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What is Business Environment?

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The business environment is very dynamic in nature and the survival and success of a business are dependent on its innate strength, ability to adapt to the environment, and the extent to which the BE is favorable to the development of the organization. In this article, we will learn about what is a business environment, its definition and objectives, types of the biz environment, its nature, and its importance.

► What is a Business Environment?

A business environment is defined as the sum of all internal and external factors that influence an organization’s environment and its operation and activities.

In other words, the business environment is defined as a collection of all internal factors such as organization structure, mission and objective, employees,  company image and brand equity, etc., and external factors such as customers, competitors, suppliers, market trends, financiers, etc.

The biz environment depends on both internal factors (controllable in nature) and external factors (uncontrollable in nature).

◉ Business Environment Meaning

Business environment refers to those aspects of the surroundings business enterprise, which affect or influence its operations and determine its effectiveness.

Definition of Business Environment

The term “Business Environment” implies the aggregate of all the individuals, groups, competitors, financial institutions, national and international organizations, legal institutions, and government that affect the business performance.

This is how you can define Business Env. with suitable definitions by authors.

Definition by Various Authors

“Business environment is the aggregate of all conditions, events, and influence that surrounds and affect it”. – Keith Davis

“The environment of a company is the pattern of all external influences that affect its life and development”. – Andrews

“BE is the climate or set of conditions such as economic, social, political or institutional in which business operates and conducted.” – Arthur M. Weimer

“BE is the total of all things external to business firms and industries which affect their organization and operations. – Bayard O. Wheeler

The BE is a very crucial aspect of any business, it helps the business to identify different business opportunities available, assists in planning and organizing, and ensures the sustainability, profitability, and growth of the business.

► Objectives of Business Environment

  • It helps in identifying business opportunities
  • It helps in rational and fact-based decision making
  • Help in planning and policy-making
  • It helps in enhancing business planning
  • It helps in identifying new emerging threat
  • It helps in resource planning

► Scope of Biz Environment

  • Business Management
  • Competitive analysis
  • Policy formation
  • Tracking of business operations and activities
  • Scanning of opportunity and threat
  • Supplier Management

► Nature/Feature/Characterisitcs of Busines Environment

The nature of the biz environment is as follows.

  • Complex nature
  • Dynamic nature
  • Mutual Interdependence
  • Uncertainty
  • Relativity
  • Far-reaching impact
  • Multifaceted

► Importance of Business Environment

  • It helps in Decision Making
  • It helps the business to Cope with the Change
  • It helps in improving the business Opportunity
  • It helps in Unforeseen Threat and uncertainty and take corrective action
  • It plays a vital role in Merger and Acquisition
  • It helps in assisting in the Planning and Development of strategy

► Dimensions of B.E.

  • Economic Environment
  • Political Environment
  • Legal Environment
  • Technological Environment
  • Social Environment

Must Read : Dimensions of B. Environment (in detail)

► Types of Business Environment

It is divided into two types.

  • Internal Environment
  • External Environment

The external environment is subdivided into two categories.

  1. Micro Environment (Task Environment or Operating Environment)
  2. Macro Environment (General Environment or Remote Environment)

This topic is also asked as discuss the component of BE. So don’t confuse. you can read more details by clicking the button below.

Must Read : Types of B. Environment (in detail)

► Advantages of B. Environment

  • Prevent risk and uncertainty
  • Harness the opportunities
  • Identification of opportunity
  • Adapt to the market trend
  • Policy and Plan Formation
  • Facilitate the decision making
  • Allocation and utilization of resources

► Disadvantages of BE

  • Can be time-consuming and costly.
  • This may be difficult in a rapidly changing market.
  • Dependency on Forecasting.
  • Environmental Threats.
  • Some unplanned opportunities may be missed.

If you want to read what are the topics that are in the Business Env. subject in the MBA syllabus then you can read it here.

Features of Business Environment

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The business environment is a very broad term that includes a lot of factors, institutions, events, agencies, and dimensions. If managers want to monitor the effectiveness and efficiency of business then they must have knowledge about features or the nature of the business environment.

These features of the business environment help the managers in the fast identification of problems, formulation of strategies, and their timely implementation.

In this, we will explain in detail about different features of the business environment.

► Features of the Business Environment

There are various Features of the business environment and they can be used to explain the nature and characteristics of the business environment.

Here are the Features of the Business Environment.

  1. Complex nature
  2. Dynamic nature
  3. Mutual Interdependence
  4. Uncertainty
  5. Relativity –
  6. Specific and general forces

✔ 1. Complex Nature

The business environment is very complex in nature because it consists of a number of factors, events, operations, and institutions that influence business activities.

Constant change and high interrelatedness among all the factors and dimensions of the business environment make it very complex in nature.

Also Read : Objectives of Business Environment

✔ 2. Dynamic Nature

The business environment continuously changes processes. The various factors that affect the business environment always keep changing like a technological improvement, customer demand, preference, industrial policies, labor reform, and demographic dividends.

If businesses want to survive and succeed then they should ensure high alertness and faster adaptability.

✔ 3. Mutual Interdependence

Many factors of the business environment have mutually interdependence and correlation. If any change in one factor affects the other factors.

For example, if the government bans some raw material then local demand arises and the industry needs the substitute raw material.

Also Read : Dimensions of Business Environment

✔ 4. Uncertainty

The business environment is very uncertain in nature it is difficult to predict what will happen in the future, especially when businesses are affected by both internal and external factors which are very dynamic in nature.

✔ 5. Relativity (Features of Business Environment)

One of the main features of the business environment is its relativity. The business environment is mainly affected by local conditions, therefore the business environment is different in different countries.

For Example, The demand for soft drinks and juices and very high in hot regions whereas the demand for tea and coffee is high in cold regions.

Also Read : Types of Business Environment

✔ 6. Specific and general forces

The business environment is affected by a lot of forces, some of these forces are specific to a particular industry or sector like customers, competitors, suppliers, etc.

These have limited effect on a sector and general forces have to affect all sectors and industries.

For Example, Any rise in taxes on aviation fuel particularly affects the aviation sector but if the government introduces a new national fuel policy then it affects the whole economy.

Importance of Business Environment

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A business environment is extremely important for the survival and growth of a business enterprise. In this article, we will discuss the importance of the business environment.

The business environment is very dynamic in nature and business is always exposed to internal and external forces that affect growth. A detailed understanding of the environment helps the business manager to identify business opportunities and threats and take timely action.

► Importance of Business Environment

Business organizations keep tracking the environment of their business. It is done by proper Environment Scanning where market analysts study the Business environment.

We can understand the importance of the Business Environment through the following points.

  • Decision Making
  • Cope with the Change
  • Identify business opportunity
  • Identify the unforeseen threat and uncertainty
  • Merger and Acquisition
  • Assists in the planning and development of strategy
  • Image building
  • Helps in the harnessing of new resources
  • Helps in improving performance

✔ Decision-Making (importance of business environment)

The business environment is the sum of all business factors that affect the functioning of the business while understanding each dimension of the business environment helps the managers to take the right and rational decisions that play a crucial role in enterprise success.

✔ Identify business opportunity

The business environment provides huge opportunities for the success of an enterprise and the early identification of opportunities will help the business to capture them and take first mover advantage and become a market leader.

For example – The rollout of 5G in India give a huge opportunity to business whu=ich are in the IT and telecom sector.

✔ Identify the unforeseen threat and uncertainty

The dynamic nature and huge dependence of business on external factors are always a source of various kinds of threats to the business and these affect the business functioning and sometimes make the survival of an enterprise difficult.

Comprehensive knowledge of business help the manager identify the early warning singles and take preventative action and reduce the impact of the threat.

✔ Cope up the change

The continuous monitoring of the business environment helps the enterprise to be aware of ongoing changes and trends in order to remain updated and formulate effective and efficient strategies according to the change.

✔ Mergers and Acquisition

Mergers and Acquisitions play a significant role in the sustainable survival of the organization. Mergers and acquisitions help the enterprise to grab new opportunities and prevent threats.

Must Read : Dimensions of Business Environment

✔ Assists in the planning and development of strategy

The key role of managers is to formulate plans, policies, and strategies that ensure the sustainable future of the organization.

The opportunities and threats are closely associated with the environment where the enterprise exists and having knowledge about these opportunities and threats helps the manager to formulate a futuristic and realistic plan and policies to address these things.

✔ Image building (Importance of business environment)

A proper understanding of the business environment helps managers to improve or build a distinct and unique image of the business in the public mind.

Business enterprises show sensitivity or care about the environment, gender equality, and labor welfare which create goodwill and reputation among people.

✔ Helps in the harnessing of new resources

Enterprises have a high dependence on input resources like land, labor, capital, and raw material so that they can produce output i.e goods and services. Managers should design their policies in such a way that the business gets the best resources as input and out should satisfy the customer’s need and want.

Must Read : Types of Business Environment

✔ Helps in improving performance

Continuous studies of environmental factors enable the organization to address its weakness and enhance its strength which provides a competitive advantage that ensures the high performance of the organization.

Types of Business Environment

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The business environment is comprised of all those external and internal factors that have an influence on the functioning of the business. These factors sometimes provide opportunity and sometimes oppose threat. Here in this article, we have shared all the Types of Business Environment with examples.

► Types of Business Environment

There are various types of business environments but mainly it is divided into two categories.

  1. Internal Environment
  2. External Environment

Let’s discuss both types of business environment in more detail one by one.

1. Internal Environment

Internal factors are generally considered controllable factors, the firm has control over these factors, and firms can alter or modify these factors according to requirements these factors include organizational human resources, organization mission, objective, management, etc.

The important internal factors which affect the business environment are.

  • Value System
  • Mission and Objectives
  • Management structure and nature
  • Internal power relationship
  • Human Resource
  • Company image and brand equity
  • Physical Assets and facilities

✔ Mission and Objectives

The mission and objective of firms define their priorities, direction of development, and business philosophy.

✔ Management structure and nature

The organizational structure, top-level management, the extent of professionalization, and delegation of power are important factors that influence decision making which is very critical to organizational performance.

✔ Internal power relationship

The relationship between different level of management, shareholders, board of directors, and employees is very crucial if an organization want to achieve its goals effectively and efficiently.

✔ Human Resource

Human resources is considered an asset for an organization and the characteristics of human resources like skill, knowledge, experience, commitment, morale, etc. could contribute to the strengths and weaknesses of an organization.

✔ Company image and brand equity

The image of a company and brand equity play very key roles in business operations like launching a new product, raising finance, forming joint ventures, selling contracts, and building a brand perception, etc.

✔ Physical Assets and facilities

Quality and size of physical assets and facilities are important for production capacity, research and development, supply chain, and logistics all these factors influence the competitiveness of the firm.

Other important factors that determine the success and failure of a business are R&D and technological capabilities, Marketing resources, and Financial position or capital structure.

Also Read : Dimensions of Business Environment

✔ 2. External Environment

The external environment is generally considered a business factor that is the outside the control of the firm. These factors are very complex and big in size which is outside the purview of the firm. External factors include economic factors, socio-cultural factors, demographic factors, geophysical factors, government, and legal factors.

The External Environment of business is further divided into two categories;

  • Micro Environment
  • Macro Environment

Here we have shared both types of External Business Environment in more detail.

Micro Environment

Micro Environment is also known as Task environment or operating environment.

The micro environment factors are the kind of external factors that have a direct impact on the firm or these factors that are specific to a sector in which the firm operates.

In others words, the microenvironment is defined as the external actors that are in immediately linked with the company and that affect the performance of the company.

Microenvironmental factors are not necessarily impacting all the firms in a particular sector, in the same way, is affect one firm.

Microenvironment factors include

  • Supplier
  • Customers
  • Competitors
  • Marketing Intermediaries
  • Media and the general public
✔ Supplier

An important microeconomic factor of business that influences company operation is suppliers. Suppliers provide raw materials and components to the company so a reliable supplier is important for a smooth functioning business.

✔ Customers

The survival of a business depends on its customers. If businesses want to survive and sustain then should monitor customer behavior, do segmentation of customers and develop a healthy relationships with customers. Due to globalization customer retention become very difficult.

✔ Competitors

Competitors are the most crucial determinant that decides the survival of a business. Due to liberalization and globalization customers have a lot of alternatives to choose the best product.

✔ Marketing Intermediaries

Businesses are very much dependent on work as a link between the company and the final consumers.

These intermediaries include agents and merchants that help the company in selling, promoting, and distributing goods to final consumers.

✔ Media and the general public

Media play a key role in developing and building the brand image and shaping public opinion about the business. So it is very important for businesses to maintain a healthy relationship with the media.

Macro Environment

Macro Environment is also known as General Environment or Remote Environment.

Macro environment factors are uncontrollable in nature and affect all businesses in general. These environmental forces shape the opportunities and pose threats to a company.

Important Macro Environment factors include

  • Economic Factors
  • Social and cultural Factors
  • Demographic Factors
  • Political or Government factors
  • Technological Factor
  • Environment Factors
  • Global Factors
✔ Economic Factors

Economic factors are very critical determinants of the business aspect. These factors include general economic conditions, GDP growth, per capita income, inflation rate, income inequality, demand and supply, and Investment and production trends in different sectors.

✔ Social and Cultural Factors

One of the important macro environments of the business environment is the societal and cultural factors.

The social system is an integral part of the business and changing society’s beliefs, attitudes, lifestyle, customs, and values have effects on business which may create new demand or fade away the old demand.

✔ Demographic Factors

Demographic factors include characteristics of the population in terms of age, sex, marital status, occupation, and educational status. Knowledge of these factors helps the business in product development and formulation of marketing strategy.

✔ Political or Government Factors

The government’s attitude toward businesses allows businesses to achieve stability. Government policies toward business influence employment level, regulatory framework, promotion of trade and commerce, entrepreneurial activity, infrastructure development, and labor welfare.

✔ Technological Factors

Technology is one of the important determinants of the success of firms. Technological development facilitates not only the introduction of new product and process but also improve the operational efficiency of the company. Any innovation in the market provides both opportunity and threat.

✔ Environmental Factors

The natural environment factor like geographical, ecological, resource availability, weather, port facilities, and location are of great importance for business.

✔ Global Factors

Globalization and global supply chain integration are the key determinates of business success and failure. Global factors like International Trade free, foreign direct investment flow, membership of WTO, IMF, World Bank, Trade blocks, etc.

Dimensions of Business Environment

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The business environment is made up of many constituents and we call it a dimension of the business environment. These dimensions are very critical for the understanding of the business environment and also this dimension also tells what is are the internal and external factors the influence activities and operation of the firm. having knowledge about these dimension of business facilitate decision-making, hence business are able to achieve their objective and goals.

► Dimensions of Business Environment

There are various dimensions of the business environment but mainly it is divided into five categories that are as follows.

  1. Economic Environment
  2. Technical Environment
  3. Social Environment
  4. Political Environment
  5. Legal Environment

✔ 1. Economic Environment

The business environment is closely related to economic characteristics and economic policy dimensions such as the structure and nature of the economy, the stage of development of the economy, Economic policies and global linkage, etc.

Important economic environmental factors are.

Structure and Nature of the economy

  1. level of development (developed, developing, and least developed)
  2. Low-income, middle-income, and high-income economies
  3. Contribution of different sectors (primary, secondary, tertiary)

Economic condition

  1. Per capita income
  2. GDP trends
  3. Demand and supply
  4. Inflation
  5. Trade and BOP trends
  6. Forex reserve position

Economic policies

  • Industrial Policy
  • Monetary Policy
  • Trade policy or EXIM policy
  • FDI policy

Global linkage

  1. International Trade
  2. Investment Flow
  3. Membership of WTO, IMF, World Bank, Trade blocs, etc.

Also Read : Theories of International Trade 

2. Technical Environment in business

Technology is one of the important determinants of the success of firms as well as the economic and social development of a nation.

Technological development facilitates not only the introduction of new process and product but also improve the operational efficiency of the company.

Access to new technology is both an opportunity and a threat for a firm. Technology provides a competitive advantage and the success of any business is depend on innovation or technological development i.e lot of firm R&D and innovation.

3. Social Environment in business

One of the important dimensions of the business environment is the societal environment. The social system is an integral part of the business and changing society’s beliefs, attitudes, and values have far-reaching effects on business and its activities are subject to social judgment.

A business enterprise shall make a profit only by accomplishing socially accepted goals by satisfying society’s needs.

The major elements of the social environment that affect the business environment are.

  • Knowledge and belief
  • Societal norms and ideals
  • Tradition and culture
  • Religion
  • language
  • Social trends
  • Consumer preference, Habits, and taste

4. Political Environment

The government plays a very vital role in deciding the faith of businesses. The decision taken by the government has a critical impact on business activities and functioning on only on the domestic level but also on a global level.

The government’s attitude toward businesses allows businesses to achieve macroeconomic and microeconomic stability, employment level, regulatory framework, promotion of trade and commerce, entrepreneurial activity, infrastructure development, and labor welfare.

5. Legal Environment in business

The legal environment is an important determinant of business location and functioning.  The legal environment not only includes the law passed by the legislature but also includes government executive orders and judgments given by courts.

The legal environment provides the knowledge about law of the land and business should comply with these laws.

This knowledge law covers the many subjects that directly and indirectly affect business functioning.

Prerequisite knowledge of these legal aspects of business ensures the smooth functioning of the business.

The legal environment includes various laws like

  • Companies Act 2013
  • Indian Contract Act 1872
  • Industrial Protection Act
  • Consumer Protection Act 2019
  • Environmental Protection Act 1972
  • Labour code 2020

What is Feasibility Study?

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Business projects or ventures are very big in terms of size, investment involve, and resources required but there is always uncertainty about the success or failure of a business so to determine the credibility or likelihood of success of the business we do a feasibility study of projects.

So, in this article today we get an overview of what is a feasibility study and the types of feasibility studies, what is a feasibility report, the Components of the feasibility report, and its advantages.

► What is a Feasibility Study?

A feasibility study is the study of a proposed project or plan and it evaluates the practicality or viability of the project in order to determine whether the project will be a success or a failure.

A feasibility study examines all aspects of a proposed plan or project and ensures that the project should be legally and technically feasible as well as project is economically and environmentally sound.

Conducting a feasibility study is always important for a business and its potential stakeholders because shows a clear picture of the proposed project.

◉ Feasibility Study Meaning

  • Feasibility study means an assessment of the practicality of a proposed plan, procedure, or method.
  • A feasibility Study refers to a detailed analysis that considers all of the critical aspects of a proposed project in order to determine the likelihood of its success.

► What is the Feasibility Report?

A feasibility report is defined as comprehensive documentation of a feasibility study that tells us about the viability of the proposed project. The feasibility report is the outcome of the feasibility report.

In another word, a feasibility report is defined as a summarized, structured, and well-documented report which is the result of the feasibility report.

► Types of Feasibility Study

  1. Technical Feasibility
  2. Economic Feasibility
  3. Legal Feasibility
  4. Financial Feasibility
  5. Operational Feasibility
  6. Scheduling Feasibility

✔ 1. Technical Feasibility

Analysis of technological resources and competency required to complete the project.

Analysis of technicalities hardware and software and managerial and manpower capabilities to handle them is needed to how institutional capabilities meet the need of the proposed system.

✔ 2. Economic Feasibility

An economic feasibility report helps in analyzing the cost-benefit analysis of the project.

The economic feasibility study provides an assessment related to whether the project is possible under the given resource constraints and what are the tangible and non-tangible benefits of the project.

It also analyzes the development and operational cost of a project.

✔ 3. Legal Feasibility

A legal feasibility study helps in determining whether the proposed project is conflicting with the law and is enacted by the government. All the legal issues are examined that directly or indirectly affect the project.

Detailed legal due diligence should be done to protect the project from all foreseeable legal requirements.

While analyzing the legal feasibility of the project business examine the environmental law, taxation law, pollution law, Land acquisition law, and labor welfare law.

✔ 4. Financial Feasibility

Financial feasibility analyzes whether a project is financially viable.

It is mainly focused on the ROI (Return On Investment), Cash inflow or outflow, and expenses and revenue incurred from the proposed project.

It identifies the both cost of the project financial benefits of the project.

✔ 5. Operational Feasibility

Operational feasibility focuses on the degree to which the proposed project matches the business’s existing environment and objectives with regard to the development schedule, delivery date, and business process.

Operational feasibility study measure how well the proposed solution to problems or a specific solution will work in the organization.

✔ 6. Scheduling Feasibility

Scheduling feasibility examines how long time will take to complete the project. It is a measure of how reasonable the project timetable is.

If a project takes a long time to complete the project then there is a higher chance that the project will fail.

Also Read : Rational Decision Making

► Content of Feasibility Report

A feasibility report comprises of  following sections

  • Executive summary
  • Description of product or service or project
  • Project evaluation and consideration
  • Technical Evaluation
  • Legal Evaluation
  • Economical Evaluation
  • Social and environmental Evaluation
  • Financial Evaluation
  • Scheduling
  • Evaluation of alternatives
  • Conclusion
  • Finding and Recommendation

► Steps of conducting the Feasibility Study

  1. Conduct a preliminary analysis
  2. Prepare the project scope outline
  3. Conduct your market research
  4. Calculate your financial cost
  5. Review and analyze all data
  6. Make a go or no-go decision

► Importance of Feasibility Study

  • To determine the outcome of the proposed business idea or project
  • Help in identifying a valid reason as to whether the project is needed or not
  •  It helps in enhancing the success rate of the project.
  • It helps in determining the amount of investment required and future cash flow
  • Identify the different alternatives.
  • The feasibility study helps in persuade the investor.
  • It helps in avoiding future risks.
  • Help in assessing Resources, demand, and Market growth.

Approaches of International Business

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If a firm wants to expand its business and want to explore new opportunities in foreign markets, here the approaches of international business help them in grabbing new, opportunities, managing and organizing the business affairs, managing the workforce requirements of a business, strategic planning, and telling them how to run a sustainable and profit-oriented business. Today in this article we give you an overview about what are the approaches of international business, what is international business, and their examples.

► What is International Business?

International Business is defined as any business that operates across international boundaries and trade of goods, services, raw material, knowledge, and capital take place between two or more nations.

International business provides an opportunity to facilitate the trade of goods and services outside of the home country. It is very helpful there for those countries where domestic trade is not sufficient to fulfill domestic consumer’s demands

Also Read : Scope of International Business

► Approaches of International Business

  1. Ethnocentric Approach
  2. Polycentric Approach
  3. Regiocentric Approach
  4. Geocentric Approach

✔ 1. Ethnocentric Approach

This approaches to international business focus on the values, ethics, and belief of the home country. All the strategies first formulated for the domestic nation or domestic business focus on the international business is secondary.

Businesses first cater to the demand of the domestic market and trade surplus is distributed to a foreign nation. Overseas operations are operated from the head office of the domestic country by domestic employees.

This approach is very beneficial for small businesses during the early days of internationalization as the investment needed in business is low.

There is no major modification in products that will export to a foreign nation and no marketing research conducting. Businesses mainly rely on exporting goods to foreign nations.

Examples of Ethnocentric Approach – Indian clothes, dresses, food, and beverage are exported to foreign nations where a large number of Indian live.

✔ 2. Polycentric Approach

As per this approach, the business focuses on each host country because they consider that each country is unique in terms of customer demand, customer preference, and taste so if businesses want to succeed in each country they should adapt according to the host country’s requirements.

The business opens its subsidiary in each oversea market and businesses adopt different marketing plans and strategies as per the host country’s needs.

The foreign subsidiary has decision-making power and their operation are decentralized.

Businesses appoint personnel the key positions from their home country, whereas the remaining positions or vacancies are filled by the personnel of the host country.

Examples of Polycentric Approach – McDonald, Starbucks, Google Doodle

Also Read : Theories of International Trade

✔ 3. Regiocentric Approach

Under this approach, businesses divide the whole world into different regions based on their common regional, social & cultural environment, economic, and political factors.

Marketing strategies and business plans are formulated in regional headquarters for the entire group of counties or region

Managers are hired or transferred from different countries lying within the same region.

Example of Regiocentric Approach – Firms divide groups or regions on the basis of unique similarities like SAARC countries, the Baltic region, and the Scandinavian region.

✔ 4. Geocentric Approach

According to the Geocentric approach, businesses consider the whole world is the same as one country for their business operation.

Businesses select the best talent from the entire globe and operate with their large number of a subsidiary that is located around the globe that coordinate with the head office.

This approach is used by big business giants which have large-scale business operations and a significant presence around the globe.

The business following this approach has a uniform and standardized marketing strategy, HR practices, and product design throughout the globe.

This international business approach help in building brand image and earning a great amount of loyalty.

Examples of Geocentric Approach – Apple, Coca-cola, Dell

Theories of International Trade

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Theories of International Trade are different theories that explain what is international trade and its purpose. Trade theories depict how a country can leverage or facilitate its international trade. So in this article, we provide insight into what is International Theory, Its definition, Types of International Trade Theories, what is classical and modern international trade theories.

► What is International Trade?

International trade is concerned with the exchange of goods and services with foreign countries.

International trading provides an opportunity to facilitate the trade of goods and services outside of the home country. It is very helpful there for those countries where domestic trade is not sufficient to fulfill domestic consumer’s demands.

Meaning of Intl. Trade

  • International trade means the exchange of goods and services between countries.
  • International trade includes activities such as the purchase, sale, or exchange of goods and services across national borders.

Definition of Intl. Trade

“International trade is defined as the exchange of goods and services across international borders or territories.”

  • An import is the purchase of a good or service made from another country.
  • An export is the sale of a good or service to another country.

► What are the Theories of International Trade?

Theories of International Trade are the theories that explain international trade practices. It gives direction to companies about their vision and objective behind doing international trade.

International trade theory refers to theories based on an exchange of raw materials and manufactured goods and providing services across national borders.

Also Read : Scope of International Business

► Types of International Trade Theories

International Theories are classified into two categories

  • (a) Classical or Country Based Trade Theories
  • (b) Modern or firm Based Trade Theories

(a) Classical or Country-based Trade Theories

  1. Mercantilism Theory
  2. Absolute Advantage Theory
  3. Comparative advantage theory
  4. Heckersher Ohline Theory or Factor proportion theory

✔ 1. Mercantilism Theory

It was developed in the 16 century, mercantilism was one of the earliest efforts to
develop an economic theory. According to this theory, a country’s wealth was solely determined by the amount of its gold and silver reserves held by the country.

Mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports this means this theory supports protectionism. The objective of each country was to have a trade surplus, which means a situation where the value of exports is greater than the value of imports.

✔ 2. Absolute Advantage Theory

This theory was propounded by the great economist Adam Smith In 1776. The focus of this theory is on the ability of a country to produce a good more efficiently than another nation.

Adam Smith assumed that trade between countries shouldn’t be influenced or restricted by government policy or intervention and that trade should flow naturally according to market forces.

He assumed that in a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing in producing that good and enhancing efficiency and vice versa.

So with increased efficiencies, people in both countries would benefit and trade should be encouraged.

His theory opposed the mercantilism concept which stated that a nation’s wealth should be judged by how much gold and silver it has.

✔ 3. Comparative advantage theory

This theory was given by David Ricardo, in 1817. This theory answers the problem that arises from the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas.

Ricardo said that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between the two countries.

Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. The essence of this theory exists in fact of comparing the opportunity cost of both products.

The key difference between these two theories is that comparative advantage theory focuses on relative productivity differences, whereas absolute advantage theory looks at Absolute productivity.

✔ 4. Heckersher Ohline Theory or Factor proportion theory

This theory was given by Eli Heckscher and Bertil Ohlin, in the early 1900s. This theory focused their attention on how a country could gain a comparative advantage by
producing products that utilized domestic factors that were in abundance in the country.

This theory is based on the fact of how much quality and quantity factors of production are available in the country such as land, labor, and capital. These factors determined the cost 0f goods and services produced from these factors

Their theory, also called the factor proportions theory, because he stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors, and countries would import those goods that required resources that were in short supply, but in higher demand from other nation.

Wassily W Leontief Paradox

The factor proportion theory was opposed by the economist Wassily W Leontief.

According to the factor proportions theory given by Eli Heckscher and Bertil Ohlin, the United States should have been importing labor-intensive goods and exporting capital-intensive goods but while examining the US economy Leontief find that the USA actually exporting labor-intensive goods this analysis became known as the Leontief Paradox because it was the reverse of what was expected by the factor proportions theory.

Also Read : Types of International Trade

(b) Modern or firm Based Trade Theories

  1. Country Similarity Theory
  2. Product Life Cycle Theory
  3. Global Strategic Rivalry Theory
  4. Porter’s National Competitive Advantage Theory

✔ 1. Country Similarity Theory

This theory was given by Steffan Linder in 1961. Linder’s theory proposed that consumers in countries that are in the same or similar stage of development would have similar kinds of needs, tastes, and preferences.

According to Linder companies first, produce for domestic consumption and after fulfilling the domestic demand companies when exploring exporting opportunities, the companies focus on finding markets that are similar to their domestic ones, in terms of customer preferences, disposing of income offer the most potential for success in the international business.

Linder’s country similarity theory mention that most trade in manufactured goods will be between countries with similar per capita income and similar customer preference.

✔ 2. Product Life Cycle Theory

Product Life Cycle Theory was given by Raymond Vernon, in the 1960s.

The theory, originating in the field of marketing which is concerned with the product life cycle has three different stages:

  • New Product Introduction
  • Maturing product
  • Standardized product.

In the first stage, the developed country will innovate a new product and the product have no competitor, which have a small market so they manufactured the product locally, the cost of producing each unit is very high as demand increase for other developed its start exporting of product

In the Second stage, the Maturity stage, New manufacturing plants are open in each developed nation to meet their demand, and decrease the manufacturing cost, the room is still available for modification, and demand for products is still high.

In the third stage, Product standardization, In this manufacturing plant is established in a developing country because of cheap labor, Firms do not focus on further modification, and the product has many competitors.

✔ 3. Global Strategic Rivalry Theory

Global strategic rivalry theory is given by economists Paul Krugman and Kelvin Lancaster in the 1980s. This theory focused on how MNCs and what kind of efforts they make to gain a competitive advantage against other global firms in their industry which threaten their business.

Firms focus on developing competitive advantage that helps them to encounter global competition in their industries and in order to remain to prosper.

The critical ways through which firms can obtain a sustainable competitive advantage include:

  • Research and development,
  • The ownership of intellectual property rights or Patents
  •  Focus on achieving economies of scale
  • Control over or favorable access to all important inputs and raw materials.

✔ 4. Porter’s National Competitive Advantage Theory

This theory was given by Michael Porter, in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the capacity of the industry how much and how fast it innovates and upgrades.

This theory explained why some nations are more competitive in certain industries. To explain his theory, Porter identified four factors.

The four key factors that determine national competitive advantage are

  • Local market resources and capabilities,
  • Local market demand conditions,
  • Local suppliers and complementary industries
  • Local firm characteristics.

What is Consumer Goods?

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There are various types of goods and services are available in the market that consumes by consumers to satisfy their needs and wants. So every marketer wants to know consumer key buying traits and how they dispose of the products. Today in this article we have shared insight into what are consumer goods, their meaning, their definition, what is FMCG, and what type of consumer goods with examples.

► What are Consumer Goods?

Consumer goods in simple word are defined as the products that are purchased by buyers to satisfy their current needs and want, for these goods, buyers become the end user or final user of the product. These goods are neither for resale nor use as intermediate goods but used as personnel goods.

◉ Consumer Goods Meaning

  • Consumer goods simply mean products bought for consumption by the average consumer.
  • In other words, consumer goods mean items that we buy for our own use and are brought on a regular basis by consumers.

Definition of Consumer

A consumer of goods can be defined as “A person who buys products or goods for his own use or consumption.”

Consumer of Goods refers to any person who buys goods for consideration, in which the consideration has been paid or promised or partly paid and partly promised or under any system of deferred payment.

What is FMCG? (Fast Moving Consumer Goods)

Fast Moving Consumer Goods are defined as goods that are nondurable in nature and have relatively low costs. FMCG products have very less margin but have high volume sales.

These are convenience goods that are present in every household and consumed by people on regular basis and they may be eatable and uneatable products. some daily-use medicines have also come under FMCG products.

Examples of FMGC

Fast-moving consumer goods, FMCG goods are Biscuits, Chips, Sauces, toothpaste, vegetables, fruits, Stationery items, cleaning laundry items, etc.

► Types of Consumers Goods

There are various types of consumer goods and it is Classified on the basis of two criteria.

  • (A) On the basis of the Time period of Consumption.
  • (B) On the basis of Consumer Behavior.

◉ (A) On the basis of the Time period of Consumption

Types of Consumer goods on the basis of the time period of consumption are mainly divided into two types. i.e Durable and Non-Durable.

✔ Durable Goods – They can be used for a long time period. Examples – Refridgerator, Televisions, Cars, Bikes, Cycles, AC, RO, Washing Machine, etc.

✔ Non-Durable Goods – They must be used in a short time and comes with an expiry date. FMCG goods, Toothpaste, Bread, Shampoo, Fruits, Vegetables, Biscuits, and Beauty Products.

Must Read :What is Consumer Protection Act 2019, 1986?

◉ (B) On the basis of Consumer Behavior

  • Convenience goods
  • Shopping goods
  • Specialist goods
  • Unsought goods

Before we further discuss all these types of goods on the basis of consumer behavior. Lets us briefly discuss consumer behavior.

What is Consumer Behaviour?

Consumer Behavior is the study of how individual customers or groups of customers select, buy, use, and dispose of goods, and services to satisfy their needs and wants.

We can classify consumer goods into four categories on the basis of consumer behavior.

1. Convenience Goods

Convenience goods refer to those goods that require little effort to purchase. These goods are easily accessible and frequently purchased by consumers. Convenience goods required minimum or very less effort thought on the part of the buyer.

Examples of convenience goods Include – All FMCG goods like Soap, Candy, Toothpaste, sugar, newspaper, etc

Characteristics of Convenience Goods

  • less effort to purchase
  • Frequently Buying
  • Normally not compared with other similar products
  • Relatively inexpensive product
  • Have constant demand
  • Non-durability
  • Easily available in market
  • Mass promotion and brand recognition strategy

2. Shopping Goods (Consumer Goods)

Shopping goods are those goods that are purchased by consumers less frequently. Consumers compare attributes of shopping goods like price, quality, sustainability, and physical evidence with other similar goods.

Consumers put in a lot of effort, time, and planning before taking a final decision on whether to purchase this product or not.

Examples of shopping goods include – Televisions, fans, air conditioners, fridges, Furniture, etc.

Characteristics of Shopping Goods

  • High effort to purchase
  • Less frequently buying
  • Normally compared with other similar products
  • Fairly expensive
  • Not easily available in the market as compared to convenience goods
  • A targeted promotion strategy is used

3. Specialist Goods (Consumer Goods)

Specialist goods are unique in nature and possess special attributes and brand identities. Specialist product is status-oriented which willingly motivate buyers to pay the expensive price and put extra effort to purchase these kinds of goods.

These goods are very infrequently purchased by the customer and required extensive search and decision making

Examples of Specialist Goods include- Luxury cars or watches, Famous paintings, Designer cloth, Luxury perfume, etc.

Characteristics of Specialist Goods

  • High effort to purchase
  • Focus on uniqueness and innovation
  • Not easily available or have exclusive distribution
  • Always compared with other similar products
  • Very high price
  • Very limited in number
  • A targeted or selected promotion strategy is used

4. Unsought Goods (Consumer Goods)

Unsought goods are those goods that are not easily purchased by consumers under normal circumstances. Consumers have negative demand for unsought goods.

These products are often purchased by consumers because of a sense of danger or fear. Marketers used direct selling and FABV(Feature Advantage Benefit Value) approach.

Example of unsought goods includes – Insurance, Pre-planned funeral services, Fire extinguisher, etc.

Characteristics of Unsought Goods

  • Sellers used forced methods to sell goods
  • Negative demand for these goods
  • Require aggressive marketing
  • Required personal selling
  • Easily available in marketing

What is International Trade?

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International trade is the trading of capital, merchandise, and administrations across worldwide boundaries or domains since there is a need or need for labor and products.

Whenever exchange happens between at least two states factors like money, government strategies, economy, legal framework, regulations, and markets impact exchange.

International trade, financial exchanges that are made between nations. Among the things regularly exchanged are shopper merchandise, for example, TVs and apparel; capital products, like apparatus; and unrefined components and food.

► What is International Trade?

International trade is the branch of economics concerned with the exchange of goods and services with foreign countries.

International trading provides an opportunity to serve goods and services outside of the home country.

It fulfills the demand of consumers of those countries where domestic trade is not sufficient in the market.

◉ International Trade Meaning

International trade means trade between two or more countries. International trade involves different currencies of different countries and is regulated by the laws, rules, and regulations of the concerned countries.

  • International trade means the exchange of goods and services between countries.
  • International trade includes activities such as the purchase, sale, or exchange of goods and services across national borders.
  • In simple words, foreign trade means the export and import of goods and services.

Definition of International Trade

“International trade is defined as the exchange of goods and services across international borders or territories.”

  • An import is the purchase of a good or service made from another country.
  • An export is the sale of a good or service to another country.

A nation does international trading because it lacks the raw materials, climate, specialist labor, capital, or technology needed to manufacture a particular good. Trade allows a greater variety of goods and services.

“International trade consists of transaction residents of different countries”. – Wasserman and Haltman

“International trade is a trade between nations.” – Anatol Marad

“International trade means trade between nations.” – Edgeworth

► Types of International Trade

For reasonable purposes, the global exchange is partitioned into three significant sorts. These are:

  • Import Trade
  • Export Trade
  • Entrepot Trade

◉ 1. Import Trade

To lay it out plainly, import exchange implies buying labor and products from an unfamiliar country since they can’t be delivered in adequate amounts or at a cutthroat expense in your own country.

For example, India imports 82% of its raw petroleum prerequisites from nations like the UAE and Venezuela. This is on the grounds that these nations have monstrous oil fields and are very equipped in investigating, handle, and moving oil at a prudent rate.

Also, the UAE imports farming and attire-based items from India since it is more straightforward and less expensive to import these, instead of delivering them to their own country.

◉ 2. Export Trade

Very like its import partner, the send-out exchange is a sort of global exchange which depends on offering privately produced labor and products to far-off nations. In principle, it is viewed as the polar opposite of import exchange.

For example, India trades inorganic synthetics, oilseeds, crude minerals, iron and steel, plastics, and dairy items to a nation like China. Consequently, China trades electrical hardware, natural synthetic compounds, silk, mineral powders, and composts to India.

These merchandise are traded between the two nations with the goal that they can benefit as much as possible from their particular creation limits.

◉ 3. Entrepot Trade

Entrepot exchange, in straightforward terms, is a particular type of worldwide exchange that includes both – import and commodity exchange. Under this sort, labor and products are imported from one nation so they can additionally be traded to another country.

This is to say that the imported products are not utilized for utilization or deal in the bringing in the country. All things being equal, bringing in a country simply enhances the products prior to trading them once more.

For example, assuming India imports elastic from Thailand, processes it, and once again sends out it to one more nation like Japan, it would be alluded to as Entrepot exchange.

Most nations bargain in Entrepot exchange due to the accompanying reasons:

  • Absence of access or direct association between any two nations.
  • Better handling or calculated offices accessible to a third country.
  • Nonappearance of an economic accord between two nations.

► Advantages of International Trade

  • Comparative advantage
  • Economies of scale
  • Transfer of Technology
  • Increase in Employment

Global exchange proffers an assortment of competitive edges for every one of the nations in question. These include:

  • Nations can only zero in on creating labor and products which are explicit to their geology, abilities, and limit. This breeds a culture of separation and specialization.
  • Global exchange empowers a country to get great labor and products at particularly reasonable costs with the goal that the particular necessities and prerequisites of its kin can be met.
  • Worldwide exchange sets off a surge of rivalry inside the neighborhood market. Nearby makers and providers start to expand their own abilities with the solitary point of overtaking the unfamiliar contest.
  • For working with a worldwide exchange, various nations have started to go into one-of-a-kind economic deals. These arrangements stress the exchange of innovation from the more evolved to the less evolved countries, in this way empowering the last option to further develop their creative capacities.
  • The universe of international exchange and money likewise opens a lot of entryways as far as making occupations and giving business. Nations exchanging with each other will quite often produce more expert open doors when contrasted with their non-exchanging partners.

In any case, global exchange, on the off chance that not utilized with governing rules, can possibly deliver a couple of drawbacks, as well. These are:

  • Over-reliance on one more country for products/administrations.
  • High vehicle, correspondence, distance, and coordinated operations costs.
  • Hazard and vulnerabilities in worldwide exchange because of unanticipated occasions.
  • Government-started import, product, and customs limitations.
  • Documentation, cash, data, and installment-based troubles.
  • Absence of legitimate comprehension of unfamiliar business sectors.

► Theories of International Trade

  • Absolute Advantage Theory
  • Comparative Advantage Theory
  • Heckscher-Ohlin Theory
  • Mercantilism Theory
  • Product Life Cycle Theory
  • National Competitive Advantage Theory

Also Read : Scope of International Business

► Benefits of International Trade

  • Greater Variety of Goods Available for Consumption
  • Efficient Allocation and Better Utilization of Resources
  • Promotes Efficiency in Production
  • More Employment
  • Consumption at Cheaper Cost
  • Reduces Trade Fluctuations
  • Utilization of Surplus Produce
  • Fosters Peace and Goodwill

✔ 1) Greater Variety of Goods Available for Consumption:

Worldwide exchange brings various assortments of a specific item from various objections. This provides buyers with a more extensive cluster of decisions that won’t just work on their personal satisfaction yet in general it will assist the country with development.

✔ 2) Efficient Allocation and Better Utilization of Resources:

Effective assignment and better usage of assets since nations will quite often create products in which they enjoy a relative benefit. At the point when nations produce through near advantage, inefficient duplication of assets is forestalled. It helps save the climate from destructive gases being spilled into the environment and furthermore gives nations superior advertising power.

✔ 3) Promotes Efficiency in Production:

Worldwide exchange advances effectiveness creation as nations will attempt to take on better strategies for creation to minimize expenses to stay cutthroat. Nations that can deliver an item at me most reduced conceivable expense will actually want to acquire a bigger offer on the lookout. Accordingly, a motivating force to deliver productively emerges. This will assist with expanding the guidelines of the item and buyers will have a decent quality item to consume.

✔ 4) More Employment:

Greater business could be created as the market for the nations’ products broadens through the exchange. Global exchange creates greater work through the foundation of more current enterprises to take care of the requests of different nations. This will assist nations with cutting down their joblessness rates.

✔ 5) Consumption at Cheaper Cost:

Worldwide exchange empowers a country to consume things that either can’t be delivered inside its lines or creation might cost exceptionally high. Along these lines, it becomes cost less expensive to import from different nations through the unfamiliar exchange.

✔ 6) Reduces Trade Fluctuations:

By making the size of the market huge with huge supplies and broad interest global exchange decreases exchange vacillations. The costs of merchandise will quite often stay more steady.

✔ 7) Utilization of Surplus Produce:

Worldwide exchange empowers various nations to offer their excess items to different nations and procure unfamiliar trade.

✔ 8) Fosters Peace and Goodwill:

Worldwide exchange cultivates harmony, generosity, and common comprehension among countries. The monetary reliance of nations frequently prompts close social relationships and in this manner stays away from the battle between them.

► Disadvantages of International Trade

At the point when a nation puts excessive dependence on an unfamiliar exchange, there is a probability of the accompanying inconveniences:

  • Depletion of Resources
  • Catastrophe for Infant Industry
  • Unloading
  • Expansion of Savings
  • Declining Domestic Employment
  • Over Interdependence

✔ 1. Depletion of Resources:

Whenever a nation has bigger and constant commodities, its fundamental unrefined components and minerals might get depleted, except if new assets are tapped or created (e.g., the close debilitating oil assets of the oil-delivering nations).

✔ 2. Catastrophe for Infant Industry:

The unfamiliar rivalry may antagonistically influence new and creating baby enterprises at home.

✔ 3. Unloading:

Unloading strategies depending on cutting-edge nations might hurt the advancement of helpless nations.

✔ 4. Expansion of Savings:

A high penchant to import might cause a decrease in the homegrown reserve funds of a country. This may unfavorably influence her pace of capital arrangement and the course of development.

✔ 5. Declining Domestic Employment:

Under unfamiliar exchange, when a nation will in general spend significant time on a couple of items, open positions accessible to individuals are abridged.

✔ 6. Over Interdependence:

Unfamiliar exchange puts independence and confidence in an economy down. Whenever nations will more often than not be reliant, their financial freedom is endangered.

For example, consequently, there is no deregulation on the planet. Every nation places a few limitations on its unfamiliar exchange under its business and political strategies.

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Also Read : Tertiary Sector of Economy