Module 2 : Understanding the Service Business Environment Lesson 6: Understanding the Macro Environment II

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Content 6.1 Introduction 6.2 Keywords 6.3 The Economic Environment 6.4 Concluding remarks 6.5 Questions 6.6 Answers

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6.1 Introduction
Wehavelearntaboutunderstandingthepoliticalenvironmentinthepreviouslesson.Inthislessonweshall learnhowtounderstandtheeconomicenvironment.

6.2 Keywords
macroenvironment,economic

6.3 The Economic Environment

The economic environment can be analysed in terms of: 1. The state of the economy, 2. patterns of real income distribution, 3. patterns of saving and debt, 4. expenditure patterns, and, 4. inflationary and deflationary pressures. The state of the economy include an awareness of whether the general economy is in prosperity, recession, depression or recovery as these states would determine the extent to which our business is likely to prosper under specific situations. We should also be aware of the business cycle, as every business appears to have cycles of ups and downs over the years. One should know the growth of the economy in terms of the growth in the gross domestic product (GDP). Knowledge of other microeconomic factors like income distribution and purchasing power of the people is also important. According to the McKinsey Global Institute, the average annual disposable income of households in India will grow from Rs. 113,744 in 2005 to Rs. 318,896 in 2025. Over half of this income will be spent on services like transportation and tourism to domestic and international places. Indias consumption will quadruple in the next 20 years. 80% of the consumption growth will be led by increase in income, 16% will be due to growth in the number of households and 4% will be due to increased rate of saving by Indians. We can guess that increasing consumption will increase business opportunities and will lead to increasing incomes. By 2025, India will become the firth-largest consumer market in the world behind USA, Japan, China and the UK. As discussed in Error! Reference source not found., the service sector is growing all over the globe. The list of countries in which services contributed more that one trillion US dollars in PPP terms in 2008-09 is given in Table Error! No text of specified style in document.-1. TableError!Notextofspecifiedstyleindocument.1Listofcountriesinwhichtheservicesectorcontributed morethan1trilliondollarsinPPPtermsin200809 Country World UnitedStates China Japan Germany India TrillionUS$ 54.38 11.49 3.20 3.14 2.02 1.76

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UnitedKingdom France Russia Brazil Italy 1.67 1.66 1.31 1.30 1.30

In Error! Reference source not found., we have discussed that the services sector contributed more than 63 per cent of Indias GDP in 2007-08. As written in the Economic Survey of India 2010, trade, hotels, transport and communication grew by 8.3%, financing, insurance, real estate and business services grew by 9.9%, community, social and personal services, including health services, grew by 8.2% and electricity, gas and water supply services grew by 8.2% in 2009-10 from the previous year. More specifically, private expenditure on: 1. rent, fuel and power grew by 3.4%, 2. health services grew by 8.1%, 3. transport and communication grew by 12.3%, 4. education and recreation grew by 3.4%, and 5. miscellaneous goods and services grew by 19.3% in 2008-09 over the previous year. AsseeninFigureError!Notextofspecifiedstyleindocument..1,theaverageIndiancustomerspent 19.7% of his annual expenses on transportation and communication, 11% on rent, fuel and power, 4.4% on healthservices,3.4%oneducationandrecreationand14.4%onmiscellaneousgoodsandservicestakingthe totalexpensesonservicestoaround45%ofhistotalexpenditurein200809.WhatdoesthisFigureimplyto servicemarketers? Railway freight traffic, telephone subscription and cargo handled at Indian ports have all increased in 2009 over the previous year. Indias legal service exports valued at US$ 31.9 billion grew by 158 per cent over the previous year. Moreover, Indias education sector presents an investment potential of US$ 100 billion through 2015. The growth potential in the sector is driven by increasing demand for skilled professionals and need for infrastructure development. According to experts, the education sector could turn into one of the most preferred sectors for investment by venture capitalists and private equity players. In recent years, India has made rapid strides in services exports and has improved its share in worldwide exports from 1.2 per cent in 2000 to 2.7 per cent in 2008. Exports for software and Business Process Outsourcing (BPO) sectors are expected to touch US$ 50 billion in 2009-10 according to the National Association of Software and Service Companies (NASSCOM). US-based healthcare companies are expected to send more information technology projects to India, in order to bring down their costs of operations, according to a study done by Offshoring Research Network (ORN). The services sector accounted for a huge 24.3 per cent of the total foreign direct investment (FDI) inflow in 2008. In actual terms, the FDI inflow to this sector has grown 32 times in the past five years from US$ 214.78 million in 2004 to US$ 6.78 billion in 2008. The services sector continues to remain the favourite destination for foreign investors as it attracted US$ 2.62 billion or 22 per cent of the total FDI in the first six months (April-September) of the 2009-10 fiscal year. Some of the major investments in the service sector include the 5-year contract between Tata Consulting Services (TCS) and Volkswagen Group, UK, to deliver IT transformation and support services. Chicago-based Global Hyatt Corporation has outsourced part of its financial and accounting transaction services to Genpact, India. The US$ 30 billion pharmaceutical company, AstraZeneca has outsourced its end-to-end maintenance services for a variety of corporate services (such as human relations and finance) to Bangalore-based Infosys. Sequoia Capital India has announced that it has invested US$ 8.3 million in Just Dial, a local search engine. DHL, the courier company, will invest US$ 10 million for two competence centres in Mumbai and Hyderabad. Indias largest back office firm,

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Genpact, has acquired US-based analytics and data management services provider, Symphony Marketing Solutions (SMS).

Education & Recreation 3.4 Health services 5 Rent, Fuel & Pow er 13

3.4 4.8

3.4 4.7

3.5 4.4

3.4 4.4

12.4

11.9

11.4

11

Transportion & Communication 19.6

19

18.9

18.7

19.7

Miscellaneous Goods & Services 9.4 Furniture etc. 3.4 Clothing & Footw ear 6.6

10 3.5 7.6

11.2 3.8 8.6

12.8

14.4

4 8.5

3.9 7.9

Food, Beverages & Tobacco 39.6

39.2

37.6

36.8

35.3

2004-05

2005-06

2006-07

2007-08

2008-09

FigureError!Notextofspecifiedstyleindocument..1PrivateexpenditureonGoodsandServicesinIndia It is clear from the above discussion that there is a huge potential for the growth of existing services and establishment of new services in India. We can take note of the service industries in India that receive relatively higher return on capital employed (ROCE) from Table Error! No text of specified style in document.-2. TableError!Notextofspecifiedstyleindocument.2ReturnonCapitalEmployed(ROCE%)ofvariousService IndustriesinIndiafrom2005to2008 Year GDPGrowthRate(%) ComputerSWLarge HotelsMedium 2005 6.2 40.2 14.5 2006 8.4 39.2 23.5 2007 2008 9.2 40.4 29.9 9.0 35.0 25.8

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ShipBreaking/Repair GasDistribution HotelsLarge Couriers HotelsResorts ITES/BPOservices Securities/CommodityTrading LNGstorage&distribution TravelAgencies Transportlogisticsservices ComputerEducation BanksPvtSectorRONW(%) TradingLarge FinancialServicesMedium ShippingLarge HotelsSmall Tourism ComputerSwfM/S FinancialServicesInvestment/Others FinancialServicesLease/Divers TelecommunicationService HousingFinanceLarge FinancialServicesInstitutionalTermLending Retailing Businessconsultancy FinancialservicesEquipmentLeasing&Maintenance HousingfinanceMedium/Small Hospital/MedicalService 35.4 25.8 9.3 24.3 9.4 22.6 29.3 18.1 20.9 22.7 8.8 12.6 18.1 11.5 21.6 16.5 10.9 11.2 15.6 8.3 9.0 8.0 17.1 5.7 8.0 6.9 7.7 18.4 28.5 14.9 25.0 16.1 19.8 12.9 14.9 17.5 20.2 10.4 13.6 10.1 11.8 15.9 11.1 16.0 14.4 12.9 15.1 9.4 8.4 7.5 14.9 9.4 8.0 7.9 9.0 26.7 20.1 22.3 28.0 17.3 22.7 24.2 18.0 20.1 17.8 13.5 14.6 5.5 11.3 12.0 11.7 16.4 14.8 13.4 10.9 11.0 9.4 8.9 10.3 13.9 61.3 8.1 7.5 24.6 23.9 20.5 19.3 19.2 19.1 18.6 17.2 17.1 15.4 15.0 14.2 14.0 13.8 13.6 13.6 13.5 12.8 12.7 12.6 10.6 10.4 10.1 10.0 9.7 8.6 8.6 8.4

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TradingMedium/Small ShippingMedium/Small RoadTransport Exhibitionoffilms Autofinanceservices Animationcontentprovider Assetfinancingservices InfoTech/Databaseservices Mediacontent Mediabroadcasting Production&distributionoffilms Recreationalservices Airtransportservices According to The Marketing Whitebook (20072008) affluent Indian customers indulged in various lifestyle activitiesin200607aslistedinTableError!Notextofspecifiedstyleindocument.3. TableError!Notextofspecifiedstyleindocument.3PercentageofaffluentIndianspurchasingvarious services Sl. No. Activitiesundertakenatleastoncein23months Percentageof affluentpeople 84 81 74 59 56 47 42 33 6.3 8.7 5.4 4.9 3.8 0.6 7.2 7.4 4.3 3.1 8.2 1.5 7.7 10.8 6.1 7.2 2.7 0.2 4.3 1.5 8.7 4.9 3.5 8.2 8.8 8.6 5.8 7.3 9.6 3.1 2.7 4.8 4.6 5.7 3.1 2.9 7.6 7.3 7.1 6.2 3.0 2.8 2.6 2.3 1.2 1.1 2.5

8.4 11.0 8.1 23.2

1. 2. 3. 4. 5. 6. 7. 8.

Finedininginspecialtyrestaurant(not5star) Shoppingmalls Finediningin5starhotels Beautysalons(women) Socialiteparties Healthandfitnesscentre Livetheatre,dramaorplay Healthandgroomingspas(men)

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9. 10. 11.

Kittyparties(women) Museumorartgallery Auctions

33 23 22

WhatdoesTableError!Notextofspecifiedstyleindocument.3havetooffertoservicemarketers?

6.4 Concluding remarks

In this lesson we have discussed how the economic environment of a business can be analysed and understood.Further,wehavediscussedtheeconomicenvironmentofIndia.Inthenextlessonwewilldiscuss howthesocialenvironmentofacountrycanbeunderstood.

6.5 Questions
Q1.Whatarethefactorsbasedonwhichtheeconomicenvironmentofacountrycanbeunderstood?

6.6 Answers
Q1.Whatarethefactorsbasedonwhichtheeconomicenvironmentofacountrycanbeunderstood? Answer:Theeconomicenvironmentcanbeanalysedintermsof:1.Thestateoftheeconomy,2.patternsof real income distribution, 3. patterns of saving and debt, 4. expenditure patterns, and, 4. inflationary and deflationarypressures.

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