsiders and limiting the export opportunities, especially ifinterest rates rise, as is often the case.

The economic environment is one of the major determinants of market potential andopportunity. Careful analysis of this, particularly income and the stage of economic developmentis essential. Failure to do so will lead, at best, to sub optimal opportunity and, at worst, todisaster. Less developed countries like Africa, are at a disadvantage, due to their primarymaterial export dependence. It behoves these nations in the continent to derive policies andstrategies for rapid industrialisation, or forever to be at the mercy of world demand and prices.

Chapter Summary

Economic factors are just some of the "environmental uncontrollables" which marketers mustconsider when deciding to market globally. The global economy can be traced back hundreds ofyears when traders from the east and west came together to exchange goods. Through thelegacy of mercantilism up to the current GATT Round, marketers have had to contend withchanges and developments in the economic environment, including the growth of regionaleconomic blocs, all aimed at increasing cooperation between the grouped nations.

Markets differ widely in their size and state of development world wide. It would be too easy to

classify these markets as "rich" or "poor", "developed" or "less developed", although this is oftendone for ease of analysis. Countries show great within country differences also and marketershave to be aware in assessing market potential that they do not use general descriptions ofnations as criteria of whether to, or whether not to, open trade negotiations.

Key Terms

Balance of payments Gross National Product National income

General Agreement on Tariffs and Trade International Monetary Fund World Bank

Gross Domestic Product Mercantilism World Trade Organisation

Review Questions

1. In what way has the global economy changed in the last 50 years? Why?

2. Discuss the various measures for assessing the size of market potential. What are theproblems in the assessment? Give examples.

Review Question Answers


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1. The Global economy has experienced the following changes

a) Capital movements rather than trade have become the driving force of the global economy.b) production has become "uncoupled" from employment.c) primary products have become uncoupled from the industrial economy.d) The world economy is in control.

Reasons

a) World trade is some US$ 3 trillion, whereas the London Eurodollar market - alone is someUS$ 75 billion per annum and foreign exchange transactions were US$35 billion per annum.Interest and exchange rate - gains are often more lucrative than investment in goods andservices manufacturing.

b) Employment is in decline while manufacturing either grows or remains static. Sectors arebecoming more productive, with injections of capital equipment and new technologies.

c) Commodity prices may collapse but industrial economies can be unaffected.

d) World trade is recognised as vital to economies as domestic growth slows down andopportunities overseas grow. Growth achievable in international trade is often at a greater ratethan domestically and the returns higher. (Ask students to find the figures which can be gainedfor rates of growth and returns on capital employed in International trade.)

2. Measures for assessing market potential are

a) Size of market - population, income (GNP/capita)b) Nature of the economy - urban and ruralc) Nature of economic activity-preindustrial, less developed, developing, industrial, advanced.

World Bank classification Rostow's five state economic tale off model.

d) Infrastructuree) Inflationf) Role of Government - laws, rules, regulations, stabilityg) Economic environment - confidence, history, stability.

Problems in assessment

a) Data too general and non specificb) Data may be out of date

c) There may be lucrative segments hidden by the general datad) Data may be invalidated or falsee) Data may be incorrectly gathered and reportedf) Units of reporting may differ from country to countryg) Data gaps or nonavailability.

References


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1. Dixie. G.R. "European Union Case Study". Network and Centre for Agricultural MarketingTraining in Eastern and Southern Africa, Zimbabwe 1994

2. "Guiness World Data Book", 1993

3. Keegan, W.J. "Global Marketing Management", 4th ed. Prentice Hall International Edition,1989.

4. Masanzu, F. "SADC and PTA". FAO consultant, Network and Centre for AgriculturalMarketing Training in Eastern and Southern Africa, Zimbabwe 1994

5. Terpstra, V. "International Marketing", 4th ed. The Dryden Press, 1987

6. World Bank. "World Development Report 1991", The Challenge of Development. OxfordUniversity Press, 1991.

7. Rostow. W. W. "The Strategies of Economic Growth" 2nd Edition, London: Cambridge

University Press, 1971

Economic Environment

The economic environment is an amalgamation of various economic factors, such as total

employment, productivity, income, wealth, inflation and interest rates. These factors influence

the spending patterns of individuals and firms.

Components of the Economic Environment

The economic environment comprises of:

Income and wealth: Income in an economy is measured by GDP, GNP and per capita income.

High values of these factors show a progressive economic environment.

Employment levels: High employment represents a positive picture of the economy. However,

there are many forms of unemployment, including partial employment and disguised

unemployment.

Productivity: This is the output generated from a given amount of inputs. High levels ofproductivity support the economic environment.

Classifications of the Economic Environment

The economic environment can be classified into:


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Microeconomic environment: It includes the economic environment of a particular industry, firm

or household and is primarily concerned with price determination of individual factors. The main

consideration from a microeconomic perspective is the efficient allocation of resources. This is

necessary to maximize total output.

Macroeconomic environment: It includes all the economic factors in totality. The main

consideration here is the determination of the levels of income and employment in the economy.

Over the course of the twentieth century, the focus has shifted from cities and countries to the

global economy being the chief economic unit.

Factors Affecting the Economic Environment

The economic environment of a nation as well as the world is impacted by:

Inflation and deflation: Inflationary and deflationary pressures alter the purchasing power of

money. This has a direct impact on consumer spending, business investment, employment

rates, government programs and tax policies.

Interest rates: Interest rates determine the cost of borrowing and the flow of money towards

businesses.

Exchange rates: This impacts the price of imports, the profits made by exporters and investors

and employment levels (also through the impact on the tourism industry).

Monetary and fiscal policy: This helps in attaining full employment, price stability andeconomic growth.

The economic environment is also influenced by various political, social and technological

factors. These include a change in government and the development of new technology and

business tools.

notes on bus environment

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