The external environment of a business affects all its decision. Changes in the business environment of businesses create both opportunities and constraints for the business. They stem from various sources including economic, social, technological, legal and political factors. Different firms will be affected by different factors, but all will be subject to economic changes.
Markets and customers are volatile too. Markets are affected as much by fashion and fad as by economics. Customers are increasingly demanding, ever more fickle, and their loyalty to products and brands is harder to win, and then is more temporary than in the past.
A host of external factor’s act on markets can affect customers’ willingness to buy. These include: economic factors and what customers can afford, political factors and how markets are allowed to operate, social factors affecting how people live and therefore what their needs are, technological factors such as the rise of information technology, and environmental factors that may affect choice and regulation. All these things are dynamic-witness to the pace of change in the area of computers and technology alone. Other changes may progress more slowly.
Government seek to control the business environment in order to meet a range of objectives. These include stability and predictability, health and safety, equity and fairness, the promotion of international trade and the efficient use of resources. Government policies affecting business have undergone substantial changes as attitudes have changed overtime. Government vary considerably in their approach to policies which affect business. Read about factors you should consider to understand the threat in your environment
There are other areas of policy which involve constant responses to change. Macro-economic policy must be continuously reviewed and adapted in the light of circumstances. In addition, policy may vary depending on which political party is on power. There are a number of contentious issues affecting the relationship between government and business. Global companies must be aware of the politics and their implications in any of the nations in which they intend to have a presence. This does not mean just the government political situation but also includes the media, industry and labour leaders as well.
A very important aspect of government policy involves the area of business regulation, competition policy and deregulation.
These are rules about how business must operate. As economies develop, governments tend to make more and more rules about how business must operate. An example is the regulation of food industries to ensure their products are safe to eat. However regulation can restrict competition. Equally it can be used to prevent monopolies from exploiting their market power.
This is a process by which government controls on the industry are reduced. One area of importance where deregulation occurred was the transport industry (buses). Buses were tightly controlled because in the 1930s, cutthroat competition had led to safety problems on the roads. Deregulating the buses had led to more frequent services in some areas but not in others. For different reasons, fares have risen and the numbers using buses has fallen.
Other political changes that affect businesses include;
a) unemployment and labour market
b) Business taxes
c) Import controls
d) Education and training.
Although the European community has come along way towards unity, it still has a long way to go. The countries of Europe need to give up more sovereignty as the Union grows in strength. Along with this, they need to begin to work with each other more directly as they begin to rely on each other not only for economic growth, but also for the common defence. An example of the fragmentation of sovereignty was the Anti-immigrant platform of the Austrian freedom party, which was resolved without involving the Austrian government. The EU needs to resolve issues together, rather than separately or in group as they did with this issue.
To be successful, companies must integrate themselves into multiple levels of the political system(s) not just the leadership, but also at the grass roots levels, before they invest heavily into fixed assets and other resources. This integration would provide insights into political situation. The consequences of a political fall could have long term and tenacious results.
Appropriate knowledge and involvement in the political, media and industry leadership of the country or regions of operations are absolutely vital to the success of any venture.
Although nationalisation of corporate resources is now less pf a threat,(Iraq, Iran, China and other third world nations aside) political impropriety can at the very least result in heavy taxation or fines and negative press. These can result in a loss of customer confidence and therefore sales.
Political distress could be detrimental even to companies established in other foreign countries. Too many companies, domestic political considerations are likely to be of prime concern. However, firms involved in international operations are faced with the additional dimension of international political developments. Many firms export and may have joint ventures or subsidiary companies abroad. In many countries, particularly those in the so-called ‘Third World’ or more latterly termed ‘Developing Nations’, the domestic political and economic situation is usually less stable than in the UK. Marketing firms operating in such volatile conditions clearly have to monitor the local political situation very carefully.
In summary, whatever industry a firm is involved in, changes in the political environment at both the domestic and international levels can affect the company and therefore needs to be fully understood.
Business want demand to grow in a steady and predictable fashion. Then all businesses can grow or at least continue producing and the pressures of competition are not too intense. When incomes start to fall because the economy is in recession, some business will be relatively unaffected. Suppliers of toothpaste may have quite an easy time but suppliers of luxury goods, for example, may not survive if the recession persists. A much quoted example is the ‘oil crisis’ caused by the Middle East war in 1973 which produced economic shock waves throughout the Western world, resulting in dramatically increased crude oil prices. This, in turn increased energy costs as well as the cost of many oil-based raw materials such as plastics and synthetic fibres.
This contributed significantly to a world economic recession, and it all serves to demonstrate how dramatic economic change can upset the traditional structures and balances in the world business environment. The construction industry typically faces great difficulties because fewer people have incomes sufficiently high to buy houses and fewer businesses are investing in new buildings. In general, most businesses will face reduced profits. The early 1990’s recession provided ample evidence of the problems. Another such factor is the level of unemployment, which decreases the effective demand for many luxury consumer goods, adversely affecting the demand for the industrial machinery required to produce such goods. The economical factors affecting businesses includes the following;
The impact of personal, corporate (private sector) and government (public sector) debt on global corporations can be deadly to the corporation under specific circumstances. This impact is sometimes too subtle to be noticed at first glance. The debt structure of a foreign country or state must be researched in depth before planning strategic initiatives that require investing in that country or state. What makes this interesting is the inter-relationship between personal, corporate and government debt; and the obligatory interaction of politics.
Historically, economies are cyclical. The frequency of the cycle is not always predictable, nor is the range always known, but they have been shown to operate in cycles. Thus, if an economy is operating in the positive portion of the cycle, it will tend towards the negative at some future point. The length of time in each portion of the cycle tends to change given the propensity of governments to intervene for their own reasons. When public debt is high, government is sometimes tempted to print money and ignore inflation. This causes an erosion of the real value of the excessive public debt.
Because of the tendency for economies to operate in cycle, debt levels must be assessed as much as possible on each level. In a strong economy, high levels of debt may not cause an economic downturn. In the event of a downturn, however, high levels of debt will at least amplify the situation that could cause the downturn to deepen into a severe recession.
The exchange rate is the value of a currency measured in how much foreign currency it can buy. In 1980 a pound could buy 525 Japanese yen. By 1995 the pound had fallen to only 135 yen. By 1998 the pound had recovered to 200yen. Clearly, exchange rates vary. They may be stable for a while, but then fall sharply. In the long term the exchange rate is determined by the pattern of international trade, supply and demand for imports and exports. In the short term, however, speculation can cause wide variations in a currency’s value.
Unstable currencies on this scale have a big impact on traders. Relative prices change dramatically. Previously profitable markets become very unprofitable. The outcome becomes very uncertain and a sharp decrease in economic activity may follow.
Interest rates have an additional dimension. They have a significant impact on the exchange rate, which in turn affects inflation. When interest rates are high, capital from abroad flows into the country in order to take advantage of the attractive rates which can be obtained on bank deposits. These capital flows increase demand for the currency and tend to push up its price, i.e. the exchange rate. As exchange rates rise, export prices rise and exporters lose competitiveness. Export creates downward pressure on output and employment in Britain. It is a major factor in the way interest rates affect the economy.
Other domestic economic variables are the rate of inflation and the level of domestic interest rates, which affects the potential return from new investments and can inhibit the adoption and diffusion of new technologies. When inflation is low, interest rates are typically low, encouraging more extensive borrowing even though real interest rates are no lower. Thus firms and individuals think they can safely afford to borrow a much larger multiple of their income. Although borrowers have historically enjoyed inflation, this is a double edge sword. This same low inflation that encourages borrowing also makes excessive debt more dangerous, because unlike in a high inflation economy, borrowers can no longer rely on inflation to erode their real debt burden if they need or decide to liquidate.
It is therefore vital that marketing firms continually monitor the economic environment at both domestic and world levels. Economic changes pose a set of opportunities and threats, and by understanding and carefully monitoring the economic environment, firms should be in a position to guard against potential threats and to capitalize on opportunities.