In consumer markets, the natural environment affects companies because of the differences in the nature of products bought by consumers due to variations in seasons and climate. A firm may be influenced by changes within the general environment but cannot itself influence the environment. Micro external environmental factors. (iv) Welfare activities of government that ensure the well-being of a country’s citizens. Therefore companies selling to consumers should generate confidence in the consumers by offering them high quality products and services at reasonable prices and also extend credit to them. The dominant features of technology have been made in the last three decades. In other cases, environmental scanning is needed to determine what technological change will mean to existing products in terms of their production processes. Some of them live with their grown-up children and are part of their household. Particularly for the last ten years, technology has worked wonders. To market soup in Japan, the manager/marketer must realise that soup is regarded there as a breakfast drink rather than a dish served for lunch or dinner. Most of their money is spent on buying gifts for their children and grandchildren. Technological factors represent major opportunities and threats that must be taken into account while formulating strategies. Strategists in industries affected by volatile technological change must be much more alert to changes than those in more stable industries. These factors are external to the business and beyond the control of individual enterprise and their management. When the price of the rupee is high against foreign currencies, Indian companies find it difficult to compete in the international market. The strategists must, therefore, understand the existing environment of the society and visualize potential changes therein before long-range plans are formulated to achieve corporate objective. Obviously companies that want to do business globally must pay attention to the above developments closely and learn to adapt themselves to the laws of the land. People in this age group spend less as they save resources to fund the higher education of their children. In recession, business buyers will postpone the purchase of new equipments and materials because they do not know if there will be demand for their products and services. New machines can reduce production costs. If our potential customer can’t afford what we provide then we just don’t have a business. Rate of growth of the economy, rate of growth of each sector of the economy, gross domestic product rate of inflation, interest rates, behavior of capital markets, exchange rates, tax rates, prices of materials, prices of energy and the conditions of the labor market are additional economic factors that must be carefully considered in strategic planning. Countries of Third World and Fourth World have recently started playing a greater role in international business, as a source of opportunities and threats. We call the global business environment within which: Organizations trade, and; Within which its market lies. Government’s view on globalization and trade liberalization. by producing new global competitors. The natural endowments began to be used recklessly leading to air, water and land pollution and ozone depletion, gradually. Changes in micro factors can affect the day-to-day activities in your business and have an outsized impact on you. Let’s examine these factors in greater detail: Demographic characteristics such as population, age distribution, religious composition, literacy levels, inter-state migration, rural-urban mobility, income distribution, etc., influence a firm’s strategic plans significantly. The internal factors that affect a business are such factors as employees, competitors, customers, suppliers and the culture of the organization.These are factors which business can control. Organisations without dated technology are either shown the door or decimated quickly. It consists of the factors in the organisation’s immediate environment (micro-environment). At the same time, American consumers may be inclined to purchase products produced abroad that are less expensive than goods produced domestically. We use it to analyse the global business environment. Interest rates, inflation rates, unemployment rates and trends in the gross national product, governmental policies, sectoral growth rates of agriculture, industry infrastructure, etc., are other economic influences it must consider. All types of organization are now faced with issues that they could ignore just a decade ago. Very little business and marketing activity is free from the law and acts of government. Consistent GDP growth generally products a healthy economy fueled by increases in consumer spending. At the corporate level, interest rates also influence strategic decisions related to financing. The values and attitudes of customers and employees can affect strategy. Generally speaking, internal environmental factors are easier to control than external environmental factors. External Business Environment is the factors which happen outside the organization. If structural changes are taking place and you are unaware of them, you can easily make poor managerial decisions”. have precipitated the problem further. Technological changes will bring in many new products as well as causing death of many existing products. There will be inflationary tendencies if interest rates are higher for long periods. Apart from willingness to bend the rules and get along with the times, political stability is also essential for economic growth. There are two elements within the external marketing environment; micro and macro. The dismantling of quantitative restrictions, to take another example, from 1.4.2001 is going to affect the fortunes of domestic companies manufacturing goods such as dry cell batteries, toys, stereos, telephone equipment, shoes, wrist watches, drinks and juices, chandeliers, colour televisions etc. The viability of businesses depends upon their ability to understand the laws of the land and to abide by them, while not becoming less innovative in their marketing endeavors due to fear of their infringing some laws. Other retailers and even grocery stores, now-a-days use scanners linked to computers that provide instant inventory information. They choose products and services that meet diverse needs and interests rather than conform to traditional stereotypes. In a political stable environment, there is certainty and confidence generated by governments that ensure with possible investment and expansion opportunities, consistent supply of financial, human and physical resources. Serious environmentalists are still in the minority but those who like to bathe their consumption in a ‘light green wash’ are now the majority. 4. Companies need to keep a track of relevant economic indicators and monitor them over time. They put in long hours at office and they have to juggle endlessly between their responsibilities as spouses and parents, and growing responsibilities at work. They also exercise considerable influence on the cost of doing. ), and relies almost entirely on external factors.PESTLE analysis focuses on six important factors which can influence business — political ones, economic ones, sociocultural ones, technological ones, legal ones, and environmental ones. It is not entirely without reason that mass customization is gaining popularity among leading firms too. India is a country where people belonging to almost all religious faiths live—Hindus, Muslims, Sikhs, Christians, Budhists and Jains. They will latch on to the next hot item. In recent times, all over the world, legislation regulating businesses has been steadily increasing. High interest rates tend to dampen business plans to raise funds to expand or to replace aging facilities. Take the stunningly successful case of MP3, a freely-available standard for the compression and transmission of digital audio. The external environment. In an open market, the organisation turns into a lifeless machine without customers. Companies should learn to expect tough customers. I hold a degree in MBA from well known management college in India. Businesses tend to study this environment to understand the nature of their customer needs and expectations. External factors. Thanks to the advances in transportation and communication technology in the past century, almost no part of the world is cut off from the rest. The political and legal environment has a significant impact on the opportunities and threats for business organizations. It is perpetuated because consumers and businesses become uncertain about future and are reluctant and scared to buy. When there is a mad scramble for scarce resources with a view to catch the upturn in demand for new homes, as it happened in recent times all over the globe, you are compelled to pay a price for the “irrational exuberance”. From access to capital, to access to technology, to access to people, projects will succeed or fail based on the project leaders ability Companies in fragrance and other business have equipped their customers with design tools so they design their own products and services. Technological changes bring many new opportunities as well as causing threat by making existing systems obsolete. There are three types of economic systems like capitalism, socialism and mixed economy. There are a lot of other ways in which technologies like the Internet are impacting businesses. The explosive population growth during the last decade has serious implications for Indian government wanting to go after sophisticated technologies, discarding tradi­tional, labour intensive methods. One is the amount spent on research and development. Interest rates on home loans have fallen to rock bottom levels—to spur demand for new homes. So strategists must keep up with changes in educational levels and social values in order to assess the potential impact on their strategies. People in this age group live on a steady income. Nowadays, every company is in a very difficult position because the competition is tough. The subsequent securities scam derailed the economy, all the more. There are numerous criteria considered as external elements. Inflation will reduce the demand for several products because the customer will ration his income on goods. Because of their general nature, an individual organization alone may not be able to sub… The internet is changing the very nature of opportunities and threats by altering the life cycles of products, increasing the speed of distribution, creating new products and services, erasing limitations of traditional geographic markets and changing the historical trade-off between production standardization and flexibility. Legal environment of business considers the factors including legislation protecting consumer, employee and sectors, corporate affairs, corporate protection, protection of the society as a whole against unbridled business behavior, regulations of products, prices and distribution, controls on trade practices, protecting national firms against the onslaught of foreign firms. (Hitt et al) “They affected where people worked, what work they did, and the education level they needed to do the work and so on. Government’s monetary and fiscal policies, xiv. High inflation rates have a negative effect on most, but not all businesses. The growth of dual-income families has resulted in increased purchasing power. Conditions that lead to positive changes like decrease in unemployment rate, increase in GDP, price stability, etc., can boost business confidence and encourage businesses to plan activities leading to their growth. Social change is the most difficult variable for marketing managers to forecast, influence and integrate into marketing plans. If the system recognises that a store is low on Tide detergent for example, an order is sent to the nearest distribution centre to send more Tide to that store. Technology and business are interrelated and interdependent. When the US economy slipped into a recession in 2001 interest rates were cut. The general environmental factors include those factors that are common ir\ nature and generally affect all organizations. The influence of unions in regulating supply of labour, when required, is diminishing in recent years due to recessionary trends, global competition, deregulation, disenchantment of members over limited successes achieved by unions, etc. For instance, by using the Internet, Dell is able to earn greater profits by serving only the most profitable customers. A weak dollar is prompting many nations to lower interest rates and loosen fiscal policy—and thereby stimulate economic expansion globally. Alternatively, socialism focuses on collective ownership of means of production by government or state through a centralised planning system that is believed to create equality and provide economic security. The natural environment comprising of ecological, geographical and topographical factors (such as natural resources, weather, climate, location etc.) The firm may use scenario planning techniques to forecast in high levels of uncertainty in external environmental conditions. If inflation keeps rising, investment planning becomes hazardous. Inflation refers to an increase in prices without a corresponding increase in wages, resulting in lower purchasing power of consumers. But this advantage is nullified if materials and components are imported from a country whose currency is stronger. The idea is to reduce production hours, waste, and the cost of materials so that companies can offer products at lower prices. According to Petrove, there are three implications of technological change; it can affect the relative competitive cost position within a business, it can create new markets and new business segments, and it can collapse or merge previously independent business by reducing or eliminating their segment cost barriers. They are internal factors and external factors. It includes character of goods, civilization of buying, technology communications, financing with directive, customers, competitors, and many more which are considered for building an effective business. Technological breakthroughs can dramatically influence organisation’s products, services markets, suppliers, distrib­utors, competitors, customers, manufacturing processes, marketing practices and competitive position. Companies, must therefore, anticipate likely impact of actions taken in both the domestic and international economic areas. The societal environment includes general forces that do not directly touch on the short-run activities of the organization but that can, and often do, influence its long-run decisions. Its elements are suppliers, consumers, competitors, new entrants, substitute products, etc. (c) Internet technologies are changing the business models and challenging the traditional structures. The world is a small networked village. High interest rates have detrimental effects on the economy. Political influence on trade unions, xxv. Political environment of a country has a bearing on the operation of a business organization right from incorporation to liquidation. Air pollu­tion is created by dust particles and gaseous discharges that contaminate the air and cause global warming. Soil conditions influences the nature of the agricultural produce in a country. Indian government has provided income tax exemptions for expenses incurred in research of technology. Foreign trade and balance of payments position, xxi. Through the last two decades it slightly improved averaging five per cent per annum. (d) Recycled by-products. in between the business firms across the globe. In undertaking environmental scanning, strategic managers must first be aware of the many variables within a corporation’s societal and task environments. These factors affect the threats & challenges of business. Licensing policies, quota restrictions, import duties, forex regulations, and restrictions on FDI flows, controls on distribution and pricing of commodities, regulations on all aspects of corpo­rate functioning – have really put the captains of industry in a spot and pushed them to the wall. A person’s values are key determinants of what is important and not important to him, how he reacts in a particular situation, and how he behaves in social situations. New products and services are possible because of new technologies. The economic variables that impact the business and industry include: ii. Recession is a period of economic activity when income, production, and employment tend to fall. The availability of physical facilities limits the scope and prospects of business.Technology refers to the knowledge of how to do things. Content Filtration 6. (iii) Consumer protection- As consumers, people are entitled to receive good quality products and services as per their expectations. Technological transfer broadly aims at new product development, improvement in production or processes and customer satisfaction. Economic and industrial policies of the government, xxii. Recent technological advances, as we well know, in computers, lasers, robotics, satellite networks, fibre optics, biometrics, cloning and other related areas have paved the way for significant operational improvements. In difficult terrains like hilly areas, it is difficult and expensive to get products to the customers. Before uploading and sharing your knowledge on this site, please read the following pages: 1. Owners, shareholders and partners, too, have a stake in the continued success of an organisation. They want cleaner air and water as well as more leisure time to enjoy life more fully. These include economic, social, legal, technological and political factors. The widespread use of the Internet over the past decade is the most pervasive technological force affecting business organizations since the dissemination of the personal computer. During recession, companies should improve existing products and introduce new ones. They change gradually and some changes will be imperceptible if not watched closely. After liberalization and globalization of the Indian economy since 1991, the economy has actually started moving on to a higher growth rate. Now small donations (imagine how cheaply Indian’s most powerful are willing to sell their souls!) Consumers will have strong tendencies to save because of the prospect of earning higher interest rates from their deposits. Price inflation can destabilize an economy leading to slower economic growth, higher interest rates and volatile currency movements. Physical factors mean and include geographical factors like weather, climatic conditions etc. Level of technology, which can be labour-based or capital-based technology. 3. If labour is heterogeneous as is the case in India, managing people becomes a tough and demanding task. The socio-cultural dimension of the environment consists of customs, life-styles and values that characterize the society in which the firm operates. Stand of opposition parties on business, viii. The situation has become quite alarming in recent years when pollution levels have risen to unmanageable proportion causing serious damage to ozone layer – heating up the soil, water and air. They will put their parents in financial inconvenience but they will have their motorbikes and fanciful mobiles, and will hang out at eating joints, theaters, and malls. The industry environment is the competitive environment of the business organization. You can now buy clothes cut to your proportions, sup­plements with the exact blend of the vitamins and minerals you like, CDs with the music tracks you choose and textbooks whose chapters are picked out by your professor. In a centrally planned and controlled economy like India, it is the government that lays down the rules of the game and the industry has to scrupulously adhere to the rule book. The big guns of the music business – Sony, RCA and the rest – were so confident about their control over the music industry that they couldn’t see the threat posed by a tiny player like MP3.com, which quietly spun its own B-web. The above four macro environmental factors have significant impact on the survival of business and growth prospects. Otherwise, it will lose competitive advantage to Triad-oriented MNCs. After completing my post graduation I thought to start a website where I can share management related concepts with rest of the people. The Russian companies have fallen behind in the competitive race, because they did not have enough buying power to buy products from abroad—which meant that the sales of foreign companies declined. Laws that protect consumers against duplication, adulteration, etc., against loss or harm to life and property are equally important. The best course of action against the external factors affecting business environment would be to always be prepared to deal with any and every possible outcome. They do not feel guilty of spending their parents’ money and put real pressure on their parents to shell out money for them. Therefore, while carrying out strategic planning exercises, the firm must focus attention on economic trends in the segments that affect its industry. With a population of over 1 billion and 65 per cent literacy level, the country offers exciting opportunities to mar­keters. In India the pattern of consumption has shifted from food and other basic items to products and services with high marketing significance. When doing business globally, the firm must also take into account the procedures to be adopted in line with the stipulations laid down by institutions such as IFC, World Bank, IMF, Environmental Protection Agency, etc. A longer life span means a growing market for products and services targeted for the elderly. India, over the past four or five decades, a great deal of legislation concerning industry and business has been enacted. Economic activity generally tends to move in cycles. 1. The task environment is that part of the external environment consisting of specific outside forces with which an organisation interfaces in the course of carrying out its operations. Understanding the dynamics of global markets, developing appropriate strategies to move in line with changes in the domestic as well as global economies—keeping track of currency movements, interest rates, rate of inflation, cyclical nature of industry in which the firm operates, the growth rate of a particular nation etc.—is one of the toughest challenges confronting global managers. The company didn’t try doing everything- the B-web had a combination of content companies (like MP3); manufacturers such as S3 (maker of the Rio MP3 player]; distribution technologies (like Napster); and, of course, hundreds of thousands of teenagers who swore by the music, but couldn’t pay for it. The legal environment serves to define what organizations can and cannot do at a particular point of time. The growth rate of population, aging pattern, geographical shifts, literacy of population, trends in the educational pattern are major factors in the demographic environment that are relevant to business organizations. The form of government in position is an important aspect of political environment and political stability is an essential factor influencing the growth of business. Technological changes can reduce or eliminate cost barriers between businesses, create shorter production runs, create shortages in technical skills, and result in changing values and expectations of customers and employees (F.R David). The entry of women into the labour market has, in recent times, affected the hiring and compensation policies of their employers. © 2020 . For example, McDonald’s does not serve the beef burgers in India because Indians consider cows as sacred animals (Hindu tradition prohibits the consumption of beef in any form). It is more profitable to export when the currency of the exporting country is weaker than the currency of the importing country. The technological environment includes the changes in technology which can alter the firm’s competitive position. These actions can be internal, national or local, which affects the operations of a business. An economic system, which consists of characteristics from both, capitalism and socialism, is a mixed economy. The technological developments need a careful and timely strategy formulation; otherwise competitors would take a lead in the market position. Additionally, they can exert greater influence on the way, the firm deals with environmental pollution, worker safety, product liability, etc. Each of these international forces lays an impact for better or worse on the economic well-being of a business. These factors can create threats and opportunities for the firm. Observing the socio-cultural and demographic factors enable to identify the opportunities and threats for the business organization. Even so, investments in technology, involve other risks. They are stylish and fashion conscious, and submit to peer pressure. The internet is saving companies billions of dollars in distribution and transaction costs from direct sales to self- service systems. the customer can buy less goods with his income because the goods have become costlier. Thanks to the Internet, the old days of being able to concentrate only on the nuts and bolts of the business seem to be over. The task environment contains a number of government agencies that provide services and monitor compliance with laws and regulations at local, state or regional, and national levels. Simplicity and understandability of government legislation, xxviii. Shifting Core Competencies: An Organization can change its core business to an emerging product and thereby lead the change in the domain for other competitors. Natural environment includes factors such as seasonal variations, climatic differences, soil conditions and natural terrain. Demographics are significant because people constitute markets. Examples of such change include the shifts from vacuum tubes to transistors, from steam locomotives to diesel and electric engines, from fountain pens to ball points, from propeller aeroplanes to jets, and from typewriters to computer-based word processors [Wright]. Despite liberalization some legislations still restrict the freedom of operations of certain industries and business are still required to grapple with a heavy load of legislation relating to business. Low interest rates are aimed at boosting up sales of consumer durables, passenger cars, electronic items, gold and jewellery etc. Technological advance­ments can create new competitive advantages that are more powerful than existing ones. The Tehelka expose covering the whole shady deals on videotapes in the recent past has put a big question mark on crucial economic issues such as disinvestment, downsizing, de-reservation, labour reforms, power sector reforms, etc. In case it hasn’t just yet clicked, all of these six factors a… Political ideology and philosophy of political party in ruling, iv. However, advance indicators about the nature of change in technology are available there is usually adequate time for strategists to prepare for the impact of change. Businesses have to operate within the framework of the prevailing legal environment. Pace of technological change, that determines whether existing technology in industries have become obsolete (e.g. Net enabled technologies are integrating with the business processes of the modern organizations. In the present competitive world, technological breakthroughs can dramatically influence an organisation’s service markets, sup­pliers, distributors, competitors, customers, manufacturing processes, marketing practices and competitive position. Political considerations relate to the motives and the action of governments and the way that, via legislation, regulation and the legal /political system, they impact on business. Many political factors influence how managers formulate and implement strategic direction. People will increasingly place more value on time than money. Factors outside or organization are the elements of the external environment. After the Babri Masjid demolition in 1992, economic reforms again took a back seat and the then prime minister, P V Narasimha Rao could not carry on the bold liberalisation programme further. Technological advancements can open up new markets, result in a proliferation of new and improved products, change the relative cost position in an industry, and render existing products and services obsolete. In recent years, deregulation has changed the face of competition in several industries such as banking, airlines, media, telecommunications, passenger car industry etc. They spend lavishly on clothes, eating out, going out, latest gadgets, and are very keen to keep up with their friends in terms of possessions and lifestyles. Technological advancements can create new competitive advantages that are more powerful than existing ones. Sales of replacement parts and other services may become an important source of income. The crucial part of the strategic planning process is the appraisal of the environment of an organization. There are few good measures of likely volatility. Socio-cultural changes have a major impact upon virtually all products, services, markets, and customers. Conversely, when the rupee falls against foreign currencies, new business opportunities open up. Each of these lifestyles is associated with different products and services and is a potential customer for companies. Regulatory calibre of government agencies, xxiii. Inflation rate is higher when costs of producing products or services go up, or when there is too much money chasing too few supplies, prompting suppliers to raise prices and earn higher profits. A deep-seated fear of multinationals prevented political leaders to shut the door on giant multinational companies for a painfully longtime in India. 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