subject commerce paper no and title 5. business

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COMMERCE

PAPER NO. 5 : Business Environment

MODULE NO. 3: Changing Dimensions of Business

Environment

Subject COMMERCE

Paper No and Title 5. Business Environment

Module No and Title 3. Changing Dimensions of Business Environment

Module Tag COM_P5_M3

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Environment

TABLE OF CONTENTS

1. Learning outcomes

2. Introduction

3. Factors influencing changes in business environment

4. Corporate response and adjustment

5. Environmental scanning

6. Changing dimensions of Indian business environment

7. Summary

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Environment

1. Learning Outcomes

After studying this module, you shall be able to

Know the changes in Business Environment

Different factors that going to Influence changes in business environment

How corporate response and adjust to these changes.

Changes in Indian business environment

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Environment

2. Introduction

Business Environment of country is never constant or static. It is always in a dynamic state and is

affected by a number of factors. There are factors that affect or constitute business environment

and that keep on interacting with each other over the period of time. Except in the case of

emergency or crisis, changes in business environment are not sudden but gradual. Much business

Organizations throughout the world are able to predict or forecast the changes on the basis of

their wisdom and experience. Such organizations are able to reposition themselves and exploit the

opportunities unfolded by changing business environment. On the other hand those who are not

able to understand the present environment and anticipate future changes face the danger of

marginalized competition.

Understanding of changing business environment and predicting it at least not an easy task. The

task required a cadre of professional business economist and managers who have through

knowledge of the behavior of macroeconomics variables and can estimate the impact of their

change on business environment conditions. Not only that, an appropriate understanding of the

interaction between the different layers of business environment is essential but at the very same

time need to understand the relationship between economic and non-economic environment

needed. The various facts, data and trends have to be carefully studied and analyzed and

researched to scan and business environment over a particular period of time. Unfortunately most

of the firms don’t have adequate resources and the expertise in this regard and depend upon the

reports of the rating agencies, consultants, newspapers and journals, economic research

institutions or even on the intuitive understanding of a few top level managers.

3. Factors influencing changes in Business Environment

The dynamics of business environment can be understood in terms of the following important

factors that trigger changes in business environment. At a particular time, some or all of the

factors could be at work but their impact on the environment would depend on the extent of

change and intensity of impact.

Changing Government Policies

In every country government affects business environment in various ways, mainly as, promoter,

entrepreneur, planner, and consumer. Any changes in government policy in each of these roles

have a profound impact on the macroeconomics as well as sectorial business environment.

Change in fiscal policy affect expenditure levels and the structure of taxation which affects costs

and prices and monetary changes impact the cost (rate of interest) and availability of credit

(liquidity), which influences the cost of capital of business firms. Monetary policy changes

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Environment

influence the financial capability of the business firms.

Changes in policy generally impacts economic growth. Public

debts policy affects the supply of savings and aggregate level of demand for the private sector.

Often, government has very much coordinated approach in designing monetary, fiscal and public

debt policy in terms of a set of pre-determined objectives like high growth rate, controlling high

inflation, promoting environmental issues and correcting regional disparities.

On the very same time government policies are also designed to impact specific sectors.

Government undertakes investment and disinvestment programme in specific segment of

different industries affecting their competitiveness and growth rate.

In India government adopt various policies for specific sectors like infrastructure, agriculture,

small-scale industries, core industries, exports, textiles and many more. Reserve Bank of India in

consultation with the government, decide Qualitative credit controls under which it changes the

flow of credit to specific industrial sectors according to national priorities.

Variation in Growth Rate

Performance of the various sectors in any economy determines the growth rate. A growth rate of

about 7 percent or more lead to appreciable increase in income and aggregate demand. However

changing growth rate from year to year brings about corresponding changes in business

environment and business firms need to adjust to the changing scenario. Along with overall

growth rate, the sectoral growth from different segments likes agriculture, infrastructural and

banking also changes depending upon the sectoral environment conditions. These different

sectors of the economy are however not segmented or independent. Each sector of the economy

has both forward and backward linkages. Changing economic conditions in one sector tends to

affect conditions in related sectors.

Changes in Market Structure and Competition

In every economy, different product and industry group face different market structures

depending upon the state of competition. The market structure basically depends upon the many

factors and number buyers and sellers in the market, freedom of entry and exit, independence

between firms, mobility of resources and the availability of market information. Markets for

product like detergents and readymade garments are monopolistically competition. On the other

hand an oligopolistic condition prevails in market for automobiles, aviation, refrigerators and air

conditioning etc. Trade liberalization and import competition are further impacting the

competition level. On similar hand policy of government towards foreign direct FDI, MNC, and

public sector undertaking are making economy more competitive or more efficient.

Business Speculation and Expected Future

Changing variables of business environment generates many future expectations and many

speculations. And individuals and business firms, on the basis of industry past trends and current

scenario anticipate future changes in a number of variables such as bank rate, inflation, exchange

rate, taxes, government borrowing, advertisement expenditure and many more. When there is a

future expectation about inflation, economic undertakings tends to prepone their purchases. Its

tends to bring inflation from future to the present stage. Similar way an expected increase in rate

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Environment

of interest may weaken the current demand for fixed-interest

bearing assets or investments. Same way firms are able to

foresee substantial increase in government borrowing can anticipate liquidity shortages and

change in rate of interest in future. Changes in current and future demand leads to establishment

of markets for future and forward in commodities. Now, the markets for derivatives are emerging

fast in a developing country like India.

Changes in Tastes, Preferences and Consumer Attitudes

Major role in product designing, delivery and accompanying service is played by consumer tastes

and attitudes. In a highly competitive market, professionally managed firms are customer focused

and closely monitor any changes that take place in consumer perception attitude towards their

products. Such consumer related factors are subject to change over the period of time. Main

factors that bring about changes in tastes and preferences are education, geographical mobility,

fashion trends and availability of products. Pattern of consumer tastes also changes as his age

advances but among younger age groups these days major changes over relatively shorter period

of time may be very much expected. A large number of youngsters quickly initiated into smoking

and drinking in recent time period. Consumer’s perception, attitudes and lifestyle are greatly

influenced by advertising and results in changing tastes and preferences. The changes on the

consumer side induced changes in product, packaging and presentation, making the environment

more competitive.

Changes in pattern of foreign Investment and Imports

Present age is the age of globalization and interdependence between countries. Most of the

economies of the world are opening their borders for imports and paying special attention to

export development. This exposure to foreign products and foreign business firms can lead to

large change in the business environment. Imports not only add to competition but also create

healthy environment in which domestic firms of the country learn about new products and

technologies. Differences in the prices of imported and domestically produced goods pose several

challenges to the domestic firms to become efficient to stay in the market. With the progress of

import liberalization business environment gets more vibrant and dynamic over the period of

time. Foreign firms bring not only new products and brand but also new management

philosophies, culture, work ethos and performance standards. MNC’s compete with domestic

companies both in home and international markets and establish new benchmarks.

External Economic Shocks

International economic changes get transmitted in economies that have high degree of global

linkages. Problems like inflation, stagnation and unemployment transmit like infectious diseases

in global interdependent economies. The cases like European debt crisis in recent time period

affect international trade, tourism, foreign investment and investor confidence on global front. In

similar way war between two countries, civil strife, lead to effect global economy. The countries

whose trade and investment are concentrated in a few narrow group geographic locations are

more likely to adversely affect.

Non-economic Factors

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Environment

There are large varieties of non-economic factors which can

destabilize the business environment and business firms can do

very little about these factors. The best they can do is to adjust to such changes over the period of

time. Social environment of business is slow changing but social tensions and communal violence

can trigger disturbance in internal law and order situation and can affect smooth functioning of

business.

Major industrial accidents and natural calamities like earth quakes and floods, outbreak of

epidemics can have a destabilizing effect on the business. Recent natural calamities in Uttrakhand

and Jammu & Kashmir have caused tremendous damage to the economy.

Factors Influnecing Changes in Business Environment

Governmnet Policies

Growth Rate

Market structure

Business speculation

Tastes,preference and attitudes

Foreign Investment and imports

External economic shocks &non economic

factors

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4. Corporate Response and Adjustment

All of the factors that we read are capable of bringing changes in the macroeconomic as well as

sectoral environment of business firm, depending upon the magnitude, direction and duration of

impact. All these factors impact different macroeconomics variables and the interrelationship

making the environment volatile, less comprehensive and unpredictable. There are large number

of companies those are unable to understand the current state and dynamic of business

environment. But there are many professional firms that are always set to build projections on the

basis of their predictions on current trends, although right quantum and direction of adjustment is

not an easy task. At the very same time over reaction and under reaction both can lead to

expensive and painful deviation for firms planned goals. Before deciding a particular responsive

action it is necessary for every firm to find out which causative factors will affect which

component of business environment.

Firms that are able to adjust to business environment changes, reduce risk and uncertainty, and

gain competitive advantage over the others. On the other hand failure to make timely adjustment

may seriously effect profitability, competitiveness and even hit market share of the company.

Firms that have sufficient time to readjust and re-orient their operations well in advance and able

to exploit many new opportunities and meet the challenges that toss up changes in business

environment. Policies must have sufficient flexibility to enable the firm to adjust to the changing

environment.

Unfortunately, there are large number of firms those are unwilling or unable to make

adjustment to environment changes. There are number of reasons behind that:

First, is the momentum and flow of business along a pre-set business plan that doesn’t permit

interruption by way if adjustment.

Secondly, the current state of business environment and the anticipated changes are subject to

varying and even conflicting interpretations and no conclusive action is possible.

Thirdly, a possible wrong adjustment can be fatal and no corporate house or group of top

management is willing to volunteer for risky initiative.

Finally, most of the business environment changes are considered to be very much minor and

reversible, so that no response is required.

Nevertheless, firms prefer to restrategise or restructure when changes in environment are clear

Dominant and durable. Firms have to readjust their goals, plans and policies and their

implementation design. At the very same time they have to plan changes in their liquid assets,

capital and investment-returns ratios. All the factors of business environment need to be scanned

carefully so that response and adjustment of the firms is appropriate.

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Environment

5. Environmental Scanning

In environmental Scanning we turn to the methods and techniques employed by the different

organization to monitor the environment and gather data at various levels to derive information

about opportunities and threat that going to affect their business.

Different factors need to be considered in environmental scanning:-

The external factors in which business organization exists consists of variety of factors. These

factors are events, trends, issues and expectations of different interested parties.

Changes in the world of work can give rise to new risk areas or change the way that occupational

safety and health needs to be managed. This has implications for workplaces themselves and also

for the occupational safety and health system. For this reason the ‘changing world of work’ has

been a priority topic for the Agency.

Example of the past like Union carbide factory accident at Bhopal was an “event”. The “trend”

was that arose on part of regulatory authorities to be conscious about safety. The “issue” is raising

concern about environment.

Sources of information for Environment Scanning

There are various sources of information for collecting data for environmental scanning and that

can be classified in different ways. They could be classified as formal and informal, written or

verbal, external and internal. Some of the important types of source of information are as follows

1. Secondary data from sources like different publications, magazines, journals, books,

annual reports and so on.

2. There are internal sources like company documents, company employees and database

etc.

3. Mass media sources like radio, television, internet etc.

4. External sources like customers, suppliers, and government agencies and so on.

5. Formal studies conducted by market researcher, consultant, educational institutions etc.

6. Changing Dimensions of Indian Business Environment

Over the period of time dimensions of business environment in India have changed widely, either

we talk about political, economic, social, technological, or legal environment. Some of the

dimensions that have changed widely have been discussed below:

Political Environment

When we talk about Indian political environment it includes factors like a political system, type

of government, centre-state relations, public opinion, law & order, nature of government policies

towards business - particularly those related to taxation, industrial relations, regulation of

business & industry, and foreign trade regulations. In the period prior to liberalization, India's

annual growth rate was low at around 3.5%, only a few licenses were given out for important

Sectors like steel, electrical power, energy and communication, and these license owners built up

powerful corporate empires. License Raj established the self-perpetuating bureaucracy that still

exists in India and corruption flourished under this system. Government of India began the

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process of privatization in 1991. The purpose of privatization

was to improve the efficiency of public undertakings and to

raise funds for public investment. As a result financial institutions have become more active,

working culture is improving and management is being professionalized, there is improvement in

technology, better investment behavior of Indian entrepreneurs and companies are aware of the

significance of human capital. The banking, financial services & insurance (BFSI) and airline

sectors have become extremely competitive, but

are in need of reforms. There have been some negative effects like curtailed growths in some

industries, reduced employment opportunities due to adoption of capital intensive technology,

sell-outs & takeovers by foreign companies, losing markets and declining capacity utilization.

Economic factors

The Indian economy is currently the 9th largest in the world by nominal GDP and the 3rd largest

by purchasing power parity (PPP). Over the period of time Indian economy adopted Economic

Liberalization and start follow free market principles and it included opening India for

international trade and investment, deregulation, initiation of privatization, tax reforms and

inflation-controlling measures. The fruits of liberalization reached their peak in the year 2007 as

India reached its highest GDP growth rate of 9%. With this India became the 2nd fastest growing

economy in the world, next only to China. However dealing with powerful lobbies such as the

trade unions and farmers, or contentious issues such as reforming labour laws and reducing

agricultural subsidies, are some areas that still need economic reforms.

Socio-cultural environment

It covers factors such as social customs, traditions, culture, Lifestyle, attitude of people, saving &

spending patterns, size of population, demographic Profile, education level, occupational

structure, trade unions, and other factors that Influence and describe the behavioral characteristics

typical of the people. It would also include the Corporate Social Responsibility initiatives

undertaken by companies.

CSR in India is in a nascent stage. It is still one of the least understood initiatives in the

Indian development sector. A lack of understanding, inadequately trained personnel, Non-

availability of authentic data and specific information on the kinds of CSR activities, coverage,

policy etc. further adds to the reach and effectiveness of CSR programs. However the situation is

changing as CSR is coming out of the purview of 'doing social good' and is becoming a 'business

necessity'.

Marketing Environment

In India due to satellite TV & other media exposure, customers are becoming more selective and

demanding, even in the rural sector. Green revolution and creation of industrial zones in rural

areas has ushered in a rich farmer class with an appetite for conspicuous consumption. Sanand (a

small town in Gujarat where the Nano factory is located) has become one of the booming

entrepreneurial centers and boasts of a number of high-end car models sold in India. It has

attracted commitments of billions of US dollars in investments from some of world's largest

companies.

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Environment

The Indian middle class is fast becoming used to Western

culture. With increasing disposable incomes, a larger middle

class has been created whose needs have gone beyond the basic 'roti, kapda aur makan'. The sheer

number of consumers has created a huge market for all kinds of goods. Hence the booming sales

of consumer durables and vehicles. This has created a huge problem of managing traffic and

providing adequate parking place for vehicles in already congested urban areas.

8. Summary

Business Environment of country is a dynamic state and is affected by a number of

factors. There are factors that affect or constitute business environment and that keep on

interacting with each other over the period of time.

There are factors like government policies, growth rate, market structure, tastes,

preference and attitudes that going to influence changes in business environment.

Corporate houses response and adjust according to changing dimensions.

Environmental scanning being done new methods and techniques to derive information

about opportunities and threats.

Over the period of time huge changes in Indian business environment being observed.

subject commerce paper no and title 5. business

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