Describe about the Implication of Microeconomics, Macroeconomic and International Economic Environment to Business Organization?
In this assignment, there are three aspects such as micro economic, macroeconomic and the international environment that are very important for a business to thrive. Without this forms of environment it get difficult for the business to function. We have seen that the UK economy is very good in performing business, the economic indicators also provides a good picture. The country being a member of the European Union will be able to perform the free trade with the developed country. The developing country is also found to increase their contact with the country UK due to the dominant position. Thus, when the market of UK is saturated then it can rely on the developing economies.
Economic Environment plays a pivotal role in the operation process of a business organization. The operation strategy of business organization and its success or failure depends on the current economic environment in which the organization is operating. The economic environment consists of a number of external and internal factors that exists in the business market and in the broader economy that may influence the current and future success of the business organization. The economic environment can be classified as three sections. These are microenvironment, macro environment and the international environment. Micro economic environment influences the individual decision making process of an organization. On the other hand, macroeconomic environment determines the market structure in which the business is operating and the marketing strategy of the business. Moreover, the international environment influences the operational strategy of the multinational firm. In this assignment, the main objective is to discuss about the importance of these three environments to a business organization elaborately.
Importance of micro-economic environment:
Microeconomics is a branch of economics that is used to make an analysis of the market behavior of a firm with the aim of understanding the decision making process of that particular organization. Micro economic environment has been referred to as the internal environment of the business organization. Various factors determine the microeconomic environment of a particular business organization. These are-1) amount of supply and demand, 2) price elasticity faced by the firm, 3) total and average marginal revenue, 4) factors of production and its allocation in the production process, 5)the availability of the limited resources, 6) the process of price determination and 7) how a particular firm responses with the change in the market price and quantity. These entire factors decide how a particular firm serves its customers. Among these above-mentioned factors, the demand is the most important one. A firm cannot operate well without sufficient amount of quantity demanded (Learnmarketing.net, 2015). Price elasticity is the responsiveness of the quantity demanded by a unit change in the price. A firm cannot be able to charge higher price if the demand for its product is relatively elastic (Williamson, 2014). On the other hand, a firm will be able to get high price if the demand for its product is quiet inelastic. The reason is in this case, the quantity demand face by the firm will not change and therefore the profit margin of the firm will not be affected much. Moreover, the quantity supplied of the firm depends on the average revenue and the marginal revenue (Goolsbee, 2015). A firm continues to increase its supply level to the point where marginal revenue is zero. The selection of the production process depends on the availability of the resources. The availability of the resources is another main important aspect of the microenvironment. The reason is the cost of factors production depends on its availability (Oxford College of Marketing Blog, 2014). A firm cannot modify the quantity supplied in the short run, as some factors of production cannot be varied in the SR. However, in the end, when all the factors are variable, then the firm can respond quickly to any change in the market price. At the time of determination of price, the firm generally considers the production cost and how much demand and profit the firm may face at a certain level of price. Therefore, it can be said that, all the factors influence the individual decision making process of a particular firm and for this reason the microenvironment is important for any business organization.
Implication of Microeconomics, Macroeconomic and International Economic Environment to Business Organization
Business objective is an important part of the planning process of an organization. It describes what company wants to get or accomplish after a certain time interval through its operation process. The objectives of a business organization can be classified into two sections. These are maximizing objectives and non-maximizing objectives. Generally, it is believed that, the main concern of an organization is to maximize its profit. However, the firm has some other maximizing objectives. Some firm generally seeks to maximize its revenue rather than profit in order to raise its market share (Economicshelp.org, 2015). Other maximizing objectives are growth maximization through merger and takeover process and long run profit maximization through the reduction of the profit levels in the short run. On the other hand, the important non-maximizing objective is improvement of the productivity through the employment of skilled labour, improvement of the skill of current employee through training program, employment of technologically advanced production process and modern equipments. Other non–maximizing objective are to retention of the existing customers and attract the potential customers through providing good customer service, reduction of the employee turnover cost, improvement of the relation with employees in order to retain the skilled labour in the company, maintain good financial condition all the time and improve the brand loyalty and recognition. Ethical behavior and corporate social responsibilities of a business organization can benefits the organization in many ways (Firm, 2015). Ethical behavior helps the company to attract more customers and increase the demand for its products, encourages the employees to stay with the company and attract the potential employees to this company. Because of this, the organization is able to get highly skilled workers in with relatively less recruitment cost (Small Business - Chron.com, 2015). In this way, the company can earn high profit; keep its share price high and able to draw more cash flow in to the company (Jupiter.plymouth.edu, 2015). However, many companies in order to increase its profit margin sometime follow unethical practices such as slashing the employee payment, offering lower quality product or employing non-environment friendly production process. These practices ultimately lead to smeared public relation and loss of market share in the future period. Business organization is a supply side entity and the main purpose of this is to achieve acertain commercial goals such as earn profit. Product Life Cycle is a sequence of four stages through which a business organization grows gradually (Productlifecyclestages.com, 2015). Product life cycle is very important for a business organization, as it will help the firm to design suitable marketing strategy. Moreover, size is positively related to the success of an organization. Large firm size means the organization has substantial market power, good financial condition and high opportunity for the R&D process and able to enjoy the economies of scale (Quickmba.com, 2015). These factors in turn cause high profit or revenue earnings of the firm. The organizational structure influences the decision-making process within the firm and firm’s goals and objective determination process.
The structure of the market in which a business organization is operating has an important role in the strategic decision making process of that organization. There exists four types of market structure viz. perfect competition, monopolistic competition, oligopoly and monopoly. These structures are important because they affect the outcome of a business organization through its impact on the motivations, opportunities and decisions of the economic agents of the market. In a perfectly competitive market, there are numbers of buyers and sellers. This means that there is no competition in this market. Hence, no economic agent has the market power or opportunity to influence the price (Tutor2u.net, 2015). This leads to the firm and the buyer to act as a price takers and to make their individual activities up to the point where their utility is maximized. For this reason, the firms are not able to earn any profits. In the monopolistically competitive market, there exists lots of buyers and sellers (Small Business - Chron.com, 2015). However, in this market, the products of sellers are not perfectly substitute with each other. Rather they are slightly different. This implies that there exists some competition in the market. Moreover, operating firms have some market power to influence the price of their own product. However, the firms are not able to acquire supernormal profit. In the oligopolistic market, there are only few firms (Small Business - Chron.com, 2015). For this reason, the market action of one firm influences the same of other firms. This indicates that, in this market structure, the firms have limited market power but they are able to gain profits substantially. However, in the monopolistic market structure, there exists only one firm. Hence, this firm has full market power to charge as much as possible high price and therefore able to earn high profit margin (Employment regulation and the labour market, 2015). According to the report published by CIPD, the condition of U.K labor market is very bad. The labor productivity, the remuneration and the participation of the young people into the labor force. In the U. K labor market, there exists some labor protection against discrimination on the ground of race, sex, disability and age. Moreover, there exists some regulation related to the minimum wage, old age pension, health and safety and flexible working time. However, labor protection of permanent workers against dismissal, collective dismissal and the regulation of temporary contracts are not satisfactory in the U.K labor market. Failure in the labor market occurs because of the existence of skill gap, poaching, labor immobility and inequality. This market failure affects the supply of labor in to a certain job and the existing wage level. However, in the U.K labor market, there does not exist any skill gap, immobility and inequality because og the labor protection law of U.K government. Therefore, it can be said that, any types of market failure do not affect the U.K labor market.
Understanding of Microeconomic Business Environment
Macroeconomic environment of a business organization in the overall condition of the economy in which the organization is operating. This environment includes economic, technological, societal and governmental influences. The accurate understanding of this macroeconomic environment is very essential as this influences the business process of the organization. Since it is not possible for nay company to change this environment like microenvironment, therefore they should adopt proper strategy so that they can operate the operation process successfully (Abel, Bernanke and Croushore, 2014). However, the decision makers of a business organization analyze the current macroeconomic environment by examining the trend of national income or GDP, inflation, unemployment, government spending, fiscal and monetary policies of the country in which it is currently operating. Among the above-mentioned factors, national income is the commonly used determinant. National income of a country is the total monetary value of the final goods and serviced that are produced in a country within in particular time interval. Three important methods are used to determine the national output of a country. These are Value added method, income method and the expenditure method. However, while calculating national income of a country some issues have to be faced. Among them, the four important issues are lack of reliable data, existence of non-monetized sector in the economy, difficulties in the classification of working population and inability to include the black market activities in the national income calculation process. However, in this context it is important to note that, the data that are used in the national income estimation process are not reliable all the time. The reason is the data that are used in the account calculation are mainly collected from various primary data sources. It has been often seen that, some producers are not interested to reveal the actual product and raw material value. On the other hand, the buyers also sometime are not literate enough to give the proper data. The circular flow of income in an economy is the representation of how income is circulated in an economy. In a five-sector economy consisting of firm, household, government, financial and external sector, household allocate their income to consumption, saving, taxation and spending on imported good. Among these four spending, the last three are considered as withdrawal from the circular flow as they are not spent on the domestically produced output. On the other hand, private investment spending on the production process and government spending on the merit goods and export expenditure but the foreigners are treated as injections in the circular flow. Equilibrium in the macroeconomic environment is a situation when the amount of injection is equal to the withdrawal amount. This implies that. Equilibrium situation occurs when there exists no tendency to change the income, expenditure and the output level in the economy. Other two important determinant of macroeconomic environment is multiplier and inflation rate. Multiplier shows how much an endogenous variable changes in response to the one init change in the exogenous variable of the economy. On the other hand, inflation shows how much the price level increases overtime. The stability of an economy depends on the inflation rate.
Analysis of the Business objectives and Business behavior in the economic assignment
Fiscal Policy and the monetary policy are the instruments that are used by the government and the central bank of a country to adjust the spending level, tax rate and the money supply of the economy. These are the two main tools that are followed by the government at the time of intervention in the economy with the aim of maintaining the economic stability. Government controls the total spending and tax revenue of a country by using the contractionary and expansionary fiscal policy. When the government wants to stimulate the growth rate through the increment of Aggregate demand, then it rises the government spending and reduces the tax rate (Bernheim and Whinston, 2014). This in turn encourages the manufacturing organizations to produce more and hire more people in the production process. In this way, the government upsurges the AD, AS and economic growth rate continuously in a cyclical manner and makes the unemployment level less (Krugman, 2014). On the other hand, the government sometime follows contractionary fiscal policy by reducing the government spending and raising the tax rate in order to control the AD of the economy. In this manner, the government keeps the balance of payment and inflation rate in a moderate level. Monetary Policy is the tool that is used by Central monetary authority of a country to control the cash liquidity condition of the economy. Central bank changes the interest rate, which in turn affects the decision of people regarding holding money in hand. In this way, the central bank influences the money spending and therefore demand in the economy. In this context it is important to note that, the fiscal and monetary policies are demand side policies as it influences the economy through making modification in the AD (Dornbusch, Fischer and Startz, 2014). However, the government has the ability to influence the productive capacity and therefore aggregate supply of the economy by adopting various types of supply side policies such as privatization, deregulation, reduction of income tax, provision of higher education facility and vocational training, deregulation of financial & labor market, improvement of social infrastructure and reduction of tariff barrier. These policies help the government to lower inflation rate & unemployment and improve balance of payment, trade and economic growth rate. In this ways various government policies directly affects the macroeconomic condition of the country and indirectly the operation process of the companies that are operating in this particular country.
SWOT and PESTLE analysis are two important tools that are used by the business enterprises in order to understand the impact of the macroeconomic environment on the business organization. SWOT analysis is followed to evaluate the strength, weakness, opportunities and threats that a business organization may face while operating in an environment. The following table illustrates the SWOT analysis of U.K business environment.
- Availability of economic resources
- Good industrial relationship
- Political stability
- Good education system
- Stable economic condition
- Favorable Business environment
- Low unemployment
- Government initiative to reduce trade barriers
- Availability of cheap labor because of recent migration
- Large consumer market size
- Poor Transport System
- Low participation of the young people in the labor force
- Insufficient R&D
- Lack of proper innovation and invention
- Continuously increasing competition
- Reduction of E.U spending on U.K
- Increase in the import of cheaper good from other countries
PESTLE analysis is also used by the business organization while planning their business strategy in order to get a bird’s eye view of the concerned environment from many different angles. The following table shows the PESTLE analysis for U.K.
- Good E.U regulation
- Easy accession of new members in E.U and therefore the opportunity of free trade with new countries
- Continuous up gradation of laws
- Change in interest rates
- Continuous terrorist attack affects the profitability of all industry
- People do not want to travel and investment
- Continuous growth of Sterling and Euro make the economic condition of U.K more stronger
- The number of aged people is high in the demographic composition
- Workers from all over the world can work in this country
- Various types of tourism, sports and leisure activities are available in this country.
- Use of latest technology in Industry
- People are very much aware and skilled enough to use the advanced technology
- Market is becoming highly competitive technologically.
- Complex legal structure
- Minimum wage legislation
- Equality, health and safety legislation
- High corporate and income tax rate
- Possibility of occurrence of natural disaster is low
- High environment pollution
- Biodiversity degradation
Impact of market structures on business organizations
Analysis of the features of the international economic environment:
A business organization has to face some risk and opportunities when it decides to operate in an international environment. The main two risks are foreign exchange risk and the political risk. The fist kind of risk happens when the amount of investment and profit varies significantly only because of the continuous change in the domestic currency’s exchange rate. On the other hand, political risk occurs when the policies of domestic country affects adversely the foreign country in which the organization has a branch. In this situation, the foreign country imposes some trade barriers and because of this, the organization may face issues to continue operation in that country (Bennett, 2011). Moreover, the diplomatic relation between two countries also plays a significant role in the success of a business in international environment. In this context, it can be said that since U.S is a developed country and because of one of the member of E.U, therefore the domestic companies of this country can reap the opportunities of free trade with other member countries. Moreover, many developing countries in the region of East and South East Asia have a good trade relationship with this country. This country is an active member of different international organization. Moreover, the domestic currency of U.K influence significantly in the global monetary system (Keillor, 2015). Therefore, it can be said that, the domestic business organization of U.K will not have to face much problems while making international operations both in other developed and in developing countries of South East and East Asia region (Pugel, 2012).
Various factors that exists in the international environment can affect the operation process of an business organization either positively or adversely. Among these, the three main factors are unemployment rate, inflation rate and labor cost. The business organization that wants to enter in the market of some developed countries have to compete with the already exists highly competitive players. In this situation, the entering strategy of the business organization has to sufficient enough so that it can overcome that competitive problem and able to set up the business process successfully. On the other hand, while making any in the market of some developing country, the business organization will be able to get the benefit of cheap labor cost. However, in this context it is important to note that, the successful international operation process of a business organization depends on the clear understanding of the economic system and adoption of proper business strategy according to that understanding. Since the economic condition of any economy changes over time, therefore sustainability of the organization depends on how the organization responds to the changes (Feenstra and Taylor, 2012).
The success or failure of a business depends on different types of environments under which the organization is operating. At the time of operation, the firm has to face different type’s internal and external factors that have the ability to influence the operation process. The organization can change some of factors, especially the microenvironment factors in order to make the condition favorable to the firm. However, the firm cannot alter the macro or the international environment factors. For this reason, the firm has to take some effective strategy in order to avoid or bypass the problems associate with these two types of environment. In this way, a business organization tries to maximize its objectives through the proper utilization all three market environments.
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