Financial Times

Awareness of the business environment

When the twin towers in New York came under attack on 9/11 it led to a crash of stock exchanges worldwide.This was because there were expectations of war breaking out and a sudden fear of global terrorism, which led to a decline in travel and business around the world. The simple lesson to be learnt from this incident is that the business environment does affect the performance as well as market expectations of any company and therefore will tend to have an impact on the values of companies. The key questions therefore would be: what is the business environment and how does it affect companies' values?

Biz environment
The business environment would comprise of forces such as political and legal, economic, social and cultural, technological and competitive forces. These forces, which can be local or global, will tend to have an impact on organisations.

Political environment
This involves issues such as the political system, its stability, as well as the policies of the party in power.

Business growth needs stability and clear policies in governance. The Colombo Stock Exchange is of late very volatile and the main reason, which can be attributed to this situation, would be the prevalence of political uncertainty in the country in the light of the forthcoming elections.

Economic Environment
This is basically the economic policy of the government in power. If the government promotes a free market policy with reasonable taxes and keeps foreign exchange rates and inflation stable, it may lead to economic stability where businesses may boom. The government of Thakshin Sinhavatra of Thailand, as well as that of A.B. Vajpayee of India have been hailed for strong economic management.

Social and cultural forces
These can change advantageously or disadvantageously for a business. Howard Schultz's Starbucks is growing in the US, due to an increasing tendency for young individuals to frequent coffee shops rather than traditional pubs. In Sri Lanka too there are significant opportunities for private education because today, higher education is considered a social must.

Technological forces
Technology can facilitate and nurture new businesses, while at the same time killing existing ones elsewhere. Today, India sees a phenomenal growth in the call centre industry due to a transfer of US white-collar jobs towards low wage markets.

Competitive forces
Competition is also a significant factor. In industries where competition is severe such as the cement industry, mobile phone industry or the soft drink industry, it may not be possible to earn significant profits in the long run because large sums will have to be spent in order to fight competition as well as to keep on making changes and improvements so as to stay ahead of competitors.

How does the biz

environment affect business values?
When the business environment is negative for a business, its current earnings as well as future potentials will be depressed. When such a depression occurs, the business value would tend to hit very low levels. Unstable political and economic policies can result in the overall under valuation of the stock exchange since all sectors may be affected. Such was the phenomenon that was experienced by the CSE in the late 1990s.

Message to the small investor
Carry out an analysis of the business environment at a macro level, as well as industry level before you make your investment.

A friend of mine who recently bought shares of a leading bank at Rs 280 each, lost significant value when its share prices collapsed to around Rs 190 after the dissolution of parliament.

The share prices may pick up after the elections, but I wonder whether investing in banks or government bonds would be a safe venture for the small investor, until the political clouds clear.

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