Nature of Business Environment
Introduction to Business
Business is the organized efforts of enterprises to supply consumers with goods
and services. Businesses vary in size as measured by number of employees or
by sales volume.
All businesses share the same purpose to earn Profits. However, the
purpose of business goes beyond earning profits.
It is an important institution in society and the role of business is crucial.
Be it for the supply of goods and services
Creation of job opportunities
Offer of better quality of life
Contributing to the economic growth of the country and putting it on the
global map
Society cannot do without business and vice versa.
Scope of Business
Business included all activities connected with production, trade,
banking, insurance, finance, agency, advertising, packaging and
numerous other related activities. Businesses include all efforts to
comply with legal restrictions and government requirements and
discharging obligations to consumers, employees, owners and to
other interest groups which have stakes in business directly or
indirectly.
Characteristics of Today’s Business
Change - Transition
Opportunities
Competition
Business
Technology Diversification
Information Globalisation
Business during the 21st Century
• There is a trend towards mini organizations alongwith large corporations.
• Existence of flexible, flat and team based structures
• Business is knowledge based. Processes have become complex. Brain power is in great demand.
• Information technology will take care of all data management and networked computers handle
information.
• Organisations have become flat.
• Dispersed ownership, open minded and a transparent environment is encouraged
1. Three types of diversification maybe distinguished : Concentric, horizontal and conglomerate
diversification. Concentric diversification refers to the process of adding new, but related products or
services. Eg : HLL which as Liril, Pears, Rexona, Lux and Lifebuoy. Horizontal diversification is adding
of new, unrelated products or services for present consumer base. Conglomerate diversification refers
to adding new and unrelated products or services.
Environment
Environment refers to all external forces which have a bearing on the
functioning of business. ‖Environment are largely if not totally external,
and beyond the control of individual industrial enterprises and their
management. These are essentially the givers within which firms and
their managements must operate in a specific country and they vary,
from country to country‖.
However, the term business environment refers to the
External Factors. The external environment has two
components ie business opportunities and threats to business.
Simmilarly, the organisational environment has two components
ie. strengths and weaknesses of the organisation. A SWOT
analysis is thus the first step in strategy formulation
Factors influencing Business Decision
Internal Environment Business Decision External Environment
BUSINESS ENVIRONMENT
Macro Environment
Micro Environment
Internal Environment
Financiers Mission / Objectives
Suppliers Management Structure Economic
Customers Internal Power Relationship Technological
Competitors Physical Assets & facilities Global
Public Demographic
Mktg Intermediaries Socio-Cultural
Business Political
Decision
Company image
Human resources
Financial Capabilities
Technological Capabilities
Marketing Capabilities
Internal Environment
Any business has certain vision, mission and objectives and a
strategy to achieve them. Formulation of strategy is defined as
establishing a proper firm-environment fit. Indeed the objectives
should be based on an assessment of the external environment
and the organizational factors (internal environment).
Vision
Mission
Objectives
Management Structure
Human Resources
Financial Factors
Company Image and Brand Equity
Micro Environment
The Micro environment consists of different types of stakeholders -
customers, employees, suppliers, marketing intermediaries, competitors. It is
also known as the Task Environment and Operating Environment and has a
direct bearing on the operations of the firm. Changes in the micro
environment will directly affect and impinge on the firm's activities.
Macro Environment
The macro environment consists of factors which are beyond the control of
the business. There is a symbiotic relationship between business and the
environmental factors, environmental factors are dynamic and a particular
business firm, by itself, may not be in a position to change it’s environment.
Macro Environment includes:
Political Environment
Economic Environment
Technological Environment
Socio-cultural Environment
Global Environment.
Technological Environment
Technological is the systematic application of scientific or other
organized knowledge to practical tasks.
Technological environment hold new technological innovation, new
products, the state of technology, the utilization of technology for
maximum inputs and outputs, the obsolescence of technology and the
dynamic changes that frequently occur in technologies which enable
firms to get a competitive advantage
Technology reaches people through business
Helps in increased productivity
Business needs to spend on R & D and keep up with the technological
advances around them
Technology leads to introduction of new products and older products
becoming outdated and redundant.
Technological advances leads to high expectations of consumers in
terms of quality
Leads to system complexity
Demand for capital
Political Environment
Political Environment refers to the influence exerted by the three
political institutions ie. legislature, executive and judiciary in
shaping, directing, developing and controlling business
activities.
The constitution of a country
Political Organisation
Political Stability
Image of the country and its leaders
Foreign Policy
Laws governing business
Flexibility and adaptability of laws
The Judicial System
Economic Environment
Economic Environment refers to all forces which have an economic
impact on Business.
The economic environment consists of the demand dynamics, supply
situation, pricing factors, degree of competitiveness, and impact of
profitability. It includes the fiscal policy, monetary policy and the taxation
policy, the FDI norms, the investment criterion and financing decisions.
Economic environment includes:
Growth strategy
Industry
Agriculture
Infrastructure
Money and Capital Markets
Per capita and national income
Population
New Economic Policy
.
Global Environment:
The global environment refers to those factors which are relevant to
business, such as the WTO principles and agreements; other
international conventions/ treaties / agreements / sentiments in other
countries etc. For eg hike in crude oil prices has a global impact etc.
World is becoming one market
Improving quality
Competition from MNCs
Capital and technology transfers
Deciding which markets to enter and what products to manufacture
Adjusting the management process
Socio-Cultural Environment:
Culture creates people
Culture and globalization
Culture determines people’s attitude to business and work.
Caste system
Spirit of collectivism
Education
Ethics in business
Social responsibility
Social audit
Corporate governance
External Environmental Analysis
Environmental Analysis has three goals:
Provides an understanding of current and potential changes taking place
Environmental Analysis should provide input for strategic decision making.
Facilitate and lead to strategic decisions within an organization.
Environmental Analysis and diagnosis give strategists time to anticipate
opportunities and to plan to take optional responses to these opportunities. It
also helps strategists to develop an early warning system to prevent threats or to
develop strategies which can turn a threat to a firm’s advantage‖. Firms which
systematically analyse and diagnose the environment are more effective than
those which do not.
Process of Environmental Analysis:
The analysis consists of four steps:
Scanning : Detect early signals of possible environmental change and detect
environmental change already underway.
Monitoring : Purpose of monitoring is to assemble sufficient data to discern
whether certain trends are emerging, identification of the trends and
identification of areas for further scanning.
Forecasting : It is concerned with developing projections of the direction, scope
and intensity of environmental change.
Assessment : To determine implications for the organisation’s current and
potential strategy.
Environmental Analysis and Strategic Management
Defining Business Mission and Objectives
SWOT Analysis
Environmental Analysis + Self Appraisal
Strategic Alternatives and Choice of Strategy
Implementation of Strategy
Evaluation and Control of Strategy
Competitive Structure of Industries
The competitive structure of industries is a very important business
environment. Identification of forces affecting the competitive
dynamics of an industry is very useful in formulation of strategies.
As per Michael Porter’ well known model of structural analysis of
industries, the state of competitions depends on:
New Entrants
Threat of new entrants
Suppliers Bargaining power Rivalry among firms Bargaining power Buyers
Threat of substitutes
Substitutes
Porter’s analysis determines the competitive intensity of the industry
and the attractiveness of the market. A highly competitive industry
is one approaching ―Perfect Competition‖ whereby businesses are
only able to earn normal profits.
Rivalry among Existing firms:
Firms in an industry are mutually dependent – competitive
motives of a firm usually affects others and may be
retaliated. Factors influencing the intensity of rivalry are:
Number of firms and their Relative market share
State of Growth of Industry: In stagnant, declining and
slow growth industries, a firm is able to increase its sales
by increasing the market share.
Fixed or storage costs: In case of high fixed costs,
strategy of firms is to increase sales which in turn would
improve on capacity utilization.
Indivisibility of capacity augmentation : Where there are
economies of scale, capacity increases would be in large
blocks necessitating, efforts to increase sales to achieve
capacity utilization norms.
Rivalry among Existing firms:
• Product standardization, after sales service: In case
of firms which have standardized products; it is price,
distribution and after sales service which become the
distinguishing factors.
Strategic stake: Rivalry becomes more intensive if
the firms have high stakes in achieving success
there.
Exit Barrier: If exit barriers are high, firms would keep
competing in the same industry even though it might
not be very attractive.
Diverse Competition: Competitors with diverse
strategies make the industry highly competitive.
Switching costs: One time costs that the buyer faces
on switching from one supplier’s product to that of
another ie cost of new ancillary equipment etc.
Expected Retaliation
Threat of Entry:
Potential competition tends to be high if the industry is profitable or
critical and entry barriers are low. Some of the common entry barriers
are:
Government Policy
Cost Disadvantages: Cost advantages enjoyed by established firms
may discourage entry of new firms such as learning curve, favorable
location etc.
Product Differentiation: Characterized by brand image, customer loyalty
etc. may deter new firms from entering the market.
Monopoly Elements
Capital Requirements : High capital intensive nature of the industry is
an entry barrier to small firms
Threat of substitutes
An industry which has close substitutes available is highly competitive
in nature. Existence of close substitutes increases the propensity of
consumers to switch to alternatives in response to price increases.
Perceived level of product differentiation in the minds of the consumer
is also a highly influential factor.
Bargaining power of Buyers:
Buyers can in turn also be potential competitors as they may integrate
backwards or bargain for lower costs, better quality of the product etc.
The volume of purchase relative to the total sale of the seller
The importance of the product to the buyer in terms of the total cost
Extent of standardization or differentiation of the product
Switching costs
Extent of buyer’s information
Bargaining power of sellers:
Important determinants of supplier power are the following:
Extent of concentration and domination in the supplier industry
Importance of the product to the buyer
Importance of the buyer to the supplier
Extent of substitutability of the product
Switching costs
Extent of standardization of the product
Potential for forward integration by suppliers
SWOT Analysis
SWOT stands for Strengths, Weaknesses,
Opportunities and Threats
Identification of the threats and opportunities in
the external environment and strengths and
weaknesses in the internal environment of the firms
are the cornerstone of business policy formulation.
It is the SWOT analysis which determines the
course of action to ensure the growth / survival of
the firm.
Strengths
•Strengths—internal to the unit; are a unit’s resources and capabilities that can
be used as a basis for developing a competitive advantage; strength should be
realistic and not modest.
Your list of strengths should be able to answer:
•What are the unit’s advantages?
•What does the unit do well?
•What relevant resources do you have access to?
•What do other people see as your strengths?
•What would you want to boast about to someone who knows nothing about this
organization and its work?
•Examples: good reputation among customers, resources, assets, people, :
experience, knowledge, data, capabilities
•Think in terms of: capabilities; competitive advantages; resources, assets,
people
•(experience, knowledge); marketing; quality; location; accreditations
•qualifications, certifications; processes/systems
Weaknesses
•Weaknesses—internal force that could serve as a barrier to maintain or
achieve a competitive advantage; a limitation, fault or defect of the unit;
•It should be truthful so that they may be overcome as quickly as
possible
Your list of weaknesses should be able to answer:
•What can be improved?
•What is done poorly?
•What should be avoided?
•What are you doing as an organization that you feel could be done
more effectively/efficiently?
•What is this organization NOT doing that you feel it should be doing?
•If you could change one thing that would help this department function
more effectively, what would you change?
•Examples: gaps in capabilities, financial, deadlines, morale
•lack of competitive
Opportunities
•Opportunities—any favorable situation present now or in the
future in the external environment.
Examples: unfulfilled customer need, arrival of new technologies,
loosening of regulations, global influences, economic boom,
demographic shift
•Where are the good opportunities facing you?
•What are the interesting trends you are aware of?
•Think of: market developments; competitor; vulnerabilities;
industry/ lifestyle trends;; geographical; partnerships
Threats
•External force that could inhibit the maintenance or attainment of a
competitive advantage; any unfavorable situation in the external
environment that is potentially damaging now or in the future.
•Examples: shifts in consumer tastes, new regulations, political or
legislative effects, environmental effects, new technology, loss of key staff,
economic downturn, demographic shifts, competitor intent; market
demands; sustaining internal capability; insurmountable weaknesses;
financial backing
Your list of threats should be able to answer:
•What obstacles do you face?
•What is your competition doing?
•Are the required specifications for your job/services changing?
•Is changing technology threatening your position?
•Do you have financial problems?
•Could any of your weaknesses seriously threaten your unit?
POSITIVE/ NEGATIVE/
HELPFUL HARMFUL
to achieving the to achieving the
goal goal
Strengths
INTERNAL Origin Things that are Weaknesses
facts/ factors of the good now, Things that are bad
organization maintain them, now, remedy,
build on them change or stop
and use as them.
leverage
Opportunities
EXTERNAL Origin Things that are Threats
facts/ factors of the good for the Things that are bad
environment in future, prioritize for the future,
which the them, capture put in plans to
organization them, build on manage them or
operates them and counter them
optimize
SWOT Analysis of Indian Economy
Weaknesses
• High percentage of workforce involved
Strengths
in agriculture
• Huge pool of labor force
• Approx a quarter of population below
• High percentage of cultivable land
the poverty line
• Diversified nature of the economy
• High unemployment rate
• Availability of skilled manpower
• Inequality in prevailing socio economic
• Extensive higher education system
conditions, rural – urban divide
• High growth rate of economy
• Low productivity
• Rapid growth of IT / ITes Sector
• Huge population leading to scarcity of
• Abundance of natural resources
resources
• Low level of mechanization
• Red tapism, Bureaucracy
• Low literacy rates
Opportunities Threats
• Scope for entry of private firms in various • High fiscal deficit
sectors of business • Threat of government intervention in
• Inflow of FDI some states
• Huge foreign exchange prospects in IT / ITeS • Growing import bill
• Investment in R & D • Population explosion, rate of growth of
• Area of infrastructure population
• Huge domestic market : Opportunity for MNCs • Agriculture excessively dependent on
• Huge agricultural resources monsoon
AN ORGANIZATION’S ENVIRONMENT
Task Environment
Industry Sector Raw Materials
Competitors, Sector
Industry size and Suppliers, Human
Characteristics, Related Manufacturers,
Resources
Industries Real Estate
Socio-Cultural sector Sector
Labor Market, Employment
Age, Values, Beliefs, Education, Agencies, Universities, Training
Religion, Work Ethic, Urban vs. Schools, Employees in Other
Rural, Birth Rate Companies, Unionization
DOMAIN
Financial Resources Sector
Government Sector
City, State, Federal Laws and ORGANIZATION Stock Markets, Banks,
Regulations, Taxes, Services, Market Savings and Loans,
Court System, Political Sector Private Investors
Economic
Processes
Conditions Sector Technology
Sector Customers, Clients,
Recession, Unemployment Techniques of Potential Users of
Rate, Inflation rate, Rate of Production, Science, Products and Services
Macro Investment, Economics, Research Centers,
Growth
Environment Automation, New
Materials