Economic Environment
The economic environment comprises capital, labor, price
changes, productivity, fiscal and monetary policy and customers.
It is required to run the organization. The enterprise needs a long-term and a
short-term capital. The capital required can be either from the internal sources
or borrowed from the financial institutions. When a capital is borrowed, it is
borrowed at an interest. The
organizational is forced to borrow for various reasons and the interest charged
by the lending financial institutions forms the cost of the capital. Hence
management of the capital is an important aspect of the business.
The next important cost of a business is the cost of labor.
The cost of labor is determined every two to three years by a union agreement.
The settlement of an agreement is based on the cost of living index, the
industry wage standards, the availability of labor, etc. These aspects are external to the
organization and a manager has no control on them.
Price changes occur in the economy for various reasons. The changes occur because of decrease in
the demand and supply, the changes in the consumer behavior, in the consumption
pattern and the money supply, and so on. The price changes affect the cost of
raw material and labor and on these changes a manager has no control.
Productivity is a result of the capital, labor and
technology. Many a times an organization's business is taken over by better
technology. The costs are affected by the technology changes affecting the
productivity. The manager has to respond quickly to the technological changes to
save the business.
The Government announces fiscal policies and controls them.
The organization's profit position is affected by these policies. These policies
affect the credit terms, the prices of the inputs and the money supply affecting
the cash position of the organization. A manager has a very little leverage to
deal with these policy changes.
The customers rule the business, especially when the business
operates in a buyer's market.
In a competitive world, it is very difficult to predict the customer
behavior. The changes in the demands occur with growth and technology. The
customer does not show consistent preference to the product. The change in the
business orientation to suit the changes in the customer demand is a difficult
task for the manager. It is not
always possible to predict these changes well in advance in order to take any
managerial action to meet the changed situation.
