Political factors, in the context of the external environment in which a business functions, are a type of external constraint acting upon a business. They’re related to actions of governments and political conditions in the location where the business conducts business or seeks to conduct business. Government actions and political realities influence the success of the business.
Political environment can also affect government policies at local to federal level. Companies should be ready to deal with the local and international outcomes of politics. Changes in the government policy make up the political factors. The change can be economic, legal or social. It could also be a mix of these factors.
Change in the political factors can affect business strategy. The stability of a political system can very well decide about the appeal of a particular local market because Government is a major consumer of goods and services. Government is liable for protecting the public interest and thus it views business organizations as a vehicle for social reform. Government pass legislation, which impacts the relationship between the firm and its customers, suppliers and other companies.
Below, is a list of political factors affecting business:
§ Corruption level
§ Freedom of the press
§ Trade control
§ Education Law
§ Anti-trust law
§ Employment law
§ Discrimination law
§ Data protection law
§ Environmental Law
§ Health and safety law
§ Competition regulation
§ Regulation and deregulation
§ Tax policy (tax rates and incentives)
§ Government stability and related changes
§ Government involvement in trade unions and agreements
§ Import restrictions on quality and quantity of product
§ Intellectual property law (Copyright, patents)
§ Consumer protection and e-commerce
§ Laws that regulate environment pollution
A business has many decisions to make – what to produce, how to produce, for whom to produce. However, these decisions will be affected greatly by the economy in which the firm operates. Even if the economy is quite stable, the business always has to monitor its own operations, those of the opposition and any changes to customers’ habits or even lifestyles. Where there is instability in the economy the decisions of the business will be even harder and difficult and even more important.
Economic environment refers to the aggregate of the nature of economic system of the country, the structural anatomy of the economy to economic policies of the government the organisation of the capital market, the nature of factor endowment, business cycles, the socio-economic infrastructure etc.
When the economy becomes unstable, that’s when problems will occur, when services and goods start to become in short supply or the price of the goods and services go so high that people are not able to afford them anymore. A rise in unemployment could mean that the production and supply of goods decrease and the amount of money to purchase the available goods decreases as well – due to wages being reduced. As there are less people in employment, the taxes being paid to the government are less (they need the taxes to fund services such as housing, health e.g. and education, etc.).
Economic factors that affect the business environments are as under:
· Government economic policies
· Rate of interest set by the central bank of any country
· Per capita Income which has a huge impact on business environment by changing their consumption behaviour
· Privatization policy by the government
· Instability in the economy due to bad political conditions in the county affects the business environment
· Customs duty structure
· Airline air freight charges
· Foreign investment in the country
Social environment of business means all factors around the business which affect it socially. It refers to the nature of social organisation and development of social institutions like caste, religion, customs, and socio-economic factors like class structure, social mobility, women employment etc.
Society is ever changing. The tastes and continuously changing trends are a part of it. It is highly affected by social media and social networking sites.
A business has some responsibilities towards society as it uses resources from society, so it has to return something to the society. Corporate social responsibility (CSR) is a form of corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms.
Below is a list of social factors which impact customer needs and size of markets:
§ Buying habits
§ Education level
§ Emphasis on safety
§ Religion and beliefs
§ Health consciousness
§ Sex distribution
§ Average disposable income level
§ Social classes
§ Family size and structure
§ Attitudes toward saving and investing
§ Attitudes toward green or ecological products
§ Attitudes toward for renewable energy
§ Population growth rate
§ Immigration and emigration rates
§ Age distribution and life expectancy rates
§ Attitudes toward imported products and services
§ Attitudes toward work, career, leisure and retirement
§ Attitudes toward customer service and product quality
Technology has revolutionized the world. It is changing rapidly with newer innovations. It has influenced operations of the business over the world. Its influence is felt in practically all aspects on the day-to-day operations of businesses, both large and small.
Technology has also changed the face and the pace of how business functions. Business processes have been modified and organizations are now working much more efficiently than ever. At the same time, technology has opened a new way of communication, allowing businesses to communicate and collaborate beyond borders.
The growing use of IT and its tools, smartphones and various smart devices have taken the business to a next level. Today, it’s seen that those organizations are higher ranked are usually more advanced in technology. Technology has, in fact, made organizations to go digital.
The rapid development of technology requires quick reaction by businesses in order to survive in an emerging competitive environment and keep up with new trends and innovative services which other competitors might be offering.
These technological factors can include both products and processes and can present opportunities and threats but it is vital for competitive advantage and is a successful driver in globalisation. Products can be marketed in new ways and processes present immense Value to the business.
The legal environment refers to the principles, rules and regulations established by the government and applicable to people. These regulations come through various legislations. The government has passed and enacted various Acts. Now due to globalization of economy, it became necessary to make changes in these Acts.
The legal environment plays a very crucial role in determining the success of a business. The government imposes taxes among other regulatory measures to promote economic growth and to cushion consumers from exploitation. Therefore, before establishing or when running a business, it is imperative to understand the role of regional tax measures and regulatory measures to determine how they affect business.
An understanding of the legal environment of business is relevant—indeed, essential—to functioning well within disciplines like accounting, finance, management and marketing. Additionally, a solid understanding of the legal environment can help avoid liability or at least minimize risk. In business, it is not enough to comport one and one’s business ethically. Business must also ensure that it understands the legal environment in which it is working. Therefore, it is important for the organization, for its employer, and for all the other people who may be relying on business expertise—such as employees and their family—to understand the legal environment. Such an understanding will help to avoid or lessen the likelihood of liability exposure, enabling organization to manage business affairs successfully, unhampered by unmanaged legal liability risks.
Most of the countries have consumer protection laws aimed at making sure that business act fairly towards their consumers. A few examples are
· Weight and Measures Act, 1976: This Act was enacted to establish standards of weights and measures, to regulate inter-State trade or commerce in weights, measures and other goods which are sold or distributed by weight, measure or number, to provide for matters connected therewith or incidental thereto. Goods sold should not be underweight. Standard weighting equipments should be used to measure goods.
· Trade Description Act, 1968: It means deliberately giving misleading impression about the product is illegal. The Act makes it a criminal offence to apply a false trade description to goods. The Act covers descriptions given both verbally and in writing. It covers any factual statement about the physical qualities of the product, e.g. size, capacity, performance, place of manufacture and previous history.
· Consumer Credit Act, 1974: According to this Act, consumers should be given a copy of the credit agreement and should be aware of the interest rates, length of loan while taking a loan. The Act also regulates what may be taken as security, limits the ways in which credit organisations can advertise and gives the county courts the ability to intercede in the case of unfair or unjust credit agreements. It also gives additional rights to the debtor, including certain limited rights to cancel concluded agreements.
· Sale of Goods Act, 1979: According to the Act, it is illegal to sell products with serious flaws or problems and goods sold should conform to the description provided. The Act applied to contracts where property in ‘goods’ were transferred or agreed to be transferred for a monetary consideration, in other words: where property (ownership) in personal chattels was sold.
Business is interconnected with nature in two ways. Firstly, business gets its raw materials from the nature, whose quality and availability can affect the business to a large extent. Secondly, natural calamities which are uncontrollable and uncertain, can bring disaster for the business.
The analysis of the mega environment must also cover aspects like extent of endowment of natural resources in the country, ecology, climate, etc. These constitute the natural environment.
In today’s nature disturbances, upcoming of global warming and other hazardous issues to the environment, companies around the world are integrating environmental interest with business and are becoming proactive in finding ways to reduce environmental impact. Additionally, consumers are favouring businesses that contribute to protecting natural resources. These interconnections are explicit domains where business is heavily implicated.
There are no hard and fast rules with regard to location of plant. In practice, a large number of factors have to be considered while choosing a suitable location. Moreover, these factors differ from situation to situation and from time to time.
ENVIRONMENT SCANNING TECHNIQUES
It is essential for a company to understand the environment in which it is working, in order to stand and survive in the market. The understanding of environment can be meant as environmental scanning. This environmental scanning is used by the companies to judge its position among its competitors. It helps to identify positive points and negative points, that is, strengths and weaknesses of the company. It provides knowledge about the upcoming opportunities and threats to the company. Thus, environmental scanning gives a proper base to the company for looking its current position and improving for the better. It shows the scope of betterment in future.
There are various techniques of environmental scanning, each having its own usefulness but having some drawbacks at the same time.
SWOT analysis is an acronym of Strengths, Weaknesses, Opportunities, Threats. It is the simplest technique of all because it does not take much time and doing it forces the management to think about the company in a whole new way. SWOT analysis is calculated by a SWOT matrix.
SWOT analysis, as per the name suggests, helps company to identify its strengths and weaknesses, understand and grab the opportunities on the way and taking precautions against threats that may harm it.
Strengths and weaknesses are the internal factors of the company which can be changed from time to time but not without some work. Opportunities and threats are the external factors which cannot be changed nor there is any control over them.
Areas typically considered in the internal factors include financial resources, human resources, physical resources, access to natural resources, and current processes.
Some example of strengths, as an internal factor, that a company can consider are patents, strong brand names, good reputation among customers, cost advantages from proprietary know-how, exclusive access to high grade natural resources, favourable access to distribution networks. Some example of weaknesses, as an internal factor, that a company can consider are lack of patent, weak brand names, poor reputation among customers, high cost structure, lack of access to the best natural resources, lack of access to key distribution channels.
Areas typically considered in the external factors include market trends, economic trends, funding, demographics, relationships with suppliers and partners, and, political, environmental and economic regulations.
Some example of opportunities, as an external factor, includes an unfulfilled customer needs, arrival of new technology, loosening of regulations, removal of international trade barriers. Some example of threats, as an external factor, that a company can face include shifts in consumer tastes away from the firm’s products, emergence of substitute products, new regulations, international trade barriers.
It is important to study SWOT analysis to determine the status of the company and providing for better future.
ENVIRONMENT THREAT AND OPPORTUNITY PROFILE(ETOP)
ETOP is the acronym of Environment Threat and Opportunity Profile. It is an environmental scanning technique in which environment is divided into different sectors and then impact of each sector is analysed separately. The impact is measured on three measures of scale: positive, negative, neutral, marked as +,-,0 respectively.
ETOP considers the environmental information and determines relative impact of threats and opportunities, for the systematic evaluation of environmental canning. It helps organization to identify opportunities and threats and to consolidate and strengthen organization’s position. It provides the strategists of which sectors have a favourable impact on the organization.
Some of the environmental factors that can be covered while undergoing ETOP analysis includes political factors, legal factors, economic factors, social factors and alike.
The strategic managers must keep focus on following dimensions:
· Issue selection
Focus on issues which have been selected, should not be missed as there is a probability of landing at incorrect practices. Some of the important issues may be related to market share, competitive pricing, customer preferences, technological change, economic policies, competitive trends, etc.
· Accuracy of data
Data should be collected from good sources otherwise the entire process of ETOP may fail. The relevance, importance, manageability, variability, and low cost of data are some of the important factors to be kept in focus.
· Flexibility in operations
Due to uncertainty in business situations, a company will be benefited by devising proactive and flexible strategies in their plans, structures, strategy, etc.
· Impact study
It should be conducted focusing on the various opportunities and threats and the critical issues selected. Efforts must be made to make the assessment more objective.
ORGANIZATIONAL CAPABILITY PROFILE(OCP)
OCP is the acronym of Organizational Capability Profile. It is summarized statement which provides overview of strengths and weaknesses in key result areas likely to affect future operation of the organization. Information in this profile may be presented in qualitative terms or quantitative terms.
The organizational capability profile is drawn in the form of a chart. The strategists are required to systematically assess the various functional areas and subjectively assign values to the different functional capability factors and sub factors along a scale ranging from values of -5 to +5.
After the preparation of OCP, the organisation is in a position to assess its relative strength and weaknesses vis-a-vis its competitors. If there is any gap in area, suitable action may be taken to overcome that. OCP shows the company’s capacity. OCP tells about company’s potential and capability. OCP tells what company can do.
STRATEGIC ADVANTAGE PROFILE(SAP)
SAP is the acronym of Strategic Advantage Profile. It is a summary statement, which provides overview of the advantages and disadvantages in key areas likely to affect future operations of the firm. It is a tool for making a systematic evaluation of the strategic advantage factors, which are significant for the company in its environment. The preparation of such a profile presupposes detailed analysis and diagnosis of the factors in each functional area.
SAP describes the organisation’s competitive position in the market place. It indicates what the organisation has done or is doing in comparison to its competitors to generate competitive advantage for itself. It is external-oriented.
INTERACTION MATRIX – PORTER’S FIVE FORCES OF MODEL
The mix, character and power of the competitive forces operating in a company’s industry varies from one industry to another. The most powerful tool used for systematically diagnosing the basic competitive pressures in a market and assessing strength, weakness, opportunities and threats, is the five-forces model of competition.
Five forces model of competition was developed by Harvard Business School’s Michael E. Porter in 1979. It emphasizes on the five important factors that help determine whether or not a business can be profitable on the basis of the present strategy it is following. The strategy the business follows is what ultimately drives competition and profitability and not on what product or services it is providing.
RIVALRY AMONG EXISTING COMPETITORS
In today’s cut-throat market, competitors are prone to use whatever weapons they have in their business to attain better market positions and earn good profits as well as brand loyalty. The challenge is to adopt a competitive strategy that produces competitive edge over rivals. This strategy consists of offensive and defensive moves, action and reaction patterns, adjust and readjust process. Thus, the current leaders of the market cannot be very sure of their continued leadership in future.
Rivalry gets stronger when competitors are active in making strategies against strategies, moves after moves. Competition increases as the products of rival sellers become more standardized and diminishes as the products of industry rivals become more strongly differentiated. Competitors to stand in market, thus, should have diverse strategies and objectives.
THREAT OF NEW ENTRANTS
Val Renault, Section 14. SWOT Analysis: Strengths, Weaknesses, Opportunities, and Threats, Retrieved from http://ctb.ku.edu/en/table-of-contents/assessment/assessing-community-needs-and-resources/swot-analysis/main
Tim Berry, What is a SWOT Analysis?, Retrieved from http://articles.bplans.com/how-to-perform-swot-analysis/
SWOT Analysis, Retrieved from http://shodhganga.inflibnet.ac.in/bitstream/10603/59535/7/07_chapter%201.pdf
Smriti Chand, Environmental Threat and Opportunity Profile, Retrieved from http://www.yourarticlelibrary.com/organization/environmental-threat-and-opportunity-profile-%D0%B5%D1%82%D0%BE%D1%80/23557/
ETOP Analysis, Retrieved from http://www.bbamantra.com/etop-environmental-threat-and-opportunity-profile/
BMS Team, Organizational Capability Profile, Retrieved from http://www.bms.co.in/organizational-capability-profile-ocp/
Strategic Management – Environmental Scanning Techniques – Notes – Business Management, Study notes for Business Administration. Banaras Hindu University,Business Administration, Retrieved from http://www.docsity.com/en/strategic-management-environmental-scanning-techniques-notes-business-management/52577/
Jim Makos, Political factors affecting business, Retrieved from http://pestleanalysis.com/political-factors-affecting-business/
Alex Pirouz, The Impact of Technology in Business, December/January 2012 issue of Business Review Australia magazine
Andrew J. Hoffman and Susse Georg, INTRODUCTION TO BUSINESS AND THE NATURAL ENVIRONMENT A history of research on business and the natural environment: conversations from the field, Retrieved from http://webuser.bus.umich.edu/ajhoff/pub_academic/2013%20Routledge%20Intro-2.pdf
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