The purpose this report is analyze the business environment in the banking industry. A business organization cannot exist a vacuum. It needs living persons, natural resources and places and things to exist. The sum of all these factors and forces is called the business environment. Hence to any kind of business organization, business environment is very important. The internal environmental factors and external environmental factors are going to discuss through this report. So another important thing id market forces so this also analyze in this report. Thus according to the assignment we will analyze the banking industry. Therefore I have selected the Sampath Bank for this purpose. Also I would expect I will be getting some knowledge about business environment and significance.
1.1. Purposes of different types of organizations.
|Private company||Private limited liability company is a business that combines the pass through taxation of a partnership or sole proprietorship with the limited liability of a corporation.Libility is limited for their contribution. The purpose of a liability company, keeps its shares on behalf of the shareholders. By doing so, they remain in the control of the company and therefore would not lose the management advantages and power of the shareholders.|
|Public company||This kind of companies are listed in the stock market and they can sell their shares in the market publicly. The main goal of every public limited company has always been to maximize shareholder value by generating as much profit as possible. However, many companies have begun to balance this primary objective with other social and environmental goals that help appease stakeholders and help produce those profits.|
|Government Business Enterprise||These are regulated by the government and departments, Ministries are some examples. The government business enterprises can categorize as Profitable and non-profitable enterprises. The principle objectives are to perform its functions and exercise its powers so as to be a successful business by operating in accordance with sound commercial practice and as efficiently as possible and achieving a sustainable commercial rate of return that maximizes value for the state in accordance with its corporate plan and having regard to the economic and social objectives of the state.|
|Voluntary organization||Voluntary organization is a group of people who spend their free time helping others without monetary compensation and do not make a profit from their activities. There are several types of groups that use volunteers to help aid cities, countries and countries that have experienced a disaster. Many of these groups offer food, water and assistance with rebuilding the local structures. Typically volunteer groups help out during a large disaster such as tornado, hurricane or large snowstorm. However, other types of voluntary groups help out their local communities with basic services. Therefore these voluntary organizations are non-profitable social organizations.|
|Charitable organizations||Charitable organizations are a kind of business that fits within the nonprofit organization. In general, this type of entity is sometimes referred to as a charity or foundation, which can be run publicly or privately. Some charities may be centered around religious, educational or other public interest activities that are philanthropic in nature. Depending upon the location of the charity, the legal definition of what constitutes a charitable organization may vary according to its country of origin. Hence charitable purposes include relieving poverty, sickness or the needs of the aged, advising education, advising religion, providing non for profit childcare services, advising animal welfare and protecting the environment.|
|Corporative||Co-operatives are autonomous associations formed and democratically directed by people who come together to meet common economic, social and cultural needs. Founded on the principle of participatory governance, co-operatives are governed by those who use their services. The purposes are established by their members. Those not basically on social welfare and other factors are also considered.|
1.2. Different types of stakeholders and their objectives (Sampath Bank).
|Customers (Depositors)||Customers are their main source for they deposit their money in the bank.Therfore they expect to earn interest income.Therfore they are willing high interest rate from Sampath bank than other banks. Generally the interest for savings, fixed deposits is higher than others. Also customers expect better customer service from the bank.|
|Central Bank||Central bank of the Sri Lanka is the governor on behalf of the government. It governs the all financial institutions and banks. They decide the interest rate for savings and fixed deposits and so on. Therefore they expect from the bank that it is operated in accordance with the rules and regulations.|
|Other banks (Competitors)||They always look at what are the bank doing and they adjust their activities in relating to the bank and compete in the industry. Generally they are looking at specially interest rate for it is important to attract and retain customers. Also the Sampath bank often try to update their systems with new technology as an example they introduced cash deposit machines. Then other banks try to introduce that into their banks.|
|Society (General Public)||The ordinary people in a country. The general public may have an interest in what the company does, especially when the company is in a position to affect people’s lives substancially.The public can be an important stakeholder for business such as industrial companies that pollute the atmosphere and banks that look after people’s money. Those are the corporate social responsibility (CSR) activities expect from the bank. Sampath bank considers CSR as an ingrained aspect of the organization process and hence strives to develop a sustainable existence for all stakeholder categories of the society through the CSR initiatives|
The bank’s CSR initiative is tripartite in nature and is facilitated through the contribution by the Bank, Team Sampath and the Community.
1.3. Responsibilities of the Sampath Bank Strategies they are used to fulfill their responsibilities.
The responsibilities of Sampath bank,
- Develop innovation on deposits for children, teenagers and adults.
- Increase children well-being by various programs and initiatives which give fun with a purpose.
- Provide Corporate Social Responsibly activities.
- Give customers useful information regarding deposits, Housing loans and other essential information.
- Improve their network and systems around the country.
- Recruit skilled employees and train their existing employees for better performance.
Strategies they are used
The Sampath bank has given the priority when recruiting the employees and more consider about fluency in English.
Also they have get advices from the World Bank.
They broadcast and provide sponsorships for programs for children and they implement funny programs on world children’s day.
They have implemented many CSR activities such as
- Organizing Shramadana Campaigns.
- Organizing Dharma Deshaun programs.
2.1. How the Economic System in Sri Lanka attempts to allocate resources effectively.
– What is an economic system?
An economic system is one that a society attempts to meet people’s material needs and wants through the production of goods and services. From country’s point of view, production of goods and services is influenced by the limited supply of such elements as labour land and natural resources and capital. The scarcity of supply of resources means that the Government has to decide the allocation of these limited resources among competing claims, given the opportunity costs associated with the decision of producing a certain products and services within the economic systems instead of others.
Sri Lanka has emerged as a strong developing economy in South Asia in the first decade of the 21st century. Sri Lankan stock market was among the world’s best performing markets with 100% gain in 2009. By November 2009, its official foreign exchange reserves rose to over $5 billion. A number of reconstruction and development projects are in pipeline in the northern and eastern provinces. However, high budget deficits and debt interest payments pose major challenges in the growth of economy.
The economic system that exists in Sri Lanka is a mixed economic system. We can see the following features in the current economic environment.
- Profit making organizations and the increase of capital would remain I the central driving force behind the economic activity.
- The government would have considerable influence over the economy through fiscal and monetary policies designed to counter economic downturns and capitalism’s tendency toward fiscal crises and unemployment along with playing a role in social welfare interventions.
- Effective Use of resources.
- The extent to which the mix economies as Sri Lanka, for effective allocation of resources between the government and private enterprises varies from countries to countries.
As Sri Lanka.It allocates scare resources among all sectors which the government or private sector and whatever through the budget. As an example the 6% from money is allocated for the education in every year from the budget.
- Government interventions are usually in the form provision or prohibition, subsidies or tax and regulations. For example, public goods are priced low or zero to maximize consumption and increase social benefits. Also the government always try to reduce the tax for public goods. The current tax rate is 11%.
Merit goods are encouraged by subsidies to increase consumption whereas the de merit goods are taxed heavily to reduce social costs. The government has subsidized heavily education of children to ensure the less fortunate are not left or from the main stream.
2.2. Impact of Fiscal policy to the banking industry.
Fiscal policy relates to the impact of government spending and tax on aggregate demand and the economy. This will leads to a larger budget deficit or reduce a budget deficit.
Fiscal policy includes followings.
- Taxation and income.
- Government spending.
- Repaying debts.
According to Central Bank in 2015, the fiscal policy of Sri Lanka as follows.
Accordingly, the budget deficit increased from 5.7% of GDP in 2014 to 7.4% of GDP in 2015, significantly overshooting the government’s original target of 4.4% of GDP. The current account deficit, which reflects government dis-savings, increased to 2.2% of GDP in 2015 from 1.2% in the previous year, while the primary deficit, which excludes interest payments from the overall deficit, increased to 2.9% of GDP from 1.5% in 2014. The budget deficit was largely financed by domestic sources, given the slowdown in foreign financing during the year. The central government debt to GDP ratio increased to 76.0% in 2015 from 70.7% in 2014, reflecting the relatively high budget deficit, lower nominal GDP growth and the impact of exchange rate variation. This highlights the need for strong fiscal reforms to reduce the budget deficit and accumulation of debt.
2.3. Impact of Monetary policy to the banking industry.
Monetary policy involves influencing the supply and demand for money through interest rates and other monetary tools. This is usually conducted by the Central Bank. The main tool of monetary policy is changing interest rates.
According to the CB report 2015, considering the sustained increase in credit flows to the private sector encouraged by the low interest rate environment that was maintained during the past few years, in March 2015, the Central Bank removed the restrictions placed on the access to its Standing Deposit Facility (SDF) under open market operations (OMO) that was in effect since September 2014. Consequent to this measure, to address the excessive volatility of short term interest rates, the Central Bank lowered its key policy interest rates, namely the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR), by 50 basis points to 6.00% and 7.50%, respectively, in April 2015. Nevertheless, as credit and monetary aggregates continued to expand at a faster pace than projected, the Central Bank commenced tightening monetary policy gradually towards end 2015. Accordingly, the SRR applicable on all rupee deposit liabilities of commercial banks was raised by 1.50 percentage points to 7.50% to be effective from the reserve period commencing 16 January 2016.
2.4. Impact of the competitive policy and other regulatory mechanisms on the Sampath Bank.
Sampath Bank is one of leading private bank in the Sri lanka.Banking industry is very challenging and they are competing with each other to get competitive advantage. Competition policy promotes competition and makes markets better and improves the efficiency of various organizations. It ensures wider customer choice, technical innovation which promotes dynamic efficiency and effective interest rates competition between private banks. Competition policies are based on four policies such as antitrust and cartels, market liberalization, state aid control and merger control. Those policies restrict competition including price fixing and other abuse.
Completion policy breaks the monopolistic market and ensures easy entry on new competitors. On the other hand, regulations are enforced by government to forecast how a market works and the outcomes which results for both customers and others in the industry. Some regulations are standard customer service and environmental policies and so on. Regulatory committee monitor rates, ensures standard customer services, surrogates competitors and opening up markets.
3.1. The market structure which the banking industry operates.
Banking has become an oligopoly instead of a competitive business. Banking is not really a competitive .In really it’s more like an oligopoly. Oligopoly is in which an industry is controlled by a small number of firms. An oligopoly is a lot like a monopoly where one firm controls the whole show. An oligopoly industry produces either a homogeneous product or heterogeneous products. Therefore we can see the products are same in the banking industry like savings accounts, fixed deposits and etc.
But the banking industry operates in a different universe. Charges for products and services and the cost of those products and services often have very little relation to each other. In Sri Lanka there are several banks in industry like Peoples’ Bank, BOC, Sampath, Commercial, and DFCC and so on. Therefore one bank is introducing something to the market so others are react to that. Also those are governed by the Central Bank on behalf of the government.
3.1.1. How the market structure determines the pricing decisions.
The banking industry is in an oligopoly structure. There are only few firms in the market. Thus the price in an oligopoly structure determines as below. The firms are competing in the market with not differecial products with differential price. If one bank increases its interest rate for savings deposits, its rivals will not follow it and change their interest rates. On the other hand it happens same.
As an example the interest rate for savings in Sampath Bank is increasing up to 12% then others in the market they also try change their interest rate as accordance compete with the Sampath Bank.
3.2. Market forces and organizational responses in the banking industry.
This is evaluated in accordance with the Porter’s five factors.
|Market Forces||Organizational response|
|Threats of new entrances||The banking industry deals with other peoples’ money and financial information new banks find it difficult to startup. Due to the nature of the industry. People are more willing to place their trust in big name, well known, major banks who they consider to be trustworthy. The banking industry has undergone a consolidation in which major banks seeks to serve all of a customer’s financial needs under their roof. Thus consolidation furthers the role of trust as a barrier to entry for new banks looking to compete with major banks. While it is nearly impossible for new banks to enter the industry.|
|Powers of suppliers||Capital is the primary resource on any bank and there are four major suppliers capital in the industry such as customer deposits, mortgage and loans, mortgage-backed securities and loans from other financial institutions. By utilizing these four major suppliers, the bank can be sure that they have the necessary resources required to service their customers’ borrowing needs while maintaining enough capital to meet withdrawal expectations. The power of the suppliers is largely based on the market, their power is often considered to fluctuate between medium to high.|
|Powers of buyers||If a person has one bank that services their banking needs, mortgage, savings, checking etc. It can be a huge hassle for that person to switch to another. To try and convenience customers to switch to their bank they will often times lower the price of switching through most people still prefer to stick with their current bank. The internet has greatly increased the power of customer in the banking industry. Therefore banks are always try to retain their existing customers.|
|Availability of substitutes.||Some of the banking industry’s largest treats f substitution are not from rival banks but from non-financial competitors. The industry does not suffer any real threat of substitution as far as deposits or withdrawals, however insurances, mutual funds and fixed income securities are some of the many banking services that are also offered by non-banking companies. Often times these non-banking companies offer a lower interest rates on payments then the consumer would otherwise get from a traditional bank loan. Therefore banks consider their substitutes and make updates with the technology.|
|Competitive Rivalry||The banking industry is highly competitive. Because of this banks must attempt to sure customers away from competitor banks. They do this offering lower financing, higher rates, investment services and greater conveniences than their rivals. The banking competition is often a race to determine which bank can offer both the best and fastest services. But has caused banks to experience a lower return on assets. Major banks tend to prefer to acquire or merge with other banks than to spend money marketing and advertising as a respond.|
3.3. Business and cultural environment in Sri Lanka shapes the behavior of the Sampath Bank.
Business environment is divided in to Business and Environment. So Business means human activities like purchase, sales of products and services, production, distribution and so on. Also Environment means factors of surroundings.Busiess environment is the set of political, economic, legal, cultural or social that is uncontrollable and affects the functions of the organization. Business environment includes two components such as internal environment and external environment.
Internal factors External factors
- Customers – Socio- Cultural factors
- Suppliers – Economic factors
- Potential investors – Political factors
- Competitors – Legal factors
- – Technological factors
Sampath Bank is operating more than 25 branches in Sri Lanka.It is operating only in Sri Lanka.Their operations largely depends on the business and cultural environment of the divisions they operate. Economic environment is not same for areas around the country. The capital income of Colombo and Jaffna are not same. Also the living expenditure is not same in those Districts.
But Economic policies like fiscal policy, monetary policy and other regulatory mechanisms are same in the country.
Social environment of business includes social factors like life expectancy rate, literacy, poverty, beliefs, values, traditions and customs. The culture of Jaffna is Hindu.
Political environment includes the political system, the government policies and attitude towards the business community and unionism. All these aspects have a bearing on the strategies adopted by the bank. The stability of the government also influences business and related activities to a great extent. Legal environment refers to set of laws, regulations which influence the bank and its operations.
Technological environment includes the methods, techniques and approaches adopted for the activities of the bank. The bank always update their systems with the new technology. Hence we can evaluate the business environment around the bank as above.
4.1. Significance of International trade to UK business organizations.
-What is International trade?
International trade is very important to every nation as it is not possible to grow or produce all goods or services within the country. Some goods are available in some countries, so it needs to exchange the products and services within a country. International trading is very profitable and economic. The significance of International trading can be discussed as follows.
- To find new markets.
If UK based companies produce products only for domestic use, they will fully limit their potential. They can export those products to other countries. By doing trading domestically they can attain steady growth but if they do it internationally they will gain international goodwill as well as high revenue.
- Benefits from production cost.
By trading in other countries, the company also it up to lower production costs. For example, McDonald’s imports many products from other countries for cheaper price and availability. McDonald’s has many outlets in many countries. Sometimes the employees of UK go other countries outlets to work which give them the opportunity to earn remittance.
- Able to get materials in low prices.
UK largely depends on other countries. Many raw materials are comes from other countries like banana and mango did not grow in the UK and for those products UK have to export from hotter countries. Similarly many countries need expensive and luxurious materials like arms, cars, engines which they import from UK.International trade gives the opportunity to exchange products otherwise there will be very scare choice for each nation.
4.2 The impact of global factors on UK business organizations.
- International trade and the UK economy.
Global factor give the opportunity to make international trade which is boosting UK economy. Many of the UK organizations are operating in other countries where they get cheap labor and raw material.
- Market opportunity.
UK has good reputation all over the world for their advancement in technology and global factor gives the opportunity to UK business organizations to conduct business all over the world.
- Global growth.
Global factors give the opportunity to expand business all over the world which is very positive for UK economy.
- World trade organization.
The World Trade Organization (WTO) deals with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.
- Government Impact.
Government makes rules and regulation according to the global factors which will be convenient for UK organizations.
4.3. The impact of policies of the European Union on UK business organizations.
After joining to the EU, UK businesses have to maintain the all rules and regulations. Now EU laws are same for all European Union’s countries. All countries have to follow the Union’s legislation. If any organization or EU countries want to do business, it needs to contact with European Money Union and it needs to transect in Euro.EU policies have immense influence on UK business through spending and taxation law, spending and directive, inspiring business activity though support and subsidies. All UK companies can exchange their product with other EU countries without any barrier. There is no boarder barriers. National authorities can monitor the activities of the business organizations locally. Directives have to be implemented in national legislation.
04. Conclusion and Recommendations.
It is very important for every organization to understand its business environment. By analyzing the business environment organization can recognize its strength, weaknesses, opportunities and threats. For proper understanding of the business environment, organization will monitor political, economic, social, and technological at regular basis. The Sampath Bank will monitor its environment regularly and make its strategic plan according to the situation. Also by analyzing the Business environment they can compete properly in the industry and retain their existing customers and can attract new customers.
Therefore business environment is very important concept any kind of organization. Thus we have discussed the different types of stakeholders those are relating to the Sampath Bank, so this also useful to the bank due to if they are satisfied customers then their stability is not an issue. So I suggest every organization to do a business environment analysis for their consistence.
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