Effect of macro business environment

Published Date: 23 Mar 2015

Chapter 1

Introduction

Business Environment: An Introduction

The business environment comprises of various internal and external forces under which the organization operates. It plays a very crucial role in the business. It shapes the ability of the organization to maintain successful relationships with its customers. Successful firms know the importance of constantly watching and adapting to the changes in the business environment (Kotler et al, 2008, p. 179).

Dibb et al (2006) categorizes the business environment into macro and micro factors. Macro environmental factors have a universal impact on every organization operating in a particular market e.g. economic environment, political environment etc. Micro environmental factors, on other hands, have an organization specific impact e.g. suppliers, customers etc.

The change in the business environment brings both opportunities and threats for the organization. To overcome this business dynamism, companies require certain predictability mechanisms that can guard them against the unanticipated threats or overlooked business opportunities. The solution lies in environmental scanning, which refers to the process of monitoring and evaluating the business environment. It helps in adjusting the business tactics in case of a change in the business environment.

The present research focuses on evaluating the impact of the macro business environment on the small manufacturing businesses in India. The scope of the research has been narrowed to include only the macro environmental forces because the macro forces are industry (sector) specific not company specific thus it allows the findings of the research to be generalized. Additionally, the macro forces have a wide scope and tend to influence the microenvironment of the business. Thus, it seems advisable to focus the research on the role of macro environmental forces to avoid the accumulation of irrelevant data.

Small Businesses: Definition in Indian Context

The concept of small business is different across the globe. The Indian context of the present research enforces the need of defining the concept according to the Indian standards. In India, Ministry of Micro, Small and Medium Enterprises (http://msme.gov.in/) deals with classifying, promoting and regulating the micro, small and medium industries.

The classification of the businesses as either micro, small or medium is in accordance with the Micro, Small and Medium Enterprise Development Act 2006. According to the subsection (1) of section 7 of this act, business classifies as small when the investment in the plant and the machinery is more than 25 Lac (25 hundred thousand) rupees but does not exceed five cr. (50 million) rupees.

All the participating organizations in the present study belong to the manufacturing industry and are small enterprises according to the above act. It ensures the homogeneity of the sample and permits the findings of the research to generalize.

Research Aims and Objectives

The organization and the business environment share a closed loop interaction. Business environment affects the organization in-turn invoking a response from the organization thus completing the cycle. It implies that the understanding of the organizational response is necessary to realize the effect of the business environment on the organization.

The aim of the present research is to analyze the impact of the macro business environment on the small manufacturing businesses in India. Moreover, the study will evaluate the response behavior of the organizations in the dynamic macro business environment. The primary objectives of this research are as follows:

1. To identify the macro environmental forces active in the participating organizations.
2. To assess the impact of the active macro environmental forces on the participating organizations.
3. To examine the response behaviour of these organizations against the macro environmental forces. Following points will be noted:
• Alertness of the organization - whether proactive or reactive?
• Perception of the business environment - stable or turbulent?
• The information sources.
• Direction of the organizational response - internal or external?

The first objective links with filtering out the micro business forces that are actively affecting the small manufacturing businesses in India. It will identify the crucial business forces active in the sector. The second objective relates with judging the impact of these macro forces on the small manufacturing businesses. This objective is vital in reviewing the intensity and the nature of the impact on the businesses. It will also help us in discovering the sensitivity of such businesses against the specific macro business forces.

The third objective is central to this research. It relates with examining the response behavior of these businesses in the dynamic macro business environment. The organizational alertness, the perception of the business environment, the information sources and the direction of the organizational response will act as yardsticks to evaluate the response behavior of these businesses. It will contribute in understanding the response formulated by the small businesses against a change in the business environment.

The importance of the present research

The importance of the present research becomes evident after considering some details. Firstly, although plenty of literature is available pertaining to the role of the business environment on the small organizations (Kaish & Gilad, 1991; Brush, 1992; Hartman, Tower & Sebora, 1994; Pineda, Lerner, Miller & Phillips, 1998), but it mostly relates to the developed economies like the US. The present research is in the context of a developing economy (India) where a completely different set of business practices and ethos exists. It will be interesting to notice the attitudes and beliefs of the Indian entrepreneurs towards the concept of the business environment.

Secondly, apart from examining the impact of the macro business environment on the small manufacturing businesses in India the study will also contribute towards understanding the response behaviors of these businesses thus resulting in a better understanding of the organization-environment interaction.

Lastly, manufacturing businesses constitute a significant proportion of the small-scale industry of India. The Third All India Census for Small Scale Industries (Development Commissioner MSME, 2002, p. 1-4) categorized 62.13% of the registered sector and 33.6% of the unregistered sector to be involved in manufacturing activities. It is a rapid growing industry that highly contributes to the Indian exports.

The manufacturing industry forms the backbone of the rapid growing small-scale industry in India. Any impact on this industry directly affects the economy of the country. The involvement of the present research with this economically and strategically important industry provides another reason to justify its importance.

Chapter 2

Literature Review

Assessment of the Macro Environment

The Political Environment

India, the largest democracy in the world is a sovereign, socialist and secular republic. It follows a federal system where the power splits between the central and the state government. However, the central government enjoys more authority. The president is the head of the state while the prime minister heads the government with the help of his cabinet ministers.

Overall, the Indian political environment is stable. However, there are certain flaws that adversely affect the business development in the country. These flaws are as follows:

The Broken Verdict and Coalition Governments

In the past many elections, the country has received broken verdicts from the masses. It has resulted in the formation of political alliances and coalition governments. At first, it hardly seems a problem but in reality, it brings a sense of inertia in the political decision-making. The government starts taking more time in introducing any legal or regulatory reforms as they deal with creating a consensus among their coalition partners. The political agenda and ambitions of the coalition partners hugely affect the course of reforms in the country.

Corruption

Corruption continues to be the major problem in the political system of India. Transparency International, the global corruption-monitoring agency defines corruption as "The abuse of entrusted power for private gain" (Transparency International, 2009a, p. 14). Their recent publication, Global Corruption Barometer (Transparency International, 2009b, p. 5-6) reveals the political sector as the most corrupt across the globe. The findings specific to India echo the same thought and classify the political sector as the most corrupt.

The corruption within institutions such as the political parties and the civil servants greatly affects the business. The businesspersons often deal with bribery while interacting with the government machinery. However, the government is willing to deal with the corruption. India has signed the UN convention against corruption in 2005 and ADB-OECD Anti-Corruption Action Plan for Asia-Pacific in the year 2001 but still its long way to go.

The Economic Environment

The Indian economy has witnessed a robust growth after the liberalization in 1991. The post liberalization era has seen the integration of the Indian economy with the global economy. This economic renaissance has bought with itself, the ray of hopes and the burden of challenges. The growth rate of the country in terms of the GDP (Gross Domestic Product) has been 9% or above since the year 2005. The impressive GDP growth rate reflects the growth in the economy in terms of the total services and goods produced in the country.

The Indian small manufacturing industry has been an active contributor in building the national economy. It becomes clear from the table 2.2 that the small manufacturing industry has contributed significantly in building the nation's foreign reserve through its share of exports.

The higher amount of export in the small-scale industry has had a positive impact on the gross domestic product of the country. It has resulted in the increased competitiveness of Indian manufacturing industries across the globe. The other positive for the manufacturing industry has been the production growth rate over the years. On one hand, it has resulted in the expansion and modernization of existing businesses while on the other it has facilitated the opening of the new ones. The verification for the above observation comes from the yearly growth of the small-scale units as shown in the table 1.1.

However, every coin has two faces. The wholesale price index that represents the wholesale price for a category of trading commodity brings the word of caution with it. In India, it is the central measure for calculating the inflation. The increase in the annual average wholesale price index for the manufacturing industry denotes an increase in the prices of the required raw materials. In case of a price-hike the small manufacturing businesses face the dilemma of whether to transfer the additional costs to the customer or to be price competitive. The inflation in the prices of the raw materials also affects the equilibrium of supply and demand. It places Indian small manufacturing businesses at a competitive disadvantage in comparison to the market leaders like China.

Additionally, it will be interesting to notice the impact of the current recession on these businesses. The recent economic meltdown is of huge significance to this study as it embodies the concept of environmental volatility. It can provide valuable data for this research. The focus will be towards identifying the impact of the recession on the lines of supply and demand. In includes the impact of recession on regular trade and business activities like exporting. Another area of consideration will be about the changing concerns of customer in terms of price/quality sensitivity.

The Competitive Environment

A study by the World Bank and Confederation of Indian Industries (World Bank & International Finance Corporation, 2004) analyzed the investment climate and the manufacturing industry of India. It argues that although there has been an increase in international competitiveness of Indian manufacturing industry, but it falls well short of China.

Although, the export share of the Indian manufacturing firms improved between the year 1990 and 2000, but it has failed to keep pace with the other competitors. China has emerged as the clear winner in the segment. Its manufacturing exports grew nearly six times between 1990 and 2002. Apart from Turkey, it was the only economy whose exports grew between the year 2000 and 2002 while the Indian share barely moved.

The Indian share in the world manufactured exports stands far below in comparison to China. In 1995, the Chinese share of the world manufacturing export stood slightly above 3 percent that rose to nearly 6.5 percent in the year 2002. In comparison, Indian share was not even 1 percent in 2002. The above observations point towards the competitive disadvantage of Indian manufacturing companies on the global level.

However, the area where the Indian manufacturing industry has a competitive advantage is the cost of labor. As shown in the figure 2.3, the manufacturing wages in India per person per annum are about $400 less than that in China and about $2600 less in comparison to Brazil. The vast amount of skilled labor and the low wages give the industry a cost advantage over their competitors.

Additionally, the manufacturing businesses face a tough local competition. The growth in small-scale units and the rising inflation (Wholesale price index) has encouraged the local competition which on most occasion is price driven. Altogether, the Indian manufacturing industry faces a very dynamic environment on both local and global frontiers. The future of the industry depends on its inherent capabilities and its adaptability towards the growing local & global competition.

The Legal/Regulatory Environment

The legal/regulatory environment in India has witnessed a series of reforms after the post liberalization era (1991 onwards). A recent publication named "Doing Business in India" by the World Bank and International Finance Corporation (2009, p.8) places India as the leading business reformer in the South Asia region since 1994.

The legal/regulatory environment influences every stage of the business. The above study (World Bank & International Finance Corporation, 2009) measures the business regulations and their enforcement across 17 major cities in India. Although, the study divides business into seven stages to categorize the regulations respectively, only four are of interest to us as they experience frequent legal changes. These four stages are as follows:

1. Starting a Business
2. Paying Taxes
3. Trading Across Borders
4. Closing a Business

The above stages alongside with the associated legal/regulatory requirements are as follows:

Starting a Business

It involves the necessary steps required for a business to operate legally. It includes permits, inscriptions, notifications etc. As suggested by the study (World Bank & International Finance Corporation, 2009), on average it takes 12 procedures to start a business. Out of these, eight are the national regulations while the remaining are the state regulations. The high number of regulations is due to the multiple tax and social security registrations. Moreover, due to the differences in the state regulations, the cost and time required to start up a business varies considerably across the cities.

The main drawback of the system is the absence of the single access points for regulating the whole process. Currently, a businessperson has to visit multiple agencies to get his business registered. The creation of a single access point will speed up the registration process. Some state governments have initiated the process for e.g. the state of Orissa and Andhra Pradesh has merged the registration of VAT and profession tax at the same office. Lastly, the government should streamline the entire process and should bring down the business start-up costs to make it more affordable.

Paying Taxes

This section examines the tax structure and the mandatory contributions that a company must pay in India. It also examines the sophisticated tax payment process and the financial burden of cumulative taxes on the businesses. Lastly, it inspects the recent tax reforms introduced for the businesses.

The study (World Bank and International Finance Corporation, 2009) ranks India as 169 out of 181 economies in ease of paying taxes. It estimates that on average an Indian business spends 278 hours yearly, dealing with the tax regulations. It takes about 68.4% of company's profit and 65 different payments to comply with all national and state tax requirements. In contrast, Hong Kong requires only requires 80 hours, 4 yearly payments amounting to 24.2% of the profits for paying the taxes.

The Indian government has introduced several reforms to streamline the tax system. In 2005, it introduced the VAT (Value Added Tax). By 2008, all Indian states successfully implemented the VAT. Additionally, the government revised the central sales tax consecutively in two years. In 2007, it lowered from 4% to 3% and finally reduced to 2% in 2008.

In another measure to boost the taxation reforms, the central government has made the payment of corporate income tax mandatory through the online payments and electronic filing system. It results in quick processing and allows entrepreneurs to focus on their business. As a result more than 2.5 million corporate income tax returns were filed online in the year 2008, a 249% increase in comparison to 2007 (World Bank and International Finance Corporation, 2009, p. 29). Apart from this, the government is planning to replace the central sales tax by the VAT. Furthermore, the government is planning to launch Goods and Services Tax (GST) to unify the state and central taxation system. The GST, after implementation, will eliminate the cascading effect of multiple taxation systems.

Although, the taxation system has witnessed some reforms but the government needs to meet the deadlines for the proposed improvements like the GST. Additionally, it should develop and promote the electronic tax payment and should stress on consolidating the overall number of payments.

Trading Across Borders

This section covers the procedural requirements for trading internationally. This business stage is of major relevance to this study as most of the participating organizations of this research are either active in international trade or are planning to do so. The legal factors that influence the international trading are documents and associated time/cost (in terms of custom clearance, inland transporting etc). The international trading involves both importing and exporting but this section will only focus at exporting because most of the participating organizations of this research are only active in exporting.

The study (World Bank & International Finance Corporation, 2009) sheds light on the shortcomings of the process. It indicates that the paperwork consumes the major time of exporters in both inland and coastal cities followed by the port activities and custom clearances. Inland transportation accounts for only a small part of the total exporting time.

However, according to the study (World Bank & International Finance Corporation, 2009), India was the top global reformer in this category in 2008. The Indian government has introduced some major reforms to foster international trade. All these developments reflect a legal/regulatory change. To reduce the documentation time for inland exporters, the government opened Inland Container Depots (ICD) across the country. It allows inland exporters to complete all clearances, inspections and payments in their respective cities without the need of going to the seaports or operating through an agent. Similarly, the introduction of ICEGATE (Indian Customs and Excise Gateway) at major seaports has significantly accelerated the custom clearance. The ICEGATE system allows the electronic transfer of cargo manifests by the incoming ships. It results in the initiation of the clearance process even before the arrival of the ship.

The inland transporting still faces some legal bottlenecks. The cargo undergoes screening at various checkpoints across the trade route, particularly at the state and district borders thus causing the delay. However, the paperwork causes the maximum delay and requires a revamp to increase the productivity.

Closing a Business

This business stage covers the legal procedures involved in the bankruptcy and debt recovery process. The Indian legal/regulatory framework dealing with the bankruptcy and debt recovery has matured in the past years.

The study (World Bank & International Finance Corporation, 2009) shows that the bankruptcy and insolvency process in India has undergone noteworthy reforms. In order to speed up the debt recovery claims, the government introduced DRT (Debt Recovery Tribunals) in 1993. In 2002, it introduced SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) Act for faster debt recovery with the minimum intervention of the courts. However, the problem persists. The number of DRT's has only increased from 29 to 33 during 2005 to 2008. It implies that most of the cities still do not have DRT's to resolve the debt recovery.

The legal procedure for closing a business and debt recovery is a painful task in India. For easing up the process, the government needs to ensure the expansion of the regulatory bodies such as the DRT's.

The Technological Environment

The manufacturing industry and technology go hand in hand. The technological exposure of a business depends on the nature of its activity. Some businesses rely heavily on technology such as the automobile industry while for others the technological change is not rapid. For the manufacturing industry, the technological advancement is not limited to better machinery. The technical development like computers, fax, Internet etc has greatly eased the business. The computer has transformed the information management process and has resulted in the creation of the paperless office. Similarly, the fax and the Internet have made distant communication easy. The Internet, in specific, has created endless business opportunities for the small businesses. Now these businesses can promote themselves cheaply and can directly take orders from customers across the globe.

The Indian small manufacturing industry is witnessing the technological change. However, most of these businesses still use inefficient production methods and obsolete machinery. The Indian government and The Ministry of Micro, Small and Medium Enterprises have taken various initiatives for promoting the technological advancements in the industry. The ministry has set up following autonomous bodies for technically assisting the Indian industry (Development Commissioner MSME, 2009a):

MSME Tool Rooms and Training Centres

The government has set up 10 tool rooms across India. These tool rooms assist the businesses in technological up-gradation by providing them consultation and training their work force on the latest available technologies.

MSME Technology Development Centre

They are the product specific centers. They provide technical services and assist in the technological up-gradation and work force development in specific product categories.

Additionally, the government also operates various schemes and incentives to promote the technical up-gradation in businesses (Development Commissioner MSME, 2009b). These schemes are as follows:

Credit Linked Capital Subsidy Scheme for Technology Up-gradation

The scheme promotes the micro and small enterprises to up-grade their machinery. It provides them a 15% assistance of the bank credit.

ISO 9000/ISO 14001Certification Reimbursement Scheme

The scheme reimburses 75% (Or INR 75,000 whichever is minimum) of the company expenses to acquire ISO 9000 or ISO 14001 certification.

The government involvement together with the increasing competition has started the technical evolution in the industry. Moreover, the international competition from China is forcing the small manufacturers to increase their efficiency and quality through better technological exposure. This transition time for the Indian small manufacturers provides the valuable opportunity to examine the impact of the technological environment.

Environmental Scanning Practices in Small Businesses

The environmental scanning refers to the process of monitoring and evaluating the business environment. The organizations can utilize it to predict the emerging trends and to stay ahead of the competition.

Until the early 1980's, the strategic planning was supposed to be the domain of the large organizations. However, the study by Robinson & Pearce (1984) showed the presence of environmental scanning in the small businesses. It also confirmed the use of the environmental scanning in the planning processes of the small businesses.

Environmental scanning is an extensive task. It involves the assessment of the current business environment together with the upcoming developments. It requires dedicated organizational resources. Therefore, the organizations should create a specialized staff for the regular monitoring of the business environment. However, the creation of such a specialized unit requires a huge capital investment, which the small businesses can rarely afford. It suggests that the entrepreneurs carry environmental scanning differently than the managers of the large firms (Kaish & Gilad, 1991).

A study by Smeltzer, Fann & Nikolaisen (1988) identified five key differences between the large and the small firms, which led to differences in the scanning practices. These five differences are as follows:

1. The owner/manager of a small firm is responsible for carrying out both functional and strategic activities while in the large firms, top management conducts the strategic activity and the middle management takes care of the functional activity.
2. In large firms, either a specialized department or sales division carries environmental scanning while in the small firms usually a single person handles it.
3. Large organizations tend to employ more formal policies and procedures in comparison to the small firms. It gradually results in the formalization of the information sources used for the scanning. As an outcome, the information becomes more filtered as it passes through the organizational hierarchy.
4. Large organizations have the superior external linkages that allow better information exchange with the external environment. Moreover, being resourceful, they are more likely to employ environmental scanning services.
5. Large organizations can better influence the business environment due to the availability of better resources.

Additionally, the organizations also differ in terms of their environmental scanning patterns. The environmental scanning pattern refers to the frequency of environmental scanning in an organization. The scanning pattern categorizes into three categories- Irregular, Periodic or Continuous. The organizations following the irregular scanning pattern are reactive in nature. They tend to employ the environmental scanning only in the times of uncertainty. The periodic scanning organizations are proactive and employ environmental scanning measures after frequent intervals. In contrast, the continuous scanning organizations are relentlessly engaged in the environmental scanning to identify any emerging opportunities or threats. Ideally, the organizations facing a dynamic environment should employ the continuous scanning pattern.

The study by Brush (1992) and Smeltzer, Fann & Nikolaisen (1988) identifies the established scanning patterns in small businesses. The later evaluated the scanning frequency of the firm on a 10 points scale. According to the findings, only 16 out of 88 firms were using irregular scanning patterns while 32 firms were using periodic environmental scanning. Almost half (40) firms were found to be using the continuous scanning. It shows the sensitivity of small businesses towards the business environment. Brush (1992) took a different approach. He identified the scanning patterns of the small firms based on the category of the required business information. According to the observation, more than half of the small firms never collected any business information about the remote markets. In contrast, they often collected the information about the immediate market environment. Predominantly, the customer and market monitoring was periodic while the competitor monitoring was done routinely or continuously. Taking the limited number of employees in the account, the focus on collecting the data from the immediate markets rather than the remote ones seems justified.

Determining the scanning patterns of the participating organizations is central to this research. It directly relates to the research objective 3(a) as the organizational scanning pattern determines the alertness of the organization. The proactive organizations exhibit either the periodic or the continuous scanning patterns while the reactive organizations exhibit irregular scanning patterns.

Moreover, the small and large firms face the differentiation in terms of the information sources employed for the environmental scanning. As pointed earlier, the large firms being more resourceful have the superior external linkages thus allowing better information exchange. The above studies (Brush, 1992; Smeltzer, Fann & Nikolaisen, 1988) uncover the various information sources used by the small businesses and classifies them into the personal sources and the impersonal sources. The personal sources of information involve the people with whom the businesspersons interact regularly while the impersonal sources involve the documented sources like magazines, journals etc and oral sources with whom businesspersons have limited interaction like suppliers, professional organizations etc.

The findings of both the studies appear to contradict each other. According to Smeltzer, Fann & Nikolaisen (1988) the dominant personal sources include the family followed by the customers and friends. However, Brush (1992) strongly challenges the above notion. According to him, the dominant personal sources of information comprise of the customers followed by the business contacts and the competitors. The gap in the two studies becomes prominent when one looks at the relative positions occupied by the family members and the competitors. Smeltzer, Fann & Nikolaisen (1988) classified the family members as the most dominant personal information source while the competitors occupied the bottom position. In contrast, Brush (1992) has placed the family members at the bottom while placing the competitors as one of the major personal sources of the information.

The trade magazines are the central impersonal source of the information apart from the journals, books, sales broachers, advertising etc. The both studies (Brush, 1992; Smeltzer, Fann & Nikolaisen, 1988) provide an exhaustive list of the major impersonal sources used in the small firms. However, Brush (1992) fails to account for the oral impersonal sources.

The information sources shape the perception of the business environment in the minds of the owners/managers in-turn affecting the response behavior of the business. Determining the information sources of the participating organizations relates to the objective 3(c) of the current research. It will contribute in understanding the role of the information sources in creating the business environment perception and thus influencing the response behavior of the businesses.

The study by Smeltzer, Fann & Nikolaisen (1988) shows the owners/managers perception of their business environment. More than 50% of the managers/owners believed their environment to be relatively stable. The above findings are useful as they closely relate to the research objective 3(b) of the current research. It will be interesting to discover any differences in the perception of the Indian entrepreneurs about their business environment.

Threat Rigidity Hypothesis v/s Prospect Theory

The organizational response in a dynamic business environment depends on the degree of the organizational alertness and the amount of the environmental stimuli channeled into the organizational decision making process (Cummings & Staw, 1995, p. 289).

In a dynamic business environment, the organizational response varies according to the classification of a development as either threat or opportunity. Threat Rigidity Hypothesis (Cummings & Staw, 1995) and Prospect Theory (Kahneman & Tversky, 1979) treats the concept of threats and opportunities in a contradictory manner. The above studies classify the organizational actions using the perception of the executives on differentiated dimensions of threats and opportunities.

Threat Rigidity Hypothesis

Threat Rigidity Hypothesis (Cummings & Staw, 1995) differentiates threats and opportunities on the dimensions of control. It views threats to be 'control reducing' and opportunities to be 'control enhancing'. It states that the executives associate threats with the negative outcomes and the possibility of reduction in their control over the organization. Furthermore, it suggests that the executives facing threats shift their focus on the internal domains of the organization where they exhibit a greater control. It advocates that in case of a threat the organizational focus shift to the internal domains like increasing the internal efficiency, employee management etc.

Additionally, the hypothesis states that the executives associate opportunities with a sense of positive outcomes and the increased sense of control over the organizational activities. It suggests that the executives facing opportunities shift their focus on the external business environment for activities like the new product launch, entering new markets etc.

Prospect Theory

Prospect Theory (Kahneman & Tversky, 1979) contradicts the threat rigidity hypothesis. It associates threat with the 'likely losses' and opportunities with the 'likely gains'. It proposes that in case of a threat the executives shift the organizational focus towards the external business environment for searching the information to manipulate the environmental forces.

Additionally, it advocates that in case of an opportunity the executives shift the organizational focus towards the internal domains of the organization as they feel they have more to lose than to gain.

The organizational response behavior is highly influenced by the direction of the organizational response which itself is subjective to the owners/managers interpretation of the threats and opportunities. In accordance with the research objective 3 (d), this research will examine the response behavior of the organizations by analyzing the direction of the organizational response. The above theories will help in determining the organizational response direction relative to the owners/managers perceived interpretation of threats and opportunities.

Chapter 3

Methodology

As mentioned before, the research examines the impact of the macro business environment on the small manufacturing businesses in India. Moreover, it evaluates the response behavior of these businesses in reaction towards the dynamic business environment.

This dissertation has used the qualitative research methods. The methods used in this study include semi-structured interviews, organizational visits (observations) and digital photography. The use of multiple methods has increased the strength of the common findings. The section below covers the epistemological consideration, methodological approach and the methods in detail.

Epistemological Consideration

The epistemological paradigm relevant to this research is that of interpretivism. Interpretivism refers to the sociological approach that stresses on understanding the social world through an examination of the interpretation of that world by its participants (Bryman, 2008, p. 366). It sees social interactions as the prime source of data generation and believes that meanings are not inherent but generated through the social interactions.

The present research determines the impact of the macro business environment on the small manufacturing businesses in India. The research methods employed in this study generates a great deal of interpreted data and demands a considerable social interaction. Taking the above facts in consideration, the application of the interpretivist paradigm in this research seems justified.

Methodological Approach

Ethnography

Babbie & Wagenaar (2004) describes ethnography as a detailed and accurate description of some natural setting. Ethnography requires the researcher to gain access to a group and immerse himself/herself in that group for an extended period, observing behavior, listening to the conversations and asking questions (Bryman, 2008, p. 402).

Ethnography involves gaining access to the environment (setting) and developing the understanding of the culture and context to facilitate a better interaction with the natives. The theoretical notion of ethnography assumes that the behavior (data) is socially situated, context related, context dependent and context rich (Cohen et al, 2007, p. 167). Moreover, the researcher needs to understand the situation and its context, as the meaning arises out of the social situation through the interpretive process (Cohen et al, 2007, p. 167).

The ethnographic approach allowed the research to progress in the natural context and surroundings. It allowed the researcher to develop familiarity with the environment resulting in the better understanding of the organizational culture and ethics. Furthermore, it resulted in the development of mutual trust between the researcher and the researched thus significantly easing the data extraction process in the later stages.

Inductive Approach

The notion of the business environment has received significant exposure in the business studies. The presence of the huge amount of literature justifies the above observation. However, the absence of relevant literature on the Indian context is surprising. Moreover, the present study also evaluates the response behavior of the small organizations, an area overlooked by the researchers. The above observations show the exploratory nature of this study and warrant the adaptation of inductive stand.

The inductive approach involves the generation of theory from the data collected during the research. It involves drawing generalized assumptions out of the observations (Bryman, 2008, p. 11). The theory generated henceforth is practically free from the generic assumptions of the other theories.

Qualitative Methodology

The present study uses the qualitative research methods. Qualitative approach involves "words rather than quantification in the collection and analysis of data" (Bryman, 2008, p. 22). According to Berg (2007, p.3), qualitative research refers to the meanings, concepts, definition, characteristics, metaphors, symbols and description of things.

The research methodology also depends on the nature of data expected to generate during the study. As mentioned above, the present study assesses the impact of the macro business environment on the small manufacturing businesses in India. The organizational visits (observations), digital photography and semi- structured interviews of the owners/managers will generate the primary data. The above data collection methods will produce a considerable amount of interpreted data, which certifies the use of qualitative methodology. Moreover, according to Patton (1987), qualitative methods are suited to an inductive approach.

However, qualitative methodology faces a strong criticism as well. As Bryman (2008, p. 391) puts it, qualitative research fetches criticism of being too impressionistic and subjective. It means that qualitative findings closely relate to the researcher's views and personal relationships he develops with studied people. Additionally, the qualitative approach faces the issue of replication. Many quantitative researchers argue that it is almost impossible to replicate an existing research, since there are hardly any standard procedures to follow. Moreover, there are concerns regarding the generalization. The main concern is about the consistency of the findings in another setting. Bryman (2008) replies the concerns regarding generalization by suggesting the generalization of generated theory rather than population.

Methods

This section covers the details of the methods used in this research. In accordance with its exploratory nature, the present research makes use of the inductive approach. It employs qualitative methods to assess the impact of the macro business forces on the small manufacturing businesses in India.

The research utilizes both participative and non-participative qualitative methods to provide depth and muscle to the findings. The participative qualitative method includes the semi-structured interviews while the non-participative qualitative methods involve organizational visits (observation) and digital photography.

Semi-Structured Interviews

Kvale (1996, p. 14) defines interview as the interchange of views between two or more people on a topic of mutual interest. Interview is the most commonly used qualitative method. The majority of the qualitative research articles use the interviews (Silverman, 2005, p. 238-9). Moreover, Bryman (2008, p. 436) believes that the ethnography involves a substantial amount of interviewing.

The investigative nature of this study has prompted the use of the semi-structured interviews. The semi-structured interviews are flexible and allow the researcher to bring up new questions during the interview. According to Jankowicz (2005), the semi-structured interviews conceive a more advantageous research method. It is relatively economical in terms of time and resources (Silverman, 2006, p. 113). In addition, it allows the researcher to explore a few general topics to help uncover the participant's views but otherwise respects how the participant frames and structures the response. The unique approach of allowing some tangents during the conversation helps in getting insight into what the interviewee sees as relevant and important and sometimes presents some additional information (Bryman, 2008, p. 437).

The following sections cover issues related to the semi-structured interviews such as sampling, and interview design. Furthermore, the information about the participating organizations and the interview process is also detailed.

Sampling

Schwandt (2001, p. 232) suggests that the interviewee selection should not be "for their representativeness, but for their reference to the research question". The sample selection for the present research reflects the spirit of the above directive. The present research aims to assess the impact of the macro business environment on the small manufacturing businesses in India. In harmony with the research objective, the chosen research sample for this study deliberately fits a certain research profile.

The participating organizations of this research are operating in the National Capital Region (NCR) including the New Delhi and the adjoining city of Aligarh. The small businesses owners emerged as the preferred choice for the interviews because of their role as the sole decision makers in their organizations. The participating criteria needed the businesses to be engaged in the manufacturing activity. Moreover, the businesses needed to fall under the category of small business in accordance with the Micro, Small and Medium Enterprise Development Act 2006. To ensure the homogeneity of the sample, it was made sure that these businesses employ less than 60 people. The above measures warrant the homogeneity of the sample and allow the findings of the research to generalize.

The present research implemented the snowball sampling technique for sample collection. The researcher accessed the participating organizations through his existing contacts in the manufacturing industry. As a result, the researcher succeeded in conducting the interviews of seven owners of small manufacturing businesses. The following section details the participating organizations together with their basic details.

Interview Design

The interview question design is in unison with the research objectives. The interview classifies into three sections to ensure accordance with the research objectives. Each of the three sections serve a specific purpose as mentioned below:

Section I: It includes questions for determining the active macro forces in the participating organizations.

Section II: It includes questions for assessing the impact of the macro forces on the participating organizations.

Section III: It incorporates questions for examining the response behaviour of these businesses in reaction to the dynamism in the business environment.

Interview Process

The semi-structured interviews took place at the business premises of the respective organizations. The researcher fixed the interview time after taking the consent of the business owners.

Prior to interviews, the business owners and researcher discussed the general nature of the business. Moreover, the researcher briefed the business owners about the concept of the business environment and the background of the study. Furthermore, the researcher took the approval of the business owners before recording the interview. All the above steps helped in setting the background for a non-threatening, cooperative interview process. The interviewer laid considerable emphasis towards creating a rapport between him and the interviewee.

Each session lasted for nearly half an hour. In some cases, the researcher encountered initial difficulties in convincing the business owners that none of their critical business information will be collected for the research. However, due to his patience, the researcher succeeded in convincing the business owner about the true nature of the study.

Organizational Visits

The organizational visits are the intrinsic part of the ethnographic approach. It helps in building the trust and commitment between the observer and the observed thus making the work of information mining easier in the later stages. Moreover, it allows the research to progress in the natural context and surroundings consequently permitting the researcher to establish familiarity with the organizational working environment.

The major obstacle in this perspective is about gaining access inside the organization. According to Shenton & Hayter (2004), gaining entry in the research locale can be difficult, so researchers should be flexible regarding their tactics and strategies. To mitigate the above concerns, the researcher successfully negotiated the confirmed access grants from the participating organizations of the study.

Digital Photography

The digital photography strongly satisfies the notion of "to see is to believe". The present research employed the digital photography to examine and compare the technological exposure of the participating organizations. It provided useful insight in assessing the technological environment faced by the small manufacturers in India. The digital photography covered only the technological aspect of the macro business environment as all other remaining factors (political, economic, social, legal and competitive forces) hardly generate any 'tangible impact' on the businesses.

The researcher took the photographs after obtaining the necessary consent from the business owners.

Data Analysis

The data for the present research came through the semi-structured interviews, organizational visits (observations) and digital photography. The researcher has prepared the observation log to summarize his observations during the organizational visits. In addition, the researcher has transcribed the semi-structured interviews and has published the content of the digital photography.

The data analysis employed the triangulation technique. The triangulation involves combining several lines of sight to obtain a clear picture of the reality (Berg, 2007, p. 5). In addition, it also provides the means of mutual confirmation and validation of findings (Leedy, 2001). Moreover, Fielding & Fielding (1986, p. 31) suggests that the triangulation is not only a combination of different approaches but also an attempt of relating them to counteract threats of validity. The study employs triangulation by using multiple methods (methodological triangulation) and by using multiple research participants (organizations).

During the analysis, the data underwent thematic categorization to relate to the research objectives and the existing literature. The next chapter covers the data analysis along with the recommendations.

Ethics

According to Cohen et al (2007, p 382), the qualitative research methods have an ethical dimension as they involve interpersonal interaction and produce information about the human condition. Bearing the above notion in mind, the researcher took several steps to retain the ethical element of the research. The steps taken are as follows:

1. The researcher fixed the interview schedule after taking the consent of the business owners.
2. The researcher briefed the interviewees about the concept of the business environment and the background of the study.
3. Through the participant information sheet (Appendix B), the researcher assured the participants about their right to withdraw from the study at any point. In addition, the researcher provided his contact details to the participants to promote the resolution of any future query or problem. Furthermore, the researcher informed the participants about their choice of being anonymous. However, all the participants independently decided to be non anonymous for the research.
4. Prior to interviews, the researcher obtained the written consent of the interviewees. The consent form informed the participants about their right to review the research before its publication.

Research Limitations

The major limitation for the present research came from some of the business owners (interviewees) who were unaware of the notion of the business environment. In such cases, the researcher provided the brief explanation of the concept.

Moreover, as mentioned before, some business owners raised their concerns regarding the confidentiality of their critical business information. To neutralize such concerns, the researcher assured these business owners for not collecting any critical business information. However, the researcher realized that these business owners were very watchful while answering the questions. The above watchfulness may have influenced the response of these business owners.

Lastly, the present research employs the qualitative methods and interpretive epistemology for data collection. The above approach can suffer from data distortion or misinterpretation that can affect the findings of the research.