Economic Business Enviroment

By Abhinash on April 24, 2010

The environment within which businesses operate is constantly changing, which will affect how they perform. The changing environment therefore forces businesses to regularly review their operations and their strategies for achieving their defined objectives. If the businesses do not make an appraisal of the changing environment, they may face loss of competitive advantage, i.e. ability to compete effectively with business rivals and thereby face the eventuality of reduced profits or worse.

The range of different issues concerning the operations and strategies of a business:

A business will have to constantly review its product portfolio. This means a business will have to think about (a) whether the range of products it produces needs to be changed and if so, to what extent; (b) how well its each product or brand is doing in terms of the product life cycle; and (c) which new products competitors are bringing to the market and how they compete with its own products.

A business will also have to constantly think about new markets, i.e. the markets it supplies and whether these need changing (e.g. domestic market or world market).

A business will also have to review its investment decision  in terms of its expenditure on Research and Development (R&D) compared with that of competitors so as to bring about sufficient new products (brands) to the market quickly enough to replace the declining ones and in terms of whether it can afford a new investment programme and whether it should reduce operating costs by reducing labour and substituting capital and the like.

A business will also have to think about the need for new partners.  That is, it will have to review whether it can continue as at present or it should grow by ploughing back retained earnings and/or borrowing from its bank and/or issuing new shares or whether it should be looking for mergers and acquisitions as means to grow.

Changing Business Environment

A business will have to constantly make an appraisal of its  environment because if it does not remain alert to its changing environment  then it will be left behind  in terms of  operations and strategies by other competing businesses which do regularly monitor it. The various variables or factors of the environment are captured well by PESTLE—an acronym for political, economic, social, technological, legal and environmental/ethical.

Political changes can have a major impact on businesses.  For example, after a general election, a newly elected party may introduce a different tax structure or other policies which impact on businesses.

There are many macroeconomic issues which can affect a business such as GDP/GNP/national income, inflation, unemployment, economic growth, business cycle, balance of payments, exchange rate and the government policies  regarding them.

Social policies in terms of regulations regarding working hours and changing aspects of society in terms of changing nature of workforce  can have a major impact on businesses.

Technological revolutions in terms of information and communication technologies can have profound impact on the operations and strategies of businesses.

Legal changes in terms of competition policy, labour law reforms etc. can directly impact on businesses.

Environmental/ethical issues  in terms of environmental damange, managerial compensation unrelated to company performance, child labour etc. are increasingly being monitored by consumer agencies and pressure groups. Consequently, businesses have to be alert to changing consumer values and ensure that they conform to these.