Business Environment Types (External Micro and External Macro)!
Type 1# External Micro Environment:
Micro external forces have an important effect on business operations of a firm.
However, all micro forces may not have the same effect on all firms in the industry. For example, suppliers, an important element of micro level environment, are often willing to provide the materials at relatively lower prices to big business firms.
They do not have the same attitude towards relatively small business firms. Similarly, a competitive firm will start a price war if its rival firm in the industry is relatively small. If the rival firm is a big one which is a capable of retaliating any adverse action from its rival, a competitive firm will hesitate to start a price war. We explain below important factors or forces of micro-level external environment.
Suppliers of Inputs:
An important factor in the external environment of a firm is the suppliers of its inputs such as raw materials and components. A smooth and efficient working of a business firm requires that it should have ensured supply of inputs such as raw materials. If supply of raw materials is uncertain, then a firm will have to keep a large stock of raw materials to continue its transformation process uninterrupted. This will unnecessarily raise its cost of production and reduce its profit margin.
To ensure regular supply of inputs such as raw materials some firms adopt a strategy of backward integration and set up captive production plants for producing raw materials themselves.
Further, energy input is an important input in the manufacturing business. Many large firms such as Reliance industries have their own power generating plants so as to ensure regular supply of electricity for their manufacturing business. However, small firms cannot adopt this strategy of vertical integration and have to depend on outside sources for supply of needed inputs.
Further, it is not a good strategy to depend on a single supplier of inputs. If there is disruption in production of the supplier firm due to labour strike or lock-out, it will adversely affect the production work of a firm. Therefore, to reduce risk and uncertainty business firms prefer to keep multiple suppliers of inputs.
The people who buy and use a firm’s product and services are an important part of external micro-environment. Since sales of a product or service is critical for a firm’s survival and growth, it is necessary to keep the customers satisfied. To take care of customer’s sensitivity is essential for the success of a business firm.
A firm has different categories of customers. For example, a car manufacturing firm such as Maruti Udyog has individuals, companies, institutions, government as its customers. Maruti Udyog, therefore, has catered to the needs of all these types of customers by producing different varieties and models of cars.
Besides, a business firm has to compete with rival firms to attract customers and thereby increase the demand and market for its product. In the present day of intense competition a firm has to spend a lot on advertisements to promote the sales of its product by creating new customers and retaining the old ones. For this purpose, a business firm has also to launch new products or models.
With increasing globalisation and liberalization the customers’ satisfaction is of paramount importance because the consumers have the option of buying imported products. Therefore, to survive and succeed a firm has to make continuous efforts to improve the quality of its products.
In a firm’s external environment marketing intermediaries play an essential role of selling and distributing its products to the final buyers. Marketing intermediaries include agents and merchants such as distribution firms, wholesalers, retailers.
Marketing intermediaries are responsible for stocking and transporting goods from their production site to their destination, that is, ultimate buyers. There are marketing service agencies such as marketing research firms, consulting firms, advertising agencies which assist a business firms in targeting, promoting and selling its products to the right markets.
Thus, marketing is an important link between a business firm and its ultimate buyers. A dislocation of this link will adversely affect the fortune of a company. A few years ago chemists and druggists in India declared a collective boycott of a leading pharma company because it was providing a low retail margin. They succeeded in raising this margin. This shows that a business firm must take care of its intermediaries if it has to succeed in this age of intense competition.
Business firms compete with each other not only for sale of their products but also in other areas. Absolute monopolies in case of which competition is totally absent are found only in the sphere of what are called public utilities such as power distribution, telephone service, gas distribution in a city etc. More generally, market forms of monopolistic competition and differentiated oligopolies exist in the real world.
In these market forms different firms in an industry compete with each other for sale of their products. This competition may be on the basis of pricing of their products. But more frequently there is non-price competition under which firms engage in competition through competitive advertising, sponsoring some events such as cricket matches for sale of different varieties and models of their products, each claiming the superior nature of its products.
The readers will be witnessing how intense is the competition between Coca Cola and Pepsi Cola. Sometimes there has been price war between them to capture new markets or enlarge their market share. Likewise, there is severe competition between the manufacturers of Aerial and Surf washing powders, between manufacturers of various brands of colour TV. This type of competition is generally referred to as brand competition as it relates to producing and selling different brands of a product.
But not only is there a competition among the producers producing different varieties or brands of a product but also among firms producing quite diverse products as all products ultimately compete for attracting spending by the consumers of their disposable incomes.
For example, competition for a firm producing TVs does not come only from other brands of TV manufacturers but also from manufacturers of air conditioners, refrigerators, cars, washing machines etc. All these goods compete for attracting disposable incomes of the final consumers. Competition among these diverse products is generally referred to as desire competition as all these goods fulfill the various desires of the consumers who have limited disposable incomes.
As a consequence of liberalisation and globalisation of the Indian economy since the adoption of economic reforms there has been a significant increase in competitive environment of business firms. Now, Indian firms have to compete not only with each other but also with the foreign firms whose products can be imported.
For example, in the USA American firms faced a lot of competition from the Japanese firms producing electronic goods and automobiles. Similarly, the Indian firms are facing a lot of competition from Chinese products. It is important to note that for successful competition the Indian firms have to improve not only the quality of the products but also to enhance their productivity so that cost per, unit can be reduced.
Finally, publics are an important force in external micro environment. Public, according to Philip Kotler “is any group that has an actual or potential interest in or impact on a company’s ability to achieve its objective”. Environmentalists, media groups, women associations, consumer protection groups, local groups, citizens associations are some important examples of publics which have an important bearing on environment of the firms.
For example, a consumer protection firm in Delhi headed by Sunita Narain came out with an amazing fact that cold drinks such as Coca Cola, Pepsi Cola, Limca, Fanta had a higher contents of pesticides which posed threat to human health and life. This produced a good deal of adverse effect on the sale of these products in 2003-04. The Indian laws are being amended to ensure that these drinks must not contain pesticides beyond European safety standards.
Similarly, environmentalists like Arundhi Roy have been campaigning against industries which pollute the environment and cause health hazards. Women in some villages of Haryana protested against liquor shops being situated in their localities.
Many citizen groups are actively campaigning against cigarette manufactures for their advertising campaigns luring the people to indulge in smoking. Thus, the existence of various types of publics influences the working of business firms and compels them to be socially responsible.
Type 2# External Macro Environment:
Apart from micro-environment, business firms face large external environmental forces. The external macro environment determines the opportunities for a firm to exploit for promoting its business and also presents threats to it in the sense that it can put restrictions on the expansion of business activities. The macro-environment has thus both positive and negative aspects.
An important fact about external macro-environmental forces is that they are uncontrollable by the management of a firm. Because of the uncontrollable nature of macro forces a firm has to adjust or adapt itself to these external forces.
External macro-environmental factors are classified into:
(4) Political and legal, and
We explain below all these factors determining external macro-environment:
1. Economic Environment:
Economic environment includes the type of economic system that exists in the economy, the nature and structure of the economy, the phase of the business cycle (for example, the conditions of boom or recession), the fiscal, monetary and financial policies of the Government, foreign trade and foreign investment policies of the government. These economic policies of the government present both the opportunities as well as the threats (i.e. restrictions) for the business firms.
The type of the economic system, that is, socialist, capitalist or mixed provides institutional framework within which business firm have to work. For example, before 1991, the Indian economic system was of the type of a mixed economy with pronounced orientation towards the public sector. Prior to 1991 private sector’s role in India’s mixed economy was greatly restricted. Many industries were reserved exclusively for investment and production by the public sector.
Private sector operations were limited mainly to the consumer goods industries. Even in these goods the private sector production and operation was controlled by industrial licensing system, Monopolistic and Restrictive Trade Practices (MRTP) Commission. The private sector was also subjected to various export and import-restrictions. High tariffs were imposed to protect domestic industries and to pursue import substitution strategy of industrial growth.
Now, there have been significant changes in the economic policies since 1991 which have changed the macroeconomic environment for private sector firms. Far-reaching structural economic reforms were carried out by Dr. Manmohan singh during the period 1991-96 when he was the Finance Minister. Industrial licensing has been abolished and private sector can now invest and produce many industrial products without getting license from the government.
Many industries, except only a few industries of strategic importance, which were earlier reserved for the public sector have been thrown open for the private sector. Import duties have been greatly reduced due to which domestic industries face competition from the imported products. Incentives have been given to boost exports. Rupee has been made convertible into foreign currencies on current account. It is thus evident that new economic reforms carried out since 1991 has significantly changed the business environment.
2. Social and Cultural Environment:
Members of a society wield important influence over business firms. People these days do not accept the activities of business firms without question. Activities of business firms may harm the physical environment and impose heavy social costs. Besides, business practices may violate cultural ethos of a society. For example, advertisement by business firms may be nasty and hurt the ethical sentiments of the people.
Businesses should consider the social implications of their decisions. This means that companies must seriously consider the impact of its actions on the society. When a business firm in their decision making take care of social interests, it is said to be socially responsible.
Social responsibility is the felt obligation or self-enforced duty of business firms to serve or protect social interests. By doing so they promote social well-being. Good corporate governance should be judged not only by the productivity and profits earned by a business firm but also by its social-welfare promoting activities.
It is worth noting that in modern management science a new concept of social responsiveness has been developed. By social responsiveness we mean “the ability of a corporate firm to relate its operations and policies to social environment in way that are mutually beneficial to the company and society at large”.
It may be noted that social responsibility or social responsiveness is related to ethics. The discipline of ethics deals with what is good and bad, or right and wrong or with moral duty and obligation. Further, even if managers enjoy full freedom to adopt actions and policies in accordance with the conceived notion of social responsibility, they may not do so if standards applied to evaluate their performance are quite different.
Every manager would like its performance to be positively appraised. Therefore, if the performance of managers of business firms are judged by the amount of profits .they make for the owners of the firms, it is then not proper to expect socially responsible actions from them.
3. Political and Legal Environment:
Businesses are closely related to the government. The political philosophy of the government wields a great influence over business policies. For example, after independence under the leadership of Jawahar Lal Nehru India adopted ‘democratic socialism as its goal.
In the economic sphere it implied that public sector was to play a vital role in India’s economic development. Besides, it required that working of the private sector were to be controlled by a suitable industrial policy of the government. In this political framework provide business firms worked under various types of regulatory policies which sought to influence the directions in which private business enterprises had to function.
Thus, Industrial Regulation Act 1951, Industrial Policy Resolution 1956, Foreign Exchange Regulation Act (FERA), Monopolistic and Restrictive Practices (MRTP) Act were passed to control the business activities of the private sector. Besides, role of foreign direct investment was restricted to only few spheres.
However, since 1991 several structural economic reforms have been undertaken following a change in political philosophy in favour of a free market economy. The collapse of socialism in Soviet Russia, China and East European Countries has brought about a change in political thinking about the roles of public and private sectors in India’s industrial development.
To encourage the growth of the private sector in India, licensing has now been abolished, role of public sector greatly reduced and foreign capital, both direct and portfolio, is being encouraged to raise the rate of capital formation in the Indian economy. FERA has been replaced by FEM A (Foreign Exchange Management Act) It is evident from above that with the change in the nature of political philosophy business environment for private firms has greatly changed.
4. Technological Environment:
The nature of technology used for production of goods and services is an important factor responsible for the success of a business firm. Technology consists of the type of machines and processes available for use by a firm and the way of doing things. The improvement in technology raises total factor productivity of a firm and reduces unit cost of output.
The use of a superior technology by a firm gives it a competitive advantage over its rival firms. The use of a particular technology by a firm for its transformation process determines its competitive strength. In this age of globalisation the firms have to compete in the international markets for sales of their products. The firms which use outdated technologies cannot compete globally. Therefore, technological development plays a vital role in enhancing the competitive strength of business firms.
It has been generally observed that the competition between firms in the domestic economy and in international markets ensures that the firms will try to improve the technology they use because failure to do so would pose a threat to their survival. In the protected markets, technological improvements are slow and firms are able to survive for a long period without making technological changes.
This is quite evident from the experience of automobile industry in India. Manufacturers of Ambassadors and Fiat Cars not only made no significant changes in their models, but also did not make any improvement in technology for decades because of absence of competition. The users had no choice and Ambassador and Fiat cars survived for decades in the protected environment.
It is when Maruti Udyog Ltd. was started in India using superior technology and introducing more attractive models that there has been a significant improvement in car manufacturing. With liberalisation of the Indian economy new car manufacturing firms have entered the industry and are producing different verities and models of cars with improved technology.
Besides, the cotton textile industry is another important example of an industry which due to protection provided to it by imposing high tariffs on imports of cotton textiles became sick. Following trade liberalisation many cotton textile firms have closed down because they could not withstand competition. Technological environment affects the success of firms and the need for technological advancement cannot be ignored.
5. Demographic Environment:
Demographic environment includes the size and growth of population, life expectancy of the people, rural-urban distribution of population, the technological skills and educational levels of labour force. All these demographic features have an important bearing on the functioning of business firms. Since new workers are recruited from outside the firm, demographic factors are considered as parts of external environment.
The skills and ability of a firm’s workers determine to a large extent how well the organisation can achieve its mission. The labour force in a country is always changing. This will cause changes in the work force of a firm. The business firms have to adjust to the requirements of their employees. They have also to adapt themselves to their child care services, labour welfare programmes etc.
The demographic environment affects both the supply and demand sides of business organisations. Firms obtain their working force from the outside labour force. The technical and education skills of the workers of a firm are determined mostly by human resources available in the economy which are a part of demographic environment.
On the other hand, the size of population and its rural-urban distribution determine the demand for the products of industrial firms. For example, when there is good monsoon in India causing increase in incomes of rural population dependent on agriculture, demand for industrial products greatly increases.
In the wake of economic reforms initiated in the early nineties when foreign investors were allowed to make investment in India, they were prompted to invest in India by pointing out that the size of Indian market was quite large. They were told that 200 million Indian people could afford to buy the industrial products and this constituted quite a large market which could be profitably exploited.
Besides, the growth rate of population and age composition of population determine the demand pattern of goods. When the population of a country is growing at a high rate, its child population will be relatively large. This means demand for products such as baby food which cater to the needs of children will be relatively high.
On the other hand, if population of a country is stable and life expectancy of the people is high, this will cause greater proportion of elderly aged people in the population of a country. This means different demand pattern of goods. Thus business firms have to consider all these demographic factors in their planning for production of goods and services and formulation of marketing strategies for sale of their products.
Demographic environment is also important for business firms as it determines the choice of technology by them. Other things being equal, if labour is abundant and relatively cheaper than capital, business firms will prefer relatively labour-intensive techniques for production of goods.
However, for various reasons such as rigid labour laws and low productivity of labour, various tax concessions on investment in capital equipment and machinery, business firms in India are generally seem to be using capital-intensive technologies imported from abroad. This has resulted in the increase in unemployment of labour, especially among the young workers.
Therefore, social and government pressure is increasing on the business firms to create more employment opportunities for labour so as to render help in solving the problem of unemployment. It is quite interesting to note here that to take advantages of relatively cheap labour in India and China that foreign MNCs are setting up manufacturing plants in these countries. It is evident from above that demographic factors play a crucial role in determining the productive activity of business firms.
Natural environment is the ultimate source of many inputs such as raw materials, energy which business firms use in their productive activity. In fact, availability of natural resources in a region or country is a basic factor in determining business activity in it. Natural environment which includes geographical and ecological factors such as minerals and oil reserves, water and forest resources, weather and climatic conditions, port facilities are all highly significant for various business activities.
For example, the availability of minerals such as iron, coal etc. in a region influence the location of certain industries in that region. Thus, the industries with high material contents tend to be located near the raw material sources. For example, steel producing industrial units are set up near coal mines to save cost of transporting coal to distant locations.
Besides, certain weather and climatic conditions also affect the location of certain business units. For example, in India the firms producing cotton textiles are mostly located in Bombay, Madras, and West Bengal where weather and climatic conditions are conducive to the production of cotton textiles.
Natural environment also affects the demand for goods. For example, in regions where there is high temperature in summer there is a good deal of demand for dessert coolers, air conditioners, business firms set up industrial units producing these products. Similarly, weather and climatic conditions influence the demand pattern for clothing, building materials for housing etc. Furthermore, weather and climatic conditions require changes in design of products, the type of packaging and storage facilities.
It may however be noted that resource availability is not a sufficient condition for the growth of production and business activities. For instance, India through rich in natural resources remained poor and underdeveloped because available resources had not been put to use due to lack of adequate capabilities of Indian business class. Thus, it is not the availability of natural resources alone but also the technology and ability to being them into use that determines the growth of business and the economy.
Ecological Effects of Business:
Until recently businesses had generally overlooked the serious ecological effects of its activities. Driven purely by the motive of maximizing profits, they cause irreparable damage to the exhaustible natural resources, especially minerals and forests. By their careless attitude they caused pollution of environment, especially air and water which posed health hazards for the people.
By creating external detrimental diseconomies they imposed heavy costs on the society. Thanks to the efforts by environmentalists and international organisations such as World Bank, the people and the governments have now became conscious of the adverse effects of depletion of exhaustible natural resources and pollution of environment by business activity.
Accordingly, laws have been passed for conservation of natural resources and prevention of environment pollution. These laws have imposed additional responsibilities and costs for business firms. But it is socially desirable that these costs are borne by business firms if we want sustainable economic growth and also healthy environment for human beings.