We explain below all these factors determining external macro-environment:
We explain below all these factors determining external macro-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.
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 which have changed the macroeconomic environment for private sector firms. Far-reaching structural economic reforms were carried out by Dr. 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 has significantly changed the business environment. 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.
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. Political and Legal Environment: Businesses are closely related to the government.
The political philosophy of the government wields a great influence over business policies. 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. Besides, role of foreign direct investment was restricted to only few spheres. However, since several structural economic reforms have been undertaken following a change in political philosophy in favour of a free market economy.
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. 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 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.
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. This is quite evident from the experience of automobile industry in India. The users had no choice and Ambassador and Fiat cars survived for decades in the protected environment. It is when Maruti Udyog Ltd.
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. Technological environment affects the success of firms and the need for technological advancement cannot be ignored. 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 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. They were told that 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. 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. 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. 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. 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.
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: 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.
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