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Strategic Management - Environmental Analysis and Diagnosis

Economic Environment - Environmental Analysis

   Posted On :  26.06.2018 12:14 am

The various forces of economic environment can be explained as follows.

Economic Environment
The various forces of economic environment can be explained as follows.

1. Capital –machinery, buildings, investments office equipment, tools and cash. Business organizations issue shares and debentures and borrow from commercial banks.

2. Labour –availability of skilled labor at affordable wage rates. US companies are outsourcing from India because labor is very cheap here.

3. Prices – The price changes caused by business cycles are a major concern. The price raise in one industry affects the other ones. It is like a chain reaction. It reduces the buying power of consumers and reduces demand.
4. Government Fiscal and tax policies – Government’s control on availability of credit through fiscal policy has considerable impact on business. If business profit taxes are high, the interest to go into business gets marginalized. If sale, tax is high people don’t buy.
5. Customers- Customers are the foundation of business. Business must serve the public. People want value for the money they pay and service that satisfy their needs. Companies are customizing products to specific groups or individuals. Refrigerator companies are introducing bare bone models for the low income groups. Auto companies are opening up service centers. Also thee are CRM (customer relationship management) programs in many organizations today.
6. General Economic Conditions - The general economic conditions like national income, per capita income, economic resources, distribution of income and assets, economic development, etc. are important determinants of the business strategies. In countries and regions where income of people is low, the demand for the product will be low. It discourages the companies to enter the market. However in economies where the income of people is rising and hence business prospects will be brighter; investment will get automatic attraction. Recently growing income of middle class in India, encouraged foreign investors to operate in India.
7. Economic Systems. All business organizations operate in at least one type of economic system-socialist, communist and capitalistic. In capitalistic type of economic system, free play of market mechanism takes place, whereas in state-controlled economies, there are restrictions, on the private sector’s role. It has been noticed that with the collapse of communist Soviet Union multinational corporations are searching their market in East European Countries.
8. Economic Policies. The economic policies of the government have tremendous impact on the business. For example, in India, before July 1991 public sectors were encouraged to play dominant role to achieve commanding heights of the economy; as a result competition was not there. With the new economic policies of liberalization and globalization, the era of protectionism and preferential treatment is giving way to competition and cost-consciousness.
9. Economic Growth The general economic growth in the economy has direct impact on the business strategies. Increased economic growth rate, leading to increase in consumptions, expenditure, lowers the general pressure within an industry and offers more opportunities than threats. On the other hand, decline in economic growth reduces consumer expenditure , that leads to competitive pressures and threatens the profitability.
10. Interest rates. The rate of interest affects the demand for the products in the economy, particularly when general goods are to be purchased through borrowed finance. If the interest rate is low, the demand for certain products like autos, appliances, capital equipments, housing materials, etc. will rise. This provides good opportunity for these industries to expand whereas rising interest rates pose a threat to these industries. Interest rates also determine the cost of capital of the company. When rates of interests are lower, companies can adopt ambitious strategy with borrowed funds.
11. Currency exchange rates. Currency exchange rates have direct impact on the business environment. When the rupee was devalued in 1991, it was to make Indian products cheaper in the world market and consequently boost India’s exports. That was a great opportunity for Indian exporters.
12. Taxes- the imposition of taxes like income tax, sales tax and excise duties have impact on business. The chocolate manufactures in India suffered a set back in the new millennium when the excise duty on confectionery items increased from 8 to 16 percent. Nutrine Confectionery company which sells a popular brand of chocolate called ‘Aasey’ with a price of 0.25 paise to had to increase its price from 0.25 paise had 0.50 paise since the price cannot be increased by 0.04 paise due to coinage problem. A child who goes to nearly kiosk with 0.25 paise used to return home to his mother without a chocolate. It took three months for the customers (children) to adjust to the new price and the company lost crores of rupees it gets from Children’s pocket money.
Tags : Strategic Management - Environmental Analysis and Diagnosis
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