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In today's world for an organization to survive or function, it has to interact constantly with the outside world. For an organization to have sufficient products and resources, raw materials, and capital they should have proper interaction with the outer world. A company will always have to keep its customers happy. An organization should be built at a place where there is a good atmosphere, which it should not effect the close by people.
In an organization there will be profit as well as loss, and the loss occurs due to the external factors. A company will not only have profit. Business dictionary defines environment as, "Circumstances, influences, stresses, and competitive, cultural, demographic, economic, natural, political, regulatory, and technological factors (called environmental factors) that effect the survival, operations, and growth of an organization. If the environment is good then there would be success in the business
It is an element that will affect all the activities of an organization. It will bring firms both opportunities and threats because of its uncertainties. Business environment is uncertain, complex & dynamic. Organization should apply more flexible to manage these treats. Business environment can classifies in two categories that are internal environment and external environment. Internal factors close to the company that have a direct impact on the organizations strategy, these factors include employee, customer, suppliers, shareholder, banker etc. External environment comprises those factors outside the organization that might have an influence upon an organization and its future. Many external factors can have an effect upon an organization - from changes in government legislation to the entry of new competition into a market. All businesses and organizations operate in a changing world and are subject to forces that are more powerful than they are, and which are beyond their control. Any business strategy needs to take account of all these forces so that opportunities and threats can be identified and the organization can navigate its way to success by matching its internal strengths to external opportunities. There are many ways and techniques that a firm can adopt to assess the external environmental forces. The most common is the PEST analysis.
PEST analysis is a technique for identifying and listing the political, economic, socio-cultural and technological factors in the general environment most relevant to an organization at that time. PEST analyzing is often used for generating marketing ideas, product ideas, etc. Kotler (1998) claims that PEST analysis is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations.
- Political factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs, and political stability. It relates to a change in government policy. Here when a government makes a change in the rule it will affect the political factors of the company. Political factors may also include goods and services which the government wants to provide or be provided (merit goods) and those that the government does not want to be provided (demerit goods or merit bad). Furthermore, governments have great influence on the health, education, and infrastructure of a nation.
- Economic factors include economic growth, interest rates, exchange rates and the inflation rate. It is related to the changes in the wider economy such as rises in living standards or the general level of demand, rises or falls in interest rates, etc. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm's cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy.
- Social factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. It relates to changes in wider society such as changes in lifestyles. For example, more women going out to work, changes in tastes and buying patterns. Trends in social factors affect the demand for a company's products and how that company operates.
- Technological factors include ecological and environmental aspects, such as R&D activity, automation, technology incentives and the rate of technological change. It relates to the application of new inventions and ideas such as the development of the internet and websites as business tools. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.
The environment under which the Indian pharmaceutical industry is operating is changing very slowly at present, but is likely to change significantly fast in the future. The Indian pharmaceutical industry grew at a very slow pace from 1947 to 1970, largely due to the lack of incentives and the failure of the government to set-up a concrete regulatory framework. Today, the industry is characterized by numerous governmental regulations and policy changes, stifling price controls, rigorous controls on formulations, and an absence of international patent protection. During 1970, the Indian Patents Act (IPA) and the Drug Price Control Order (DPCO) were passed. Although the DPCO acted as a buffer against pharmaceutical companies making free pricing illegal, it fulfilled the goal of providing quality drugs to the public at reasonable rates. To understand the implications of the environment on this industry, let us discuss the pest analysis.
- DPCO which is the bible for the industry has in effect worked contrary to the stated objectives. DPCO nullifies the market forces from encouraging competitive pricing of goods dictated by the market. Now the pricing is determined by the Government based on the approved costs irrespective of the real costs.
- Effective January, 2005 the country goes in for the IPR (Intellectual Property Rights) regime, popularly known as the Patent Act. This Act will impact the Pharmaceutical Industry the most. Thus far an Indian company could escape paying a patent fee to the inventor of a drug by manufacturing it using a different chemical route. Indian companies exploited this law and used the reverse-engineering route to invent a lot of alternate manufacturing methods. A lot of money was saved this way. This also encouraged competing company to market their versions of the same drug. That meant that the impurities and trace elements found in different brands of the same substance were different both in qualification as well as in quantum.
- Therefore different brands of the same medicine were truly different. Here Branding actually meant quality and a purer brand actually had purer active ingredient and lesser or less toxic impurities.
- Product patent regime will eliminate all this. Now, a patented drug would be manufactured using the same chemical route and would be manufactured by the inventor or his licentiates using the chemicals with same specifications. Therefore, all the brands of the same active ingredient would not have any difference in purity and impurities. The different brands would have to compete on the basis of non input-related innovations such as packaging, color, flavors, Excipients etc.
- This is the biggest change the environment is going to impose on the industry. The marketing effort would be now focused on logistics, communications, economy of operation, extra-ingredient innovations and of course pricing.
- In Pharma industry there is a huge PSU segment which is chronically sick and highly inefficient. The Government puts the surpluses generated by efficient units into the price equalization account of inefficient units thereby unduly subsidizing them. On a long term basis this has made practically everybody inefficient.
- Effective the January, 2005 the Government has shifted from charging the Excise Duty on the cost of manufacturing to the MRP thereby making the finished products more costly. Just for a few extra bucks the current government has made many a life saving drugs unaffordable to the poor.
- The Government provides extra drawbacks to some units located in specified area, providing them with subsidies that are unfair to the rest of the industry, bringing in a skewed development of the industry. As a results Pharma units have come up at place unsuitable for a best cost manufacturing activity.
- India spends a very small proportion of its GDP on healthcare ( A mere 1% ). This has stunted the demand and therefore the growth of the industry.
- Per capita income of an average Indian is low ( Rs. 12,890 ), therefore, spending on the healthcare takes a low priority. An Indian would visit a doctor only when there is an emergency. This has led to a mushrooming of unqualified doctors and spread of non-standardized medication.
- The incidence of Taxes are very high. There is Excise Duty ( State & Central), Custom Duty, Service Tax, Profession Tax, License Fees, Royalty, Pollution Clearance Tax, Hazardous substance (Storage & Handling) license, income tax, Stamp Duty and a host of other levies and charges to be paid. On an average it amounts to no less than 40-45% of the costs.
- The number of Registered Medical practitioners is low. As a result the reach of Pharmaceuticals is affected adversely.
- There are only 50,00,000 Medical shops. Again this affects adversely the distribution of medicines and also adds to the distribution costs.
- India is a high interest rate regime. Therefore the cost of funds is double that in America. This adds to the cost of goods.
- Adequate storage and transportation facilities for special drugs is lacking. A study had indicated that nearly 60% of the Retail Chemists do not have adequate refrigeration facilities and store drugs under sub-optimal conditions. This affects the quality of the drugs administered and of course adds to the costs.
- India has poor roads and rail network. Therefore, the transportation time is higher. This calls for higher inventory carrying costs and longer delivery time. All this adds to the invisible costs. Its only during the last couple of years that good quality highways have been constructed.
- Poverty and associated malnutrition dramatically exacerbate the incidence of Malaria and TB, preventable diseases that continue to play havoc in India decades after they were eradicated in other countries.
- Poor Sanitation and polluted water sources prematurely end the life of about 1 million children under the age of five every year.
- In India people prefer using household treatments handed down for generations for common ailments.
- The use of magic/tantrics/ozhas/hakims is prevalent in India.
- Increasing pollution is adding to the healthcare problem.
- Smoking, gutka, drinking and poor oral hygiene is adding to the healthcare problem.
- Large joint families transmit communicable diseases amongst the members.
- Cattle-rearing encourage diseases communicated by animals.
- Early child bearing affects the health standards of women and children.
- Ignorance of inoculation and vaccination has prevented the eradication of diseases like polio, chicken-pox, small-pox, mumps and measles.
- People don't go in for vaccination due superstitious beliefs and any sort of ailment is considered as a curse from God for sins committed.
- Advanced automated machines have increased the output and reduced the cost.
- Computerization has increased the efficiency of the Pharma Industry.
- Newer medication, molecules and active ingredients are being discovered. As of January 2005, the Government of India has more than 10,000 substances for patenting.
- Ayurveda is a well recognized science and it is providing the industry with a cutting edge.
- Advances in Bio-technology, Stem-cell research have given India a step forward.
- Humano-Insulin, Hepatitis B vaccines, AIDS drugs and many such molecules have given the industry a pioneering status.
- Newer drug delivery systems are the innovations of the day.
- The huge unemployment in India prevents industries from going fully automatic as the Government as well as the Labor Unions voice complains against such establishments.