ENVIRONMENTAL ANALYSIS

ENVIRONMENTAL ANALYSIS
Shanmukha Rao. Padala *Dr. N. V.S.				Economic environment covers those factors, which
Suryanarayana				give shape and form to the development of
INTRODUCTION:				economic activities and include factors like nature of
Strategic management involves				economic system, general economic conditions,
three levels of analysis viz., the organisation's macro				various economic policies and various product factors.
environment/general environment, the industry in				1. General Economic conditions: Determine the extent
which the organization operates, and the organization				to which various organisations find the economic
itself. Every company operates within a complex				forces favourable or unfavourable. The economic
network of external environmental forces both				conditions are also affected by the political and social
international and national.				factors also.
All external forces which have an
impact on the functioning of an organization is				i. Economic System –
referred as Macro Environment. According to Barry M.				Determines the extent to which the organisations
Richnam and Melvyn Copen, "Environment factors or				have to face different constraints and controls by
constraints are largely, if not totally, external and				the economic factors.
beyond the control of individual industrial enterprises
and their managements. These are essentialthe				ii. National Income –
‘givers within which firms and their managements				Indicates the level of economic growth of the
must operate in a specific country and they vary,				country.
often greatly, from country to country."
The macro environment is not				iii. Distribution of Income –
simply the forces operating outside the organization.				Determines the type of products that may be
The forces create opportunities for the business				demanded by the people. There is wide disparity in
organizations for their existence and development				the distribution of national income.
and pose threats or challenges affecting the business
adversely. The environment includes factors outside				iv. Monetary policy –
the firm ‘which can lead to opportunities for or				Regulates the economic growth through the
threats to the firm.'				expansion or contraction of money supply.
A host of external and often largely uncontrollable
factors influence a firm's choice of direction and				v. Fiscal policy – Deals with
action and, ultimately, its organizational structure and				the tax structure and governmental expenditure.
internal processes. These factors which constitute				Fiscal policy is adopted to mobilising maximum possible
the external environment can be divided into two				resources, optimal allocation of resources, attainment
interrelated subcategories – those in the remote				of greater equality in distribution of income and
environment and those in the more immediate				maintenance of greater equality in the distribution of
operating environment. This is also known as task or				income.
competitive environment.				1. Factor markets: Determine the availability of these
				factors so that suitable strategies can be adopted
REMOTE ENVIRONMENT:				for their procurement and utilisation.
The remote environment is
composed of a set of forces that originate beyond
and usually irrespective of any single firm's operating				i. Natural resources –
situation that is political, economic, social, technological				becomes a strategic planning factor for organisations
and industry factors. It presents opportunities,				requiring such resources in the production process.
threats, and constraints for the firm, while the
organisation rarely exerts any meaningful reciprocal				ii. Infrastructural facilities –
influence. Thus, organisation environment interaction				provides the various supporting elements for the
has a number of implications.				efficient functioning of the organisations.
The environmental forces may affect different parts
of the organisation in different ways because				iii. Raw materials and supplies
different parts interact with their relevant external				– requires continuous flow of raw materials to
environment. The technological environment may				maintain its operations.
affect the R&D department. The environmental
influence process is quite complex because most				iv. Plant and Equipment.
things influence all other things. Many of the
environmental forces may be interacting among				v. Financial Facilities.
themselves and making the impact on the
organisation quite complex.				POLITICAL AND LEGAL ENVIRONMENT:
The organisational response to the environmental				Political factors, which direction and
forces may not be quite obvious and identical for				stability are a major consideration for managers in
different organisations but these are subject to				formulating company strategy. Political considerations
different internal forces. The environment is quite				define the legal and otherwise governing parameters
dynamic and not static; the rate of changes may not				in which the firm must or may operate.
be uniform over a period of time. The impact of the				Political constraints are placed on
environmental forces on the organisation is not				each company through fair trade decisions, tax
unilateral but the organisations may also affect the				programs, wage legislation, pollution and pricing
environment.				policies, administrative and many other actions aimed
ECONOMIC ENVIRONMENT:				at protecting the consumer and the environment.
All those economic factors which have a bearing on				Political and legal environment is an important element
the functioning of a business is called as Economic				particularly in mixed economy like ours and affects
Environment. Economic environment and business are				directly the working of business organisations. This
mutually independent. In fact, the dependence of the				performs two roles: promoting and restraining.
business on the economic environment is more. The				The promoting role of political and
important economic factors that constitute the				legal environment includes the stimulation of business
economic environment are:				through the provisions of various facilities and
1. Growth strategy.				incentives, protecting the markets, taking direct roles
2. Economic system.				in the development of the business, and purchasing
3. Economic planning.				from business organisations. The political and legal
4. Industry				environment however, works as restraining force by
5. Agriculture.				limiting the scope of business operations. A web of
6. Infrastructure.				laws, regulations and court decisions encircles every
7. Financial and fiscal sectors.				manager.
8. Removal of regional imbalances				Political and legal environment
9. Price and distribution controls				depends on (i) political stability like impact of changes
10. Economic reforms				in the form and structure of government, declaration
11. Population				of emergency etc., (ii) political organisations like
12. Per capita and national income.				political parties and their ideology; (iii) defence and
				military policy; and (iv) legal rules of the game of
Indian is one of the major economies in the world.				business- the formulation, implementation, efficiency
India has developed her economy in different areas.				and effectiveness.
The important factors of Indian economic				The political and legal environment can
environment are discussed hereunder:				be analysed in three respects: (i) political atmosphere;
1. Industrial Policy: Industrial policy is the most				(ii) The general governmental approach towards
important document which indicates the relationship				business; and (iii) laws regulating operations of
between the government and business. The Industrial				business in the country.
Policy Resolution 1948, 1956, 1977 and 1980 laid				1. Political atmosphere:
emphasis on industrial development through the				The general political atmosphere of the
development of public sector. The Industrial Policy,				country presents a mixed picture. These factors are
1991 is a major departure from the earlier policies.				quite favourable for the development of business in
The significant objectives of this policy are:				the country as a whole. On the other hand, we have
self-reliance to build on the many-sided gains already				certain problems, which have their direct impact on
made, removing regulatory system and other				the working of business organisations. These
weaknesses, link the Indian economy to the global				problems are in the form of generation of regionalism
markets so that we acquire the ability to pay for				at the political level, tug of war between Central and
imports, and to make us less dependent on aid,				State governments.
increasing competitiveness of industries for the				2. Government's attitude:
benefit of the common man and ensuring running of				Being a mixed economy, this offers
public sector undertakings on business lines and to				considerable scope of government's role in business.
reduce their losses.				There are four important roles of the government in
2. Industrial Licensing: Abolition of industrial licensing				relation to business: regulatory, promotional,
for many projects except those specified (13 in				entrepreneurial role and planning.
number), irrespective of levels of investment is
worthwhile. These specified industries will continue to				3. Laws regulating the Business:
be subject to compulsory licensing for reasons				With increasing role of the government in
related to society, strategic concerns, social reasons,				business, there is every possibility that the
problems related to safety, overriding environmental				government will exercise more control over the
issues, manufacturing of products of hazardous				business particularly in the private sector.
nature and articles of elitist consumption.				The government tries to fulfill its regulatory role
3. Foreign Investment: It has been decided to provide				through various acts and the result is plethora of acts
approval for direct foreign investment up to 51 per				affecting business in the private sector.
cent foreign equity in high priority industries requiring
large investments and advanced technology. There				TECHNOLOGICAL ENVIRONMENT:
shall be no hurdles in this process. This group of				The final set of considerations in the
industries is generally known as the "Appendix-I				remote environment involves technological
Industries" and are areas in which FERA companies				advancements. To avoid obsolescence and promote
have already been allowed to invest on a				innovation, a firm must be aware of technological
discretionary basis.				changes that might influence its industry. Creative
4. Foreign technology Agreements: Government of				technological adaptations can affect planning in that
India now, provides automatic approval for				new products may be suggested or existing ones
technology agreements related to high priority				improved; manufacturing and marketing techniques
industries within specified parameters, in order to				may also be improved.
inject the desired level of technological dynamism in				A technological innovation can have a
Indian industry. Other industries can also avail similar				sudden and dramatic effect on the environment of a
facilities, if the agreements do not require free				firm. A breakthrough may swarm sophisticated new
foreign exchange. Indian entrepreneurs can negotiate				products and markets or significantly shorten the
the terms to technology transfer. The hiring of				anticipated life of a manufacturing facility. Thus, all
foreign technicians and foreign testing of indigenously				firms must strive for an understanding both of the
developed technologies do not, now, require prior				present state of technological advancement affecting
clearance.				their products and services and of probable future
5. Public Sector: The objective of the Government				innovations.
before opening the Indian economy to the rest of				The key to beneficial forecasting of
the globe had been to establish pattern of society.				technological advancement lies in accurately predicting
This objective made the government to give top				future capabilities and probable future impacts. A
priority for public sector to develop industrial sector in				comprehensive analysis of the effect of technological
the country. Public sector played a dominant role by				changes involves study of the expected impact of
establishing industries in the areas of public utilities,				new technologies on the remote environment, on the
infrastructure, development banks, capital goods				competitive business situation, and on the
industries, core and key industries and industries				business-society interface.
requiring huge capital resources.
In fact the government nationalized commercial				SOCIAL AND CULTURAL ENVIRONMENT:
banks, insurance industry and coal mines to achieve				Social and Cultural Environment is quite
its objectives. Public sector was made responsible to				comprehensive because it may include the total social
achieve the objectives of the government like				factors within which an organisation operates. In fact,
creation of employment opportunities, balanced				the political and legal environment is closely
regional development, providing infrastructural facilities				intertwined with social and cultural environment
and acting as a model employer. Public sector has				because laws are passed as a result of social
played a crucial role in the country in the direction of				pressures and problems. Social and cultural
these objectives. But, the public sector, in view of its				environment consists of attitudes, beliefs, desires,
conflicting dual roles of profit making and service				expectations, education and customs of the society
rendering, it could not do juistice to any of these				at a given point of time.
two objectives. Serious problems observed are:				From business organisation's point
insufficient growth of productivity, poor project				of view it may include (i) expectations of the society
management, over manning, absence of continuous				from the business; (ii) attitudes of society towards
technological up-gradation, inadequate attention to				business and its management; (iii) view towards
R&D and human resource development. These				achievement of work; (iv) views towards authority
factors, led to the disinvestment and privatization of				structure, responsibility and organisational positions;
public sector in addition to liberalization of the				(v) views towards customs, traditions and
economy.				conventions; (vi) class structure and labour mobility;
1. Monopolies and Restrictive Trade Practices: The				and (vii) level of education.
Monopolies and Restrictive Trade Practices Act, 1969				Often the social and cultural factors
had two objectives before 1991. they were:				are not considered adequately. The operating
(i) Regulation of monopolies and				environment also called the competitive or task
prevention of concentration of economic power and				environment differs from the remote environment in
(ii) Prohibition of monopolistic, restrictive and				that it is typically subject to much more influence or
unfair trade practices.				control by the firm.
The economic liberalization of 1991, which aims at
achieving high productivity, competitive advantage to				OPERATING ENVIRONMENT:
the domestic industry in the international market and				The operating environment involves
economies of scale led to the amendment of the Act				factors in the immediate competitive situation that
in 1991. the objectives of the amended Act are:				provide many of the challenges a particular firm faces
(i) Controlling monopolistic				in attempting to attract or acquire needed resources
trade practices, and				or is striving to profitably market its goods and
(ii) Regulating restrictive and				services. Among the most prominent of these
unfair trade practices.				factors are a firm's competitive position, customer
				profile, reputation among suppliers and creditors, and
1. Foreign Trade: It is widely recognized during the				accessible labour market. The operating environment
1990s that the internationalization of business,				also called the competitive or task environment
export-oriented industrial growth and self-reliance in				differs from the remote environment in that it is
the development of competencies are the high				typically subject to much more influence or control
essential factors for rapid economic development of				by the firm. Thus, when they consider conditions in
the developing countries. Some countries believe in				the operating environment, businesses can be much
import substitution whilst majority of the countries				more proactive in strategic planning than they are
believe in mutual dependence of the world nations				when dealing with remote factors.
for production and consumption. India recognized the
significance of export and import trade for its				COMPETITIVE POSITION:
development. This is quite evident in the new				By assessing its competitive
economic policy of 1991. government announced the				position, a business improves its chances of designing
export-import policy (1992-1997) which came into				strategies that optimize environmental opportunities.
force from 1st April 1992.				Development of competitor profile enables a firm to
2. Privatisation: The word privatization has been				plan accurately both its short and long term growth
receiving much attention in business and government				and profit potentials. Although the exact criteria used
all over the world. Privatization techniques have				in constructing a competitor profile are largely
already been tried in countries like Great Britain,				determined by situational factors in the environment.
U.S.A., Turkey, Brazil, Eritrea, Mexico and Japan. The				The following is the list of criteria which can be used
process of privatization has already been started in				for such a profile.
India through disinvestment of government's
shareholdings in public sector. The process of				1. Market share;
privatization should be accelerated for effective				2. Breadth of product line;
functioning of public sector and rapid industrial growth.				3. Effectiveness and sales distribution;
In fact, government of India recognized the need for				4. Proprietary and key account advantages;
privatization for rapid and efficient industrial growth.				5. Price competitiveness;
3. Small Scale Industries: It was argued that				6. Advertising and promotion effectiveness;
‘small is beautiful'. It was further believed that				7. Location and age of facility;
small is efficient, innovative and productive. Further,				8. Capacity and productivity;
government viewed that small scale sector solves				9. Experience;
the problems of the country like unemployment and				10. Raw material costs;
regional imbalance. Consequently, the government				11. Financial position;
provided huge financial and non-financial facilities to				12. Relative product quality;
this sector. But the government realized that this				13. R&D advantages/position;
sector failed to a greater extent in playing its role				14. Caliber of personnel; and
and is a misfit in the market economies.				15. General image.
10. Financial Sector: The financial sector consist of				Once appropriate criteria have been selected, they
commjercial banks, development banks, mutual funds,				are subjectively weighted to reflect their relative
unorganisaed financial sector institutions, custodial				importance to a firm's success. Next, the competitor
service institutions, stock exchanges, underwriting				being evaluated is rated on the criteria. The type of
and capital issue houses. The economic liberalization				competitor profile suggested is limited by the
brought significant changes in financial sector. The				subjectivity of the criteria selection, weighting and
important ones among are:				evaluation approaches employed. Nevertheless, this
- Permission for NRIs to enter the Indian stocvk				process is of considerable value is helping a business
market;				to explicitly define its perception of its competitive
- Establishment of the Securities and Exchange Board				position.
of India;				Comparing profiles of the firm and its competitors
- Setting up of the Investment Information and				can further aid managers in identifying specific factors
Credit Rating Agency of India,				that might make a competitor vulnerable to
- Establishment of Credit Rating Information Services				alternative strategies the firm might choose to
of India Ltd.				implement.

Global Trade

ENVIRONMENTAL ANALYSIS