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8/2/2019 Class Retail1

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Introduction to Business and its

Environment Gary Hamel and C.K.Prahalad observe: Substantial

challenges face any organization intent on getting to thefuture first. The first challenge, how to navigate from hereto there arises as both public and pvt. institutions struggle

to plot a course thro an increasingly inconstantenvironment where experience is rapidly devalued andfamiliar landmarks no longer serve as guideposts. Neverbefore has the institutional terrain been changing soquickly or have industry boundaries been so malleable.

Never before have competitors, partners, suppliers andbuyers been so indistinguishable. How then does one getto the future first even when there is no map?


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A critical challenge is to cope up with environmentaldynamics of changes which may not follow a set pattern

Business environment presents 2 challenges- ie to faceenvironmental threats like competition, declining demand

etc and to exploit business opportunities Hence need for environmental analysis and diagnosis in

strategic mgt. process

Environmental analysis is the process by which strategists

monitor the economic, governmental/legal,mkt/competitive, supplier/technological, geographic andsocial settings to determine opportunities and threat totheir firm


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Factors influencing Business

Environment

1)Value System-of the founders and those at thehelm of affairs eg Tatas social and moralresponsibilities to consumers, employees,shareholders etc. The Murugappa group decidedto sell off the liquor business when they tookover EID Parry group

2)Mission and Objectives-policies, directions anddecisions are based on these

3)Mgt. Structure and Nature-extent ofprofessionalization of mgt.


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4)Internal Power Relationship-support that top

mgt. enjoys from different levels of employees,

shareholders and Board of Directors influence

decisions and their implementation5)Human Resources-skill, quality, morale,

commitment, attitude etc could contribute to the

strength and weakness of an organization

-a SWOT analysis is very much essential for

business policy formulation


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Internal Environment

Influenced by organizational culture,

involvement, initiative, companys image

and brand equity etc

Also influenced by factors like physical

assets and facilities, R&D and

technological facilities, mktg. resources

and financial factors like financial policies,capital structure etc


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External Environment

External business environment consists of a microenvironment and a macro environment

Micro Environment

-factors that influence companys immediate environment

like suppliers, mktg. intermediaries, competitors,customers and the public

Macro Environment

-demographic, economic conditions and policies, natural(natural resources, weather and climatic conditions,

locational aspects etc), technological, political and socio-cultural forces like customs, traditions, taboos, tastes,preferences etc


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International Environment

It effect industries that depend on imports/exports eg aprotectionist policy adopted by a foreign country affect ourexports to that country and vice versa. The GreatDepression in the US affected all other countries that had

trade relation with the US. The oil crises is anotherexample

A company which depends on export mkt. to aconsiderable extent is prone to face the impact of adversedevelopments in foreign mkts.

Environmental forces like consumerism or consumermovement, social justice, govt. regulations andcompetitive environment compel companies to adopt thesocietal marketing concept


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Business environment is dynamic with several elements inthe environment undergoing changes-technology, tastes,habits, preferences, competition, population size andcomposition, attitudes, values, income etc

Business policy should be dynamic enough tosuccessfully adapt to the changing environment

Success of business depends on its ability to foresee theenvironmental changes and to modify its strategiesappropriately

SWOT analysis plays a very important role in the strategicmgt. process or formulation of business policy

Strategic mgt. is defined as that set of decisions andactions that lead to the devt. of an effective strategy tohelp achieve corporate objectives


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After identification of the environmental opportunities andthreats and the organizations strengths and weaknesses,consider the various strategic alternatives that areavailable and choose the most appropriate one

Effective implementation of the chosen strategy is equallyimportant. There are 3 levels of strategies applicable-1)corporate level strategy 2)business level unit strategy(strategy to achieve specific objectives of the strategicbusiness unit so as to achieve the overall corporate

objectives) 3)functional level strategy-strategy formktg.,finance, R&D etc


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Evaluation of the implemented strategy is

essential to determine whether it is

meeting the objectives of the enterprise

Thus key to business success lies in the

most effective utilization of the companys

resources given the companys strengths

and weaknesses in the light of theenvironmental threats and opportunities


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Factors influencing Business

Environment Economic Factors

1)Growth rate of the economy

2)Inflation

3)Rates of savings and investment

4)Fiscal imbalance- govts in less developed countries tryachieve a high rate of investment by resorting to deficitfinancing which, in due course of time, results in largefiscal deficit

5)BOP deficits

6)Prosperity, Recession and Stagflation7)Financial system

8)Economic policies-trade policy, monetary & fiscal policies


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Non-Economic Factors

1)Political environment

2)Legal environment

3)Socio-cultural environment-caste, race, ethics,

religion, gender etc

4)Demography

5)Technology

6)Natural environment-availability of natural

resources


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Business during the 21st Century

Large organizations with a large workforce will

not exist-there will be mini organizations eg

powerful organizations like

HAL,HMT,BHEL,BEML etc have lost theirprominence to organizations like Infosys, Wipro

etc

Business will be knowledge based. Mfg

processes will become highly complex, jobs willbecome intellectual and employees will need to

be intelligent


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Tomorrows managers need not spent time onfile pushing and paper-shuffling. IT will take careof most of that work

Organizations will become flat- 8 to 10 layers willbe replaced by 2-3

Employees will have no definite jobs. Most of thejobs will last for 2-5 years (short projects)-real

growth will come from frequent changes of jobsand responsibility, acquisition of new skills andthe ability to put those skills to use in entirelynew environment


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Process of Environmental Analysis

The analysis consists of 4 steps: scanning (to

identify early signs of possible environmental

change or detect changes already under way),

monitoring (tracking environmental trends,sequences of events or stream of activities),

forecasting (projection of the direction, scope

and intensity of environmental change) and

assessment (determining implications for theorganizations current and potential strategies

due to environmental changes)


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Components of International

Economy-WTO The WTO is the only international body dealing

with the rules of trade between nations

Its main objective is to help trade flow as freely

as possible by ensuring that individuals,companies and govt. know what the trade rulesare around the world and giving confidence thatthere will be no sudden changes of policy

It is a forum for trade negotiations It helps in dispute settlement-arising from

differences in interpreting trade agreements


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WTO came into existence on 1-1-95

Since 1948 the General Agreement onTariffs and Trade (GATT) had provided the

rules for the system While GATT dealt mainly with trade in

goods, WTO and its agreements cover

trade in services and in traded inventions,creations and designs (intellectualproperty)


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WTO is based in Geneva. Its functions are1)administering and implementing themultilateral and plurilateral trade agreementswhich together make up the WTO

2)acting as a forum for multilateral tradenegotiations

3)seeking to resolve trade disputes

4)overseeing national trade policies

5)co-operating with other international institutionsinvolved in global economic policy making


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The principles of the trading system should be

1)without discrimination-between trading partners

2)freer-with barriers coming down thro negotiation

3)predictable-foreign companies, investors and govts.should be confident that trade barriers shall not be raisedarbitrarily

4)more competitive-by discouraging unfair trade practiceslike export subsidies and dumping products at below cost

to gain mkt. share5)more beneficial to less devd. countries-giving them more

time to adjust, greater flexibility and special privileges


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WTO has more than 130 members accounting for over90% of world trade and is based in Geneva

The Uruguay Round of Negotiation (ie the 8th round ofGATT) was held in 1986 at Ministerial level due to the

drastic changes that world trade had undergone-a) shareof agriculture in world trade decreased to 13% in 1987from 46% in 1950 b) share of service sector in GDP ofdeveloped countries was rapidly increasing eg in USAservice sector represents 2/3rd of GDP and employs 70%

of work force. In commodity sector comparative costadvantage was in favour of Japan and several other newlyindustrialized countries


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Thus a need was felt to bring service sectors into tradenegotiation-banking, insurance, telecommunication, touroperators, hotels, transport etc looking to do businessabroad can now enjoy a freer and fairer trade that

originally only applied to trade in goods The WTO also offers technical assistance to developing

countries

Negotiation on Trade Related Aspects of IntellectualProperty Rights (TRIPS) was an highlight of the Uruguay

Round of negotiation it provides the norms andstandards of protection of intellectual property


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TRIPS puts the protection of private monopoly

rights of the inventor as the main objective of the

new international regime for protection of

intellectual property rights TRIMS (Trade Related Investment Measures)

which was also a part of the Uruguay negotiation

was intended to bring liberalization in investment

ie provide equal opportunity to all thro nationaltreatment thereby overlooking the level playing

field argument of developing countries


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Implications for India

Some of the major Advantages

Benefits from reduction of tariffs on products ofexport interest to India

Improved prospects for agricultural exports as aresult of likely increase in the world prices ofagricultural products due to reduction indomestic subsidies and barriers to trade

Likely increase in export of textiles and clothingdue to phasing out of Multi-Fibre Agreement(quota system)


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Advantages from greater security and

predictability of the international trading

system due to the revamped settlement

procedures and the agreements onSafeguards, Subsidies and Anti-dumping

Measures

Compulsion on India to be competitive inthe world mkt.


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Some of the Dis-advantages

Tariff reduction on goods of export interest to India arevery small

Meager prospects of increase in agricultural exports

Not much benefits expected for the textile sector (which isprimarily labor intensive)

Increased pressure to liberalize the services industries

Technology dependence on foreign firms will increase due

to our paucity of resources in carrying out R&D Trend towards protectionism in developed countries

against our exports


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Regional Trade Blocks

In recent years there has been an accelerated movement towardsregional economic integration-to reduce and ultimately remove tariffand non-tariff barriers to free flow of goods, services and factors ofproduction between them eg the European Union became a singlemkt. with 360 m consumers w.e.f. 1/1/93, Canada, Mexico and UShave implemented the North American Free Trade Agreement

(NAFTA). Similarly Argentina, Brazil, Paraguay and Uruguay haveagreed to reduce trade barriers between themselves. ASEAN(Assoc. of South East Asian Nations) comprising of Brunei,Indonesia, Malaysia, Phillippines, Singapore, Thailand

Regional economic integration can create new opportunities andwell as problems

There is fear in some quarters of competition between blocks andattempts to protect its own mkt. from outside competition


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The main objectives of regional integration are

1)to explore the economic and political debatesurrounding regional economic integration,

paying particular attention to the economic andpolitical benefits and costs of integration

2)to review progress towards regional economicintegration around the world

3to map the important implications of regionaleconomic integration for the purpose ofinternational business


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Levels of Economic Integration

Free Trade Area-ie all barriers to trade of goods andservices among member countries are removed

Customs Union-adopt a common external trade policy egthe Andean Pact between Bolivia, Colombia, Equador and

Peru to encourage free trade with a common tariff onproducts imported from outside

Common Market-factors of production are allowed freemovement between member countries which needs asignificant degree of harmony and cooperation between

fiscal, monetary and employment policies which may bedifficult to achieve


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Economic Union-involves free flow of products and factorsof production between member countries and adoption ofa common external trade policy. It also requires commoncurrency, harmonization of countries tax rates and a

common monetary and fiscal policy Political Union-to make a coordinating bureaucracyaccountable to the citizens of member nations eg theEuropean Parliament is directly elected by the citizens ofthe EU countries. Besides the Council of Ministers is

composed of ministers from each member country


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Regional Economic Integration in

Europe There are 2 trade blocks in Europe, the EU and

the European Free Trade Association (EFTAcomprising of Norway, Iceland and Switzerland)

The EU was the outcome of 2 political factors:

1)the devastation of the 2 world wars onWestern Europe and desire for lasting peace 2)European nations desire to hold their own onthe worlds political and economic stage

The European Commission , headquartered inBrussels, Belgium is responsible for proposingEU legislations, implementing it and monitoringcompliance by member states


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Regional Economic Integration

Elsewhere

Association of Southeast Asian Nations(ASEAN) founded in 1967 by Indonesia,Malaysia, Philippines, Singapore and

Thailand with the basic objective to fosterfreer trade between countries and toachieve cooperation in their industrialpolicies. However only limited progress

has been achieved-the tariff reductioneffected benefits only 5% of the intra-

ASEAN trade


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Asia Pacific Economic Cooperation (APEC) was foundedin 1990 at the suggestion of Australia comprising of 18countries including US, Japan and China

South Asian Association for Regional Cooperation(SAARC) was started in 1985 at Dacca with members as

India, Pakistan, Bangladesh, Nepal, Bhutan, Sri Lankaand Maldives. The objectives were

1)to achieve self reliance

2)promote welfare of people and improve life quality

3)accelerate economic growth, social progress and culturaldevt.

4)provide individuals opportunity to live in dignity and realisetheir full potential


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Performance not upto expectation due to

lack of economic cooperation, restrictive

foreign trade regime, information gap in

trade opportunities eg natural gas ofPakistan and Bangladesh can be exported

to India, for products like jute, cotton and

tea SAARC countries are competing theworld mkt. etc


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Summary-Global and National

Business Environment Rapid political and economic changes in various parts of the world Unipolar world in which the USA has a dominant position Spectra of recession haunting both developed and under-developed

economies South-East Asian economies have not truly recovered from the

financial crises Adoption of mkt. economy in Russia has proved to be disastrous forthe people of the country

In this pessimistic global scenario some developed are makingregional economic arrangement and some others resorting toprotectionism

This uncertainty has made business environment veryunpredictable


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The Unipolar World

The collapse of Eastern Europe in 1989 and theUSSR in 1991 marked the end of a bi-polarworld and supremacy of USA

Formation of European Union w.e.f.1/1/99 isseen as a major step towards economic andpolitical integration of the biggest economic zone

Due to weakening of asian currencies, dollar andeuro likely to dominate world economy asreserve and key currencies


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Globalization

Movement of the world economy towards and

international economic integration ie expansion

of economic activities across political boundariesof the nation-the process is driven by the lure of

profit and threat of competition in the mkt.

Three important dimensions of this process are-

international trade, international investment and

international finance

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