The sociocultural dimensions of the environment consist of customs, lifestyles, and values that characterize the society in which the firm operates. Socio-cultural components of the environment influence the ability of the firm to obtain resources, make its goods and services, and function within the society. Sociocultural factors include anything within the context of society that has the potential to affect an organization. Population demographics, rising educational levels, norms and values, and attitudes toward social responsibility are examples of sociocultural variables.
Changes in population demographics have many potential consequences for organizations. As the total population changes, the demand for products and services also changes. For instance, the decline in the birthrate and improvement in health care have contributed to an increase in the average age of the population in the United States. Many firms that traditionally marketed their products toward youth are developing product lines that appeal to an older market. Clothing from Levi Strauss & Co. was traditionally popular among young adults. While its popularity in this market has waned, the firm has been able to develop a strong following in the adult market with its Dockers label. Other firms are developing strategies that will allow them to capitalize on the aging population. Firms in the health-care industry and firms providing funeral services are expected to do well given the increasing age of the U. S. population. They are projected as a growth segment of U. S. industry simply because of the population demographics.
Rising educational levels also have an impact on organizations. Higher educational levels allow people to earn higher incomes than would have been possible otherwise. The increase in income has created opportunities to purchase additional goods and services, and to raise the overall standard of living of a large segment of the population. The educational level has also led to increased expectations of workers, and has increased job mobility. Workers are less accepting of undesirable working conditions than were workers a generation ago. Better working conditions, stable employment, and opportunities for training and development are a few of the demands businesses confront more frequently as the result of a more educated workforce.
Norms (standard accepted forms of behavior) and values (attitudes toward right and wrong), differ across time and between geographical areas. Lifestyles differ as well among different ethnic groups. As an example, the application in the United States of Japanese-influenced approaches to management has caused firms to reevaluate the concept of quality. Customers have also come to expect increasing quality in products. Many firms have found it necessary to reexamine production and marketing strategies to respond to changes in consumer expectations.
Social responsibility is the expectation that a business or individual will strive to improve the welfare of society. From a business perspective, this translates into the public expecting businesses to take active steps to make society better by virtue of the business being in existence. Like norms and values, what is considered socially responsible behavior changes over time. In the 1970s affirmative action was a high priority. During the early part of the twenty-first century, prominent social issues were environmental quality (most prominently, recycling and waste reduction) and human rights, in addition to general social welfare. More than just philanthropy, social responsibility looks for active participation on the part of corporations to serve their communities. The stakeholder approach to social responsibility demonstrates some of the complexities of incorporating socially responsible issues into a firm’s strategies. Stakeholders are anyone with a stake in the organization’s existence. Highly visible stakeholders are stockholders, employees, customers, and the local community. Decisions to be responsible and maximize the return to stockholders may require closing an unprofitable plant. However, employees and members of the local community could view this move as socially irresponsible since the move would not benefit the community.
Technology is another aspect of the environment a firm should consider in developing strategic plans. Changing technology may affect the demand for a firm’s products and services, its production processes, and raw materials. Technological changes may create new opportunities for the firm, or threaten the survival of a product, firm, or industry. Technological innovation continues to move at an increasingly rapid rate.
Technology can change the lifestyle and buying patterns of consumers. Recent developments in the field of microcomputers have dramatically expanded the potential customer base and created innumerable opportunities for businesses to engage in business via the Internet. Whereas computers were traditionally used only by large organizations to handle data processing needs, personal computers are commonly used by smaller firms and individuals for uses not even imagined fifteen years ago. Similarly, new developments in technology led to a reduction in prices for computers and expanded the potential market. Lower prices allow computers to be marketed to the general public rather than to business, scientific, and professional users—the initial market. Technology may also cause certain products to be removed from the market. Asbestos-related illnesses have severely limited asbestos as a resource used in heat-sensitive products such as hair dryers. Further, a number of chemicals that have been commonly used by farmers to control insects or plants are prohibited from use or require licensure as a consequence of those chemicals appearing in the food chain.
Technology also changes production processes. The introduction of products based on new technology often requires new production techniques. New production technology may alter production processes. Robotics represents one of the most visible challenges to existing production methods. Robots may be used in positions considered hazardous for people or that require repetitive, detailed activities. The consequences for other jobs currently occupied by people are not clear. When production was first automated, although some workers were displaced, new jobs were created to produce and maintain the automated equipment. The impact of robotics on jobs is in large part a function of the uses made of the technology and the willingness of workers to learn to use new technology. In some industries, use of robots during the early 2000s increased production and efficiency but resulted in significant numbers of job losses. However, technological innovation can also result in increased job growth. For example, Ford Motor Company’s $375-million technology update to its Norfolk assembly plant to build its 2004 F-150 resulted in the ability to build more models on its assembly line and consequently created about 270 new jobs, an 11 percent increase.
There is little doubt that technology represents both potential threats and potential opportunities for established products. Products with relatively complex or new technology are often introduced while the technology is being refined, making it hard for firms to assess their market potential. When ballpoint pens were first introduced, they leaked, skipped, and left large blotches of ink on the writing surface. Fountain pen manufacturers believed that the new technology was not a threat to existing products and did not attempt to produce ball-point pens until substantial market share had been lost. Another technology, the electric razor, has yet to totally replace the blade for shaving purposes. Perhaps the difference is that the manufacturers of blades have innovated by adding new features to retain customers. Manufacturers of fountain pens did not attempt to innovate until the ballpoint pen was well established. It is quite difficult to predict the impact of new technology on an existing product. Still, the need to monitor the environment for new technological developments is obvious. Attention must also be given to developments in industries that are not direct competitors, since new technology developed in one industry may impact companies and organizations in others.
The political-legal dimension of the general environment also affects business activity. The philosophy of the political parties in power influences business practices. The legal environment serves to define what organizations can and cannot do at a particular point in time.
A pro-business attitude on the part of government enables firms to enter into arrangements that would not be allowed under a more anti-business philosophy. The numerous joint ventures between U. S. nd Japanese automobile manufacturers could have been termed anticompetitive by a less pro-business administration. The release of many acres of government land for business use (logging, mining) angered many environmentalists who had been able to restrict business use of the land under previous administrations. Changes in sentiments toward smoking and its related health risks have altered the public’s attitude toward the tobacco industry. These changes have been reflected in many organizations by limiting smoking to designated areas or completely prohibiting it at work. The transformation in attitude has also caused firms within the tobacco industry to modify marketing strategies, encouraging many to seek expansion opportunities abroad.
The legal environment facing organizations is becoming more complex and affecting businesses more directly. It has become increasingly difficult for businesses to take action without encountering a law, regulation, or legal problem. A very brief listing of significant laws that affect business would include legislation in the areas of consumerism, employee relations, the environment, and competitive practices. Many of the laws also have an associated regulatory agency. Powerful U. S. regulatory agencies include the Environmental Protection Agency (EPA), the Occupational Safety and Health Administration (OSHA), the Equal Employment Opportunity Commission (EEOC), and the Securities and Exchange Commission (SEC). Estimates of the cost of compliance vary widely, but could well exceed $100 billion annually. Many of these costs are passed to consumers. However, costs of legal expenses and settlements may not be incurred for years and are not likely to be paid by consumers of the product or owners of the company when the violation occurred. Still, potential legal action often results in higher prices for consumers and a more conservative attitude by business executives.
We generally speak about “the government” as referring to the federal government. It is the federal government that passes and enforces legislation concerning the entire country. Actions by the federal government affect a large number of firms and are consistent across state boundaries. Environmental analysis, however, should not overlook actions by both state and local governments. Regulations concerning many business practices differ between states. Tax rates vary widely. Laws regarding unionization (e. g. , right-to-work states) and treatment of homosexual workers differ between states. Local governments have the potential to affect business practices significantly. Some local governments may be willing to provide incentives to attract business to the area. Some may build industrial parks, service roads, and provide low-interest bonds to encourage a desirable business to move into the community. Regulatory measures such as building codes and zoning requirements differ significantly between communities. Infrastructure such as electric and sewer services, educational facilities, and sewage treatment capabilities may not be able to accommodate the increased demand associated with certain industries, making that locale unsuitable for establishing some businesses.
Economic factors refer to the character and direction of the economic system within which the firm operates. Economic factors include the balance of payments, the state of the business cycle, the distribution of income within the population, and governmental monetary and fiscal policies. The impact of economic factors may also differ between industries.
The balance of payments of a country refers to the net difference in value of goods bought and sold by citizens of the country. To decrease the dollar value of goods imported into a country, it is common practice to construct barriers to entry for particular classes of products. Such practices reduce competition for firms whose products are protected by the trade barriers. Mexico has limited the number of automobiles that can be imported.
The purpose of this practice is to stimulate the domestic automobile market and to allow it to become large enough to create economies of scale and to create jobs for Mexican workers. A side effect of the import restriction, however, has been an increase in the price and a decrease in the quality of automobiles available to the public. Another potential consequence of import restrictions is the possibility of reciprocal import restrictions. Partially in retaliation to import restriction on Japanese televisions and automobiles by the United States, the Japanese have limited imports of agricultural goods from the United States. Lowering trade restrictions as a means of stimulating the economy of a country may meet with mixed results. The North American Free Trade Agreement (NAFTA) has opened the borders between the United States, Canada, and Mexico for the movement of many manufacturers.
Government officials in the United States argue the results have been positive, but many local communities that have lost manufacturing plants question the wisdom of the agreement. As discussed in an article by Susan Schmidt in World Trade magazine, issues that stemmed from regulatory agencies and national security measures were barriers to free trade during the early part of the twenty-first century, demonstrating that NAFTA alone could not clear the path for companies and countries to take advantage of free trade benefits. BUSINESS CYCLE. The business cycle is another economic factor that may influence the operation of a firm. Purchases of many durable goods (appliances, furniture, and automobiles) can be postponed during periods of recession and depression, as can purchases of new equipment and plant expansions. Economic downturns result in lower profits, reductions in hiring, increased borrowing, and decreased productivity for firms adversely affected by the recession. Positive consequences of recessions may include reductions in waste, more realistic perceptions of working conditions, exit of marginally efficient firms, and a more efficient system. Some organizations may benefit from an economic downturn.
Postponed purchases may result in the need to service existing products. An owner electing to keep a used automobile rather than buying a new one may need to have it repaired, thus creating an increased demand for automobile mechanics and replacement parts. Limited job opportunities during downturns also encourage individuals unable to get satisfactory jobs to consider going to college or joining the armed services. INCOME DISTRIBUTION. The distribution of income may differ between economic systems. Two countries with the same mean (per capita) income levels may have dramatically different distributions of income. The majority of persons in the United States are considered middle income, with only a relatively small number of persons having exceptionally high or low incomes. Many developing countries have citizens who are either extremely wealthy or extremely poor. Only a few persons would qualify as middle class. Therefore, although both countries had the same mean income, opportunities to market products to the middle class would be greater in the United States.
Transfer payments (e. g. , welfare, social security) within the United States change the distribution of income. Transfer payments provide money to individuals in the lower income brackets and enable them to purchase goods and services they otherwise could not afford. Such a redistribution of income may not be the practice in other economic systems. Thus, large numbers of people in need of basic goods and services do not assure that those people will be able to purchase such goods and services. MONETARY AND FISCAL POLICIES. Monetary and fiscal policies utilized by the federal government also influence business operations. Monetary policies are controlled by the Federal Reserve System and affect the size of the money supply and interest rates. Fiscal policies represent purchases made by the federal government.
For example, allocation of funds to defense means expenditures for weapons and hardware. If appropriations had gone to the Health and Human Services and Education Departments instead, much of the money would have constituted transfer payments. The primary beneficiaries of such a fiscal policy would be firms in the basic food and shelter businesses. No matter how government expenditures are reallocated, the result is lost sales and cut budgets for some companies, and additional opportunities for others. Though unpopular in the United States, another aspect of government fiscal policy is deficit spending, which may allow government expenditures to rise, but can also influence interest rates, exchange rates, and other economic trends.
A final component of the general environment is actions of other countries or groups of countries that affect the organization. Governments may act to reserve a portion of their industries for domestic firms, or may subsidize particular types of businesses to make them more competitive in the international market. Some countries may have a culture or undergo a change in leadership that limits the ability of firms to participate in the country’s economy. As with the other elements of the macroenvironment, such actions are not directed at any single company, but at many firms.
One of the most recent joint efforts by governments to influence business practices was NAFTA. The agreement between the United States, Canada, and Mexico was intended to facilitate free trade between the three countries. The result has been a decrease in trade barriers between them, making it easier to transport resources and outputs across national boundaries. The move has been beneficial to many businesses, and probably to the economies of all three countries. In most economic associations, preference is also given to products from member countries at the expense of products from nonmembers. Probably the best-known joint effort by multiple countries to influence business practices is the Organization of Petroleum Exporting Countries (OPEC). The formation of OPEC, an oil cartel including most major suppliers of oil and gas, led to a drastic increase in fuel prices. Rising fuel prices had a significant effect on the demand for automobiles worldwide. The increases in oil prices also contributed to inflation all over the world. OPEC’s early success encouraged countries producing other basic products (coffee beans, sugar, bananas) to attempt to control the prices of their products. A more recent example of an economic association serving multiple countries was the International Coffee Organization (ICO). The United States rejoined the ICO 2004 in hopes of fostering sustainability and competition across countries and the industry. The United States works with the Honduras, Mexico, and Nicaragua, among others, as part of this organization.
Changing relationships between the United States and other countries may alter the ability of firms to enter foreign markets. The United States’ establishment of trade relations with China in the 1970s created opportunities for many firms to begin marketing their products in China. The rise of Ayatollah Ruhollah Khomeini to power in Iran altered the lives of many Iranian citizens. Wine, vodka, music, and other forms of entertainment were prohibited. Black markets provided certain restricted items. Other products, such as wine, began to be produced at home. Anti-American sentiments throughout the country showed the hostility of many citizens. Non-American firms thus had an opportunity to capitalize on the anti-American sentiments and to provide goods and services formerly provided by U. S. firms.
In different countries, sometimes even within a country, there are substantial differences in attitudes, beliefs, motivation, morality, superstition, and perception, as well as other characteristics. Geert Hofstede (b. 1928) developed a model in which worldwide differences in culture are categorized according to five dimensions. These dimensions include: * Power distance—the degree of inequality among people which the population of a country considers normal. * Individualism vs. collectivism—the degree to which people in a country prefer to act as individuals or as members of a group. Masculinity vs. femininity—the degree to which values like assertiveness, performance, success, and competitiveness are used to guide decisions versus values like the quality of life, warm personal relationships, service, and solidarity. * Uncertainty avoidance—the degree to which citizens of a country prefer structured over unstructured situations, rigidity of procedures, or willingness to accept risk and potential failure. * Time orientation—the extent to which decisions are based on long-term orientation versus short-term orientation, past versus present versus future, and punctuality.
Hofstede argues that U. S. management theories contain a number of idiosyncrasies that are not necessarily shared by managers in other cultures. Approaches to motivation and leadership, for example, differ widely throughout the world. Citizens of Japan tend to put greater importance on collective effort and working as a team member. Individual recognition is not desired. It is viewed as contradictory to being a good team member. Similarly, in other countries, high tax rates may make bonuses and other forms of monetary compensation less attractive and less motivating than in the United States. Hofstede argues that employees and products are more readily transferred between countries sharing similar cultures. The macroenvironment consists of forces that originate outside of an organization and generally cannot be altered by actions of the organization. Dimensions of the macroenvironment consist of sociocultural factors, technological factors, political-legal elements, economic factors, and international elements. A firm needs to study these elements of its environment, as they have the potential to affect how the organization should operate to attain and maintain its competitive advantage.
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