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