1. Business Environment

1 SREERAM ACADEMY (Formerly SREERAM COACHING POINT)

BUSINESS ENVIRONMENT

The term Business Environment is composed of two words Business and Environment.

The word Business in its economic sense means human activities like production, extraction or

purchase or sales of goods that are performed for earning profits. Environment refers to the aspects

of surroundings.

Therefore, Business Environment may be defined as a set of conditions Social, Legal,

Economical, Political or Institutional that are uncontrollable in nature and affects the functioning of

organization. Business Environment has two components:

1. Internal Environment

2. External Environment

Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management,

usually within the control of business. Business can make changes in these factors according to the

change in the functioning of enterprise.

External Environment: Those factors which are beyond the control of business enterprise are

included in external environment. These factors are: Government and Legal factors, Geo-Physical

Factors, Political Factors, Socio-Cultural Factors, Demo-Graphical factors etc. It is of two Types:

1.Micro/Operating Environment

2. Macro/General Environment

FEATURES OF BUSINESS ENVIRONMENT (a) Business environment is the sum total of all factors external to the business firm and that greatly influences their functioning. (b) It covers factors and forces like customers, competitors, suppliers, government, and the social, cultural, political, technological and legal conditions. (c) The business environment is dynamic in nature that means, it keeps on changing. (d) The changes in business environment are unpredictable. It is very difficult to predict the exact nature of future happenings and the changes in economic and social environment. . (e) Business Environment differs from place to place, region to region and country to country. Political conditions in India differ from those in Pakistan. Taste and values cherished by people in India and China vary considerably.

IMPORTANCE OF BUSINESS ENVIRONMENT There is a close and continuous interaction between the business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively. As stated above, the business environment is multifaceted, complex, and dynamic in nature and has a far-reaching impact on the survival and growth of the business. To be more specific, proper


understanding of the social, political, legal and economic environment helps the business in the following ways: (a) Determining Opportunities and Threats: The interaction between the businesses and its environment would identify opportunities for and threats to the business. It helps the business enterprises for meeting the challenges successfully. (b) Giving Direction for Growth: The interaction with the environment leads to opening up new frontiers of growth for the business firms. It enables the business to identify the areas for growth and expansion of their activities. (c) Continuous Learning: Environmental analysis makes the task of managers easier in dealing with business challenges. The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in realm of business. (d) Image Building: Environmental understanding helps the business organizations in improving their image by showing their sensitivity to the environment within which they are working. For example, in view of the shortage of power, many companies have set up Captive Power Plants (CPP) in their factories to meet their own requirement of power. (e) Meeting Competition: It helps the firms to analyze the competitors strategies and formulate their own strategies accordingly. (f) Identifying Firms Strength and Weakness: Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments. Peter F Drucker has drawn two important conclusions about what is a business that are useful for an

understanding of the term business.

The first thing about a business is that it is created and managed by people.

The second conclusion drawn is that the business cannot be explained in terms of profit.

OBJECTIVES OF A BUSINESS

You want to perform well in your examination; you want to earn money to sustain your Livelihood; you want to be a good citizen; you want to help the poor and needy people. What are these? These may be different objectives that you want to achieve in your life. In the similar way every business has several objectives, which it wants to achieve. For instance, no business can prosper in the long run unless fair wages are paid to the employees and customer satisfaction is given due importance. Again a business unit can prosper only if it enjoys the support and goodwill of people in general. Business objectives also need to be aimed at contributing to national goals and aspirations as well as towards international well-being. Thus, the objectives of business may be classified as - a. Economic Objectives b. Social Objectives c. Human Objectives d. National Objectives e. Global Objectives


Economic Objectives Economic objectives of business refer to the objective of earning profit and also other objectives that are necessary to be pursued to achieve the profit objective, which includes creation of customers, regular innovations and best possible use of available resources. Let us learn about these. i. Profit earning Profit is the lifeblood of business; profit making is the primary objective for which a business unit is brought into existence. Profits must be earned to ensure the survival of business, its growth and expansion over time. Profits help businessmen not only to earn their living but also to expand their business activities by reinvesting a part of the profits. In order to achieve this primary objective, certain other objectives are also necessary to be pursued by business, which are as follows: a) Creation of customers A business unit cannot survive unless there are customers to buy the products and services. Again a businessman can earn profits only when he/she provides quality goods and services at a reasonable price. For this it needs to attract more customers for its existing as well as new products. This is achieved with the help of various marketing activities. b) Regular innovations Innovation means changes, which bring about improvement in products, process of production and distribution of goods. Business units, through innovation, are able to reduce cost by adopting better methods of production and also increase their sales by attracting more customers because of improved products. Reduction in cost and increase in sales gives more profit to the businessman. Use of power-looms in place of handlooms, use of tractors in place of hand implements in farms etc. are all the results of innovation. c) Best possible use of resources As you know, to run any business you must have sufficient capital or funds. The amount of capital may be used to buy machinery, raw materials, employ men and have cash to meet day-to-day expenses. Thus, business activities require various resources like men, materials, money and machines. The availability of these resources is usually limited. Thus, every business should try to make the best possible use of these resources. This objective can be achieved by employing efficient workers, making full use of machines and minimizing wastage of raw materials. Social Objectives Social objectives are those objectives of business, which are desired to be achieved for the benefit of the society. Since business operates in a society by utilizing its scarce resources, the society expects something in return for its welfare. No activity of the business should be aimed at giving any kind of trouble to the society. If business activities lead to socially harmful effects, there is bound to be public reaction against the business sooner or later. Social objectives of business include production and supply of quality goods and services, adoption of fair trade practices and contribution to the general welfare of society and provision of welfare amenities. i. Production and supply of quality goods and services Since the business utilizes the various resources of the society, the society expects to get quality goods and services from the business. The objective of business should be to produce better quality goods and supply them at the right time and at a right price. It is not desirable on the part of the businessman to supply adulterated or inferior goods which cause injuries to the customers. They should charge the price according to the quality of the goods and services provided to the society.


Again, the customers also expect timely supply of all their requirements. So it is important for every business to supply those goods and services on a regular basis. ii. Adoption of fair trade practices In every society, activities such as hoarding, black-marketing and over-charging are considered undesirable. Besides, misleading advertisements often give a false impression about the quality of products. Such advertisements deceive the customers and the businessmen use them for the sake of making large profits. This is an unfair trade practice. The business unit must not create artificial scarcity of essential goods or raise prices for the sake of earning more profits. All these activities earn a bad name and sometimes make the businessmen liable for penalty and even imprisonment under the law. Therefore, the objective of business should be to adopt fair trade practices for the welfare of the consumers as well as the society. iii. Contribution to the general welfare of the society Business units should work for the general welfare and upliftment of the society. This is possible through running of schools and colleges for better education, opening of vocational training centers to train the people to earn their livelihood, establishing hospitals for medical facilities and providing recreational facilities for the general public like parks, sports complexes etc. Human Objectives Human objectives refer to the objectives aimed at the well-being as well as fulfillment of expectations of employees as also of people who are disabled, handicapped and deprived of proper education and training. The human objectives of business may thus include economic well-being of the employees, social and psychological satisfaction of employees and development of human resources. i. Economic well being of the employees In business employees must be provided with fair remuneration and incentives for performance, benefits of provident fund, pension and other amenities like medical facilities, housing facilities etc. By this they feel more satisfied at work and contribute more for the business. ii. Social and psychological satisfaction of employees It is the duty of business units to provide social and psychological satisfaction to their employees. This is possible by making the job interesting and challenging, putting the right person in the right job and reducing the monotony of work. Opportunities for promotion and advancement in career should also be provided to the employees. Further, grievances of employees should be given prompt attention and their suggestions should be considered seriously when decisions are made. If employees are happy and satisfied they can put their best efforts in work. iii. Development of human resources Employees as human beings always want to grow. Their growth requires proper training as well as development. Business can prosper if the people employed can improve their skills and develop their abilities and competencies in course of time. Thus, it is important that business should arrange training and development programs for its employees. iv. Well being of socially and economically backward people Business units being inseparable parts of society should help backward classes and also people those are physically and mentally challenged. This can be done in many ways. For instance, vocational training programme may be arranged to improve the earning capacity of backward people in the community. While recruiting it staff, business should give preference to physically and mentally challenged persons. Business units can also help and encourage meritorious students by awarding scholarships for higher studies.


National Objectives Being an important part of the country, every business must have the objective of fulfilling national goals and aspirations. The goal of the country may be to provide employment opportunity to its citizen, earn revenue for its exchequer, become self-sufficient in production of goods and services, promote social justice, etc. Business activities should be conducted keeping these goals of the country in mind, which may be called national objectives of business. The following are the national objectives of business. i. Creation of employment One of the important national objectives of business is to create opportunities for gainful employment of people. This can be achieved by establishing new business units, expanding markets, widening distribution channels, etc. ii. Promotion of social justice As a responsible citizen, a businessman is expected to provide equal opportunities to all persons with whom he/she deals. She/he is also expected to provide equal opportunities to all the employees to work and progress. Towards this objective special attention must be paid to weaker and backward sections of the society. iii. Production according to national priority Business units should produce and supply goods in accordance with the priorities laid down in the plans and policies of the Government. One of the national objectives of business in our country should be to increase the production and supply of essential goods at reasonable prices. iv. Contribute to the revenue of the country The business owners should pay their taxes and dues honestly and regularly. This will increase the revenue of the government, which can be used for the development of the nation. v. Self-sufficiency and Export Promotion To help the country to become self-reliant, business units have the added responsibility of restricting import of goods. Besides, every business units should aim at increasing exports and adding to the foreign exchange reserves of the country. Global Objectives Earlier India had a very restricted business relationship with other nations. There was a very rigid policy for import and export of goods and services. But, now-a-days due to liberal economic and exportimport policy, restrictions on foreign investments have been largely abolished and duties on imported goods have been substantially reduced. This change has brought about increased competition in the market. Today because of globalization the entire world has become a big market. Goods produced in one country are readily available in other countries. So, to face the competition in the global market every business has certain objectives in mind, which may be called the global objectives. Let us learn about them. i. Raise general standard of living Growth of business activities across national borders makes available quality goods at reasonable prices all over the world. The people of one country get to use similar types of goods that people in other countries are using. This improves the standard of living of people. ii. Reduce disparities among nations Business should help to reduce disparities among the rich and poor nations of the world by expanding its operation. By way of capital investment in developing as well as underdeveloped countries it can foster their industrial and economic growth.


iii. Make available globally competitive goods and services Business should produce goods and services which are globally competitive and have huge demand in foreign markets. This will improve the image of the exporting country and also earn more foreign exchange for the country. ENVIRONMENTAL INFLUENCES ON BUSINESS

1. Apart from natural environment, environment of humans include family, friends, peers and neighbors. It also includes manmade structures such as buildings, furniture, roads and other physical infrastructure.

2. Business cannot function in isolation. Environment is the sum of several external and internal factors that affect the functioning of the business.

3. External factors are beyond the control of the organization. Business functions as a part of broader environment.

4. The inputs in the form of human, physical, financial and other resources are drawn from the environment. The business converts these resources through various processes into outputs of products/ services. The products and services are partly exchanged with the external client groups. The exchange process brings profit, goodwill and reputation.

5. Different organizations use different inputs, adopt different processes and produce different outputs. For e.g. School provides literates, hospitals provide health services, Restaurant provides food. The input output exchange activity is a continuous process and requires active interaction with external environment.

6. Business must continuously monitor the environment and adapt to the environment if it is to survive and prosper. A successful business has to identify, appraise and respond to the various opportunities and threats in its environment.

7. Environment is a combination of external and internal forces that affect the functioning of the business.

Problems in understanding the environment

1. The environment encapsulates many different influences. The difficulty is in making sense of this diversity in a way which can contribute to strategic decision making. Listing all conceivable environmental influences may be possible but it may not be of much use because no overall picture emerges influencing the organization.

2. The second difficulty is that of uncertainty. Managers typically claim that the pace of technological change and the speed of global communications mean more and faster change now than ever before. Whether or not change in fact faster now than hitherto, and whether

Processing

Transformation of

inputs into outputs

Inputs

Human

Physical

Technology

Finance

Outputs

Products/Services


or not the changes are more unpredictable, it remains the case that, while it is important to try to understand future external influences on an organization, it is very difficult to do so.

3. Managers are no different from other individuals in the way they cope with complexity. They tend to simplify such complexity by focusing on aspects of the environment, which perhaps have been historically important, or confirm prior views.

Framework to understand the environmental influences

To take initial view of the nature of the organizations environment.

Auditing the environmental influences

To focus more towards explicit consideration of immediate environment of the organization.

To anticipate opportunities and to plan on optional responses to these opportunities

To develop an early warning system to prevent threats or to develop strategies which can turn a threat to firms advantage.

Need for the analysis:

Environmental analysis is very important for identifying threats and opportunities existing in the environment

It is clear that because of the difficulty in assessing the future, all future events cannot be anticipated. But some events can be anticipated and proper plans can be made to achieve the goal.

Proper managerial decisions can be taken if the events are anticipated in advance and this in turn reduces time pressures. Thus, the managers can concentrate on these few areas which are relevant to their organization instead of considering all external facts.

Environmental Scanning is also known as environmental monitoring. It is the process of gathering information regarding companys information regarding companys environment, analyzing it and forecasting the impact of all predictable environmental changes. MICRO AND MACRO ENVIRONMENT The environment of business can be categorized into two broad categories microenvironment and macro- environment. Microenvironment is related to small area or immediate periphery of an organization. Microenvironment influences an organization regularly and directly. Microenvironments factors are specific to the said business or firm and affect its working on a short-term basis. Issues within the microenvironment:- i. The employees within the firm, their characteristics and how they are organized. ii. The customer base on which the firm relies for business. iii. The ways in which the firm can raise its finance. iv. Who are the firms suppliers and how are the links between the two being developed. v. The local community within which the firm operates. vi. The direct competition and how they perform.


Elements of microenvironment This is also known as the task environment and affects business and marketing in the daily operating level. 1. Consumers/ Customers: Te aim of business is to create and retain customers. Customers pay

money and acquire the products and services. Without customers the organizations will cease to exist. Consumer is the one who ultimately consumes or uses the product or service. A consumer occupies the central position in the marketing environment. The marketer has to closely monitor and analyze changes in consumer tastes and preferences and their buying habits. The issues are: Who are the customers/ consumers? What benefits are they looking for? What are their buying patterns?

2. Competitors: They compete for resources as well as markets. Competition shapes business and is

very much essential for the business. The issues to be analyzed are:- Who are the competitors? What are their present strategies and business objectives? Who are the most aggressive and powerful competitors?

Direct competition is between organizations, which are in the same business activity. Indirect competition may be between companies and tourism or air travel etc.

3. Organization: The organization should understand it sown strength and capabilities. Understanding a business in depth should be the goal of firms internal analysis. The objectives, goals and resource availabilities are important factors in the micro environment. Owners, Board of Directors and employees make the micro environment. Owners- They are individuals, shareholders, groups or organizations who have a major stake in the organization. They have a vested interest in the wellbeing of the company. Board of Directors- They are elected by the shareholders and is charged with overseeing the general management of the organization to ensure that it is being run in a way that best serves the shareholders interest. Employees- Are the people who actually do the work in an organization. They are the major force within an organization. It is important for an organization that employees consider the same values and goals as the organization.

4. Market: Customers, consumers and intermediaries constitute the market. The marketer should study the trends and development and the key success factors of the market he is operating. Important issues are:-

Cost structure of the market

The price sensitivity of the market

Technological structure of the market

The existing distribution system of the market

Is the market mature? 5. Suppliers: Supplier forms an important component of the micro environment. The suppliers

provide raw materials, equipment, services and so on. Suppliers with their own bargaining power affect the cost structure of the industry.


6. Intermediaries: Intermediaries play a considerable influence on the business organizations. They

are the major determining force in the business. In many cases the consumers do not know the manufacturers. They buy product from the local retailers or big departmental stores such as big bazaars that are increasingly becoming popular.

Macro environment has broader dimensions, mainly consisting of economic, technological, political, legal and socio- cultural. Issues within the macro environment:- i. Who are their threats in the competitive world in which they operate and why? ii. Which areas of technology might pose a threat to their current product range and why? iii. The bargaining power of customers and suppliers. iv. The type of competition they are facing and their perceived threats and weaknesses. Elements of Macro environment Macro environment is one which is largely external to the enterprise and thus beyond the direct influence and control of the organization. The external environment of the enterprise consists of individuals, groups, agencies, organizations, events, conditions and forces with which the organization comes across during the course of its functioning. ECONOMIC ENVIRONMENT It refers to the nature and direction of the economy in which a company competes. The economic environment includes general economic situation in the region and the nation, conditions in resource markets. Economic environment determines the strength and size of the market. The purchasing power in an economy depends on current income, prices, savings, circulation of money, debt and credit availability. Key economic factors:- Shift to a service economy Availability of credit Level of disposable income Propensity of people to spend Interest rates Inflation rates Tax rates Money market rates Government budget deficits Gross national product trend Consumption patterns Trade block formations Coalitions of countries/ regional blocks Demand shifts for different categories of goods and services Income differences by region and consumer groups


Price fluctuations Worker productivity levels Global movement of labor and capital Monetary and fiscal policies Stock market trends Foreign countries economic conditions Import/ export factors Organization of Petroleum Exporting Countries (OPEC) Unemployment trends

Legal Environment Business organizations prefer to operate in an environment with a sound legal system. The businesses must have a good working knowledge of the major laws protecting consumers, competitions and organizations. It is necessary to understand the relevant laws relating to companies, competition, intellectual property, foreign exchange, labor and so on. Political Environment Political pressure groups influence and limit organizations. It puts pressure on business organizations to pay more attention to consumers rights, minority rights, and women rights and so on. Technological Environment The most important factor is the technology which plays a significant role on the business. With the help of E-Commerce and ERP the organization is able to reach any customer and consumer. Business and technology are linked in many aspects; some of them are as follows:-

Technology reaches people through people

Increase in Productivity Consumers

Expectation of consumers Spending of R&D Techno structure

Rise and Decline of products Professional managers System complexity

Intellectual jobs Demand for capital Regulation and opposition

The following factors are to be considered about the technological environment: The pull of technological change Opportunities arising out of technological innovation Role of R&D in a country and governments R&D budget.

Technology and business are highly interrelated and interdependent also. The benefits of technological research and development are available to society through business. The organization should pay attention to the following: What are the technologies used by the company? Which technologies are utilized in the companys business, products or their parts? How critical is each technology to each of these products and businesses? Which external technologies might become critical and why? Will they remain outside the

company? What has been the investment in the product and in the process side of these technologies? What are the other applications of the companys technologies? Which technological investments should be curtailed r eliminated?


What additional technologies will be required in order to achieve the current corporate business objectives?

What are the implications of the technology and business portfolios for corporate strategy? DEMOGRAPHIC ENVIRONMENT TO BUSINESS

The term demographic denotes characteristics of population in an area, district, and country

or in world. It includes factors such as race, age, income, educational attainment, asset

ownership, employment status and location.

Data with respect to these factors within a demographic variable and across households are

both of interest as well as trends over time to businessmen in addition to economist.

Marketers and other social scientists often group populations into categories based on

demographic variables. Some of the demographic factors have great impact on the business.

Factors such as general age profile, sex ration, education, growth rate affect the business with

different magnitude. India has relatively younger population as compared to other countries.

China on the other hand is having an aging population.

Multinationals are interested in India considering its population size. With having approximately sixteen percent of the worlds population the country holds huge potential for overseas companies.

This refers to the size, density, distribution and growth rate of population. All these factors have a direct bearing on the demand for various goods and services. For example a country where population rate is high and children constitute a large section of population, and then there is more demand for baby products. Similarly the demand of the people of cities and towns are different than the people of rural areas. The high rise of population indicates the easy availability of labour. These encourage the business enterprises to use labour intensive techniques of production. Moreover, availability of skill labour in certain areas motivates the firms to set up their units in such area. For example, the business units from America, Canada, Australia, Germany, UK, are coming to India due to easy availability of skilled manpower. Thus, a firm that keeps a watch on the changes on the demographic front and reads them accurately will find opportunities knocking at its doorsteps.

Business organizations need to address two main questions What demographic trends will affect the market size of the industry? What demographic trends represent opportunities or threats?

Let us discuss few factors that are of interest to the business in determining the future strategic competitiveness of the company:-

1. Income Distribution- Changes in income distribution are important because changes in the levels of individual and group purchasing power and discretionary income often result in changes in spending and savings patterns. Tracking, forecasting and assessing changes in income patterns may identify new opportunities for companies.


2. Population Size- While population size itself, large or small, may be important to companies that require a critical mass of potential customers, changes in the specific make up of a population size may have been more critical implications. Among the most important changes in a populations size are:

I. Changes in a nations birth rate or family size Are people living longer? What is the life expectancy of infants?

II. Increases or declines in the total population; III. Effects of rapid population growth on natural resources or food

supplies Implications in the health care system, the development of products and services targeted at older/ younger population.

3. Geographic Distribution- Population shifts from one region of a nation to another may have an impact on a companys strategic competitiveness. Issues that should be considered include: i. The attractiveness of a companys location may be influenced by governmental

support. ii. Companies may have to consider relocation if population shifts have a

significant impact on the availability of a qualified workforce. iii. The concepts of working- at-home and commuting electronically on the

information highway have also started in India in a very small level. These may imply changes in recruiting and managing the workforce.

4. Ethnic mix: This reflects the changes in the ethnic make-up of a population and has implication both for companys potential customers and for the workforce. Issues that should be addressed include: i. Will new products and services be demanded or can exist ones be modified? ii. What do changes in the ethnic mix of the population imply for product and

service design and delivery? iii. Managers prepared to manage a more culturally diverse workforce? iv. How can the company position itself to take advantage of increased workforce

heterogeneity? SOCIO- CULTURAL ENVIRONMENT

This is a complex of factors such as social traditions, values and beliefs, level and standards of literacy

and education, the ethical standards and state of society, the extent of social stratification, conflict

and cohesiveness and so forth. Socio- cultural environment consists of factors like social attitude and

cultural values.

Some of the important factors which influence the business are:-

Social concerns, like the role of business in society, environmental pollution, corruption, use

of mass media, and consumerism.

Social attitudes and values like expectations of society from business, social customs, beliefs,

rituals and practices, changing lifestyles patterns and materialism.


Family structure and changes in it, attitude towards and within the family and society.

Educational levels, awareness and consciousness of rights, and work ethics of members of

society.

PESTLE ANALYSIS

PESTLE is an analytical tool which considers external factors and helps you to think about their

impacts

Is a useful tool for understanding the big picture of the environment in which you are

operating

By understanding your environment, you can take advantage of the opportunities and

minimize the threats.

This provides the context within which more detailed planning can take place to take full

advantage of the opportunities that present themselves.

The factors in PESTLE analysis

P Political : The current and potential influences from political pressures

E - Economic :The local, national and world economic impact

S - Sociological :The ways in which changes in society affect the project

T - Technological :How new and emerging technology affects our project /

organization

L - Legal :How local, national and global legislation affects the project

E - Environmental :Local, national and global environmental issues

PESTLE vs. SWOT

In contrast to a SWOT, PESTLE encourages you to think about the wider environment and

what might be happening now and in the future which will either benefit or be of

disadvantage to the organization, individual etc.

A kind of radar which picks up trends and developments in the external environment which

can be used to inform longer term planning and strategy making.


Examples of factors

Political:

Government type and stability

Freedom of the press, rule of law and levels of bureaucracy and corruption

Regulation and de-regulation trends

Social and employment legislation

Tax policy, and trade and tariff controls

Environmental and consumer-protection legislation

Likely changes in the political environment

Economic:

Stage of a business cycle

Current and projected economic growth, inflation and interest rates

Unemployment and supply of labor

Labor costs

Levels of disposable income and income distribution

Impact of globalization

Likely impact of technological or other changes on the economy

Likely changes in the economic environment

Sociological:

Cultural aspects, health consciousness, population growth rate, age distribution,

Organizational culture, attitudes to work, management style, staff attitudes

Education, occupations, earning capacity, living standards

Ethical issues, diversity, immigration/emigration, ethnic/religious factors

Media views, law changes affecting social factors, trends, advertisements, publicity

Demographics: age, gender, race, family size


Technological:

Maturity of technology, competing technological developments, research funding,

technology legislation, new discoveries

Information technology, internet, global and local communications

Technology access, licensing, patents, potential innovation, replacement

technology/solutions, inventions, research, intellectual property issues, advances in

manufacturing

Transportation, energy uses/sources/fuels, associated/dependent technologies, rates

of obsolescence, waste removal/recycling

Legal:

current home market legislation, future legislation

European/international legislation

regulatory bodies and processes

environmental regulations, employment law, consumer protection

industry-specific regulations, competitive regulations

Environmental:

Ecological

environmental issues, environmental regulations

customer values, market values, stakeholder/ investor values

management style, staff attitudes, organizational culture, staff engagement

Issues of concern

The main problem with these external PESTLE factors is that they are continuously changing

Therefore PESTLE analysis should include a thorough analysis of what is affecting the

organization or a project Now, and what is likely to affect it in the Future

The result of a PESTLE analysis is usually a list of positive and negative factors that are likely to

affect a project

However, by themselves, these factors they mean very little


It is important to bear in mind, that PESTLE analysis requires careful Application of

results

PEST Analysis Example - Restaurant The various Political, Economic, Social and Technical factors that a firm needs to consider and research in order to enter the restaurant business in a new environment may be depicted as follows:- Political Factors:

Government regulations regarding hygiene, health and food regulations, food standards, etc.

Economic policies of government regarding the restaurant industry and running eating joints; these may include licenses, inspections by Health and Food Ministry departments, etc.

Economical Factors:

Interest rate would impact the cost of capital, the rate of interest being directly proportionate to the cost of capital.

Rate of inflation determines the rate of remuneration of employees and directly affects price of the restaurant's products. Again, the proportion between the inflation rate and wages/ prices is direct.

Economic trends also help you to decide your marketing strategy.

Social Factors:

Certain cultures abhor certain foods. For instance, Hindus will not eat beef and Mohammedans would not even touch pork. Therefore knowing these cultural truths about your business environment may decide whether or not you'll be able to do any business there.

Eating habits of the people in your chosen business environment may affect your marketing decisions.

Ratio of people preferring to eat out regularly.

Technological Factors:

A good technical infrastructure would lead to better production, procurement and distribution logistics, resulting in reduced wastage and lower costs.

Sound technology may be a decisive factor for food technology innovation, better presentation, more effective business marketing, etc.

COMPETITIVE ENVIRONMENT

The nature and extent of competition that a business is facing in the market is one of the major

factors affecting the rate of growth, income distribution and consumer welfare. Businesses have to

consider competitors strategies, profits, levels, costs, products and services when preparing and

implementing their business plans.


While formulating strategies, organizations have to identify and concentrate on the competitors who

are significantly affecting the business. The equal competitors and huge competitors should be

considered thoroughly before the strategic plans are made. Competition is not necessarily restricted

to same product or services.

Coke and Pepsi may be obvious competitors. At the same time they have to compete with other

companies such as Hindustan Unilever whose squashes will be directed towards same needs. They

have to compete with natural juices such as Real.

A better understanding of the nature and extent of competition may be reached by answering the

following questions:

Who are the competitors?

What are their products and services?

What are their market shares?

What are their financial positions?

What gives them cost and price advantage?

What are they likely to do next?

Who are the potential competitors?

Cooperation in a competitive environment

In economics we study oligopoly, wherein a small number of manufacturers /sellers of a product may

join together to have monopolistic behavior.

The cooperation may also be witnessed in highly competitive business environment. Tata and Fiat

have arrangements in relation to cars. They may identify some common interest for cooperation

between them. A soft- drink manufacturer may enter into arrangement with a chain of restaurants to

offer its beverages to the clients of restaurants.

Various credit card companies are entering into arrangements with other businesses to launch co-

branded credit cards. Such arrangements help in reaching greater number of customers.

The benefits of cooperation are also seen in Japan, where large cooperative networks of businesses

are known as KEIRETSUS. These are formed in order to enhance the abilities of individual member

businesses to compete in their respective industries.

A vertical keiretsu is one of the two primary types of keiretsu relationships that exist. In this model,

there are one or many companies that are created in order to benefit a single, greater manufacturer


or parent company. These are most commonly seen with large manufacturers such as Toyota and

Honda.

The Horizontal Keiretsu varies from the vertical model in that it is setup around a major Japanese

bank. Included in the companies that are based on this model are the Japanese Big Six which

include: Fuyo, Sanwa, Sumitomo, Mitsubishi, Mitsui, and Dai-Ichi Kangyo bank groups. Many of the

horizontal keiretsu have been known to also have vertical relationships that are referred to as

branches of the company (for example, Mitsubishi).

In India, a very large number of business enterprises, big, medium and small are family- managed

enterprises. These include large business houses such as Tata, Birla, Godrej, Reliance, Modi and

Escorts.

Members of the family who manage the enterprise make major decision and sometimes even minor

decisions. The interests of the family largely influence the managerial decisions and activities of the

enterprise. There is a total identity between the needs and goals of the family and of the business.

Sometimes, quarrels and conflicts among the managing members of the family on family matters

tend to spill over to managing the enterprise also and thereby damage its functioning.

PORTERS FRAMEWORK

A structured approach of examining the competitive environment of an organization has been

suggested by Michael Porter.

The logic behind this approach is that for most organizations, the strategic competitive advantages

enhance and ensure long term profit potentials, and also because competitive forces happen to be

more immediate external influences which organizations are likely to overcome directly by their own

actions.

Porters Framework: Porter identified five basic forces which according to him, determine the

intensity and state of competition in an industry and the other collective impact of which determines

the long run profit potential in the industry. The basic forces are: -

I. Degree of competitive rivalry: The specific factors determining competitive rivalry are:

i. The number and size of competitors.

ii. The industry growth rate

iii. Capital intensity involving high fixed costs.

iv. Product differentiation

v. Exit barriers.


II. Threat of potential entrants: This threat depends on the barriers to entry, which may typically

include:

i. Economies of scale

ii. Capital requirement for entry

iii. Access to distribution channel

iv. Cost advantages irrespective of size.

v. Differentiation of product (brand identity)

vi. Expected retaliation by existing players

vii. Cost of switching over to other product markets.

viii. Government policy and legislation.

III. Substitutes: The threat of actual or potential substitutes need to be examined carefully, as it

may put a ceiling on the prices for a product, or make inroads into the market and reduce

its demand. E.g.: PVC tubes making inroads into the market for steel tubes, or copper

losing its market to aluminum or plastics.

IV. Supplier power: The strategic freedom of an organization may be constrained by suppliers

under circumstances, which may lead to reduced margins for the organization. This

happens where:

i. There is a concentration of suppliers, or monopoly of supply enjoyed by a supplier.

ii. The switching costs from one supplier to another are high due to a manufacturers

dependence on a specialized or differentiate item of supply.

iii. The scope of supplier resorting to forward integration.

iv. The customers are of little importance to the supplier.

V. Customer power: The bargaining power of customers is a function of factors as:

I. Concentration of buyers

II. Alternate sources of supply.

III. Cost of switching over to other customer segments.

IV. Threat of backward integration of buyer organization, and

V. Substitutes available.


Identifying key issues: Porters five- forces framework not only helps analyzing the

structural dimensions of the competitive environment but also requires that key issues be

identified to address the organizational strategic competitive position. Structural analysis

must be followed by identifying the key issues on the basis of the insight gained into the

competitive forces. The following question may be posed for the purpose:

i. What are the key forces at work?

ii. What are the strength and weaknesses of particular competitors in relation to the key

forces?

iii. Are the key forces in the competitive environment likely to be change, and if so, how?

iv. What could be done to influence the competitive forces affecting the organization?

v. Is there some industry which is more attractive?

RECENT DEVELOPMENTS IN INDIAN ECONOMY The economic environment of business in India has been changing at a fast rate mainly due to the changes in the economic policies of the government. At the time of independence, the Indian economy was basically agrarian with a weak industrial base. To speed up the industrial growth and solve various economic problems, the government took several steps like state ownership on certain categories of industries, economic planning, reduced role of private sector, etc. The Government adopted several control measures on the functioning of private sector enterprises. All these efforts resulted a mixed response. There was growth in net national product, per capita income and development of capital goods sector and infrastructure. But rate of industrial growth was slow, inflation increased and government faced a serious foreign exchange crisis during eighties. As a result, the government of India introduced a radical change in economic policies in 1991. This policy abolished industrial licensing in most of the cases, allowed private participation in most industries; disinvestment was carried out in many public sector industrial enterprises and opened up the economy considerably. Foreign Investment Promotion Board was set up to channelize foreign capital Investment in India. Let us discuss the developments under three heads, viz., (a) Liberalization, (b) Privatization, and (c) Globalization Liberalization refers to the process of eliminating unnecessary controls and restrictions on the smooth functioning of business enterprises. It includes: (i) Abolishing industrial licensing requirement in most of the industries; (ii) Freedom in deciding the scale of business activities;. (iii) Freedom in fixing prices of goods and services; (iv)Simplifying the procedure for imports and exports; (v) Reduction in tax rates; and (vi) Simplified policies to attract foreign capital and technology to India. Through this liberalization process, Indian Economy has opened up and started interacting with the world in a big way. This has resulted in easy entry of foreign business organizations in India. This has further resulted in stiff competition and efficiency. Ultimately, liberalization has helped us in


achieving a high growth rate, easy availability of goods at competitive rates, a healthy and flourishing stock market, high foreign exchange reserve, low inflation rate, strong rupee, good industrial relations, etc. Privatization refers to reducing the role of public sector by involving the private sectors in most activities. Due to the policy reforms announced in 1991, the expansion of public Sector has literally come to a halt and the private sector registered fast growth in the post liberalized period. The issues of privatization include: (i) Reduction in the number of industries reserved for the public sector from 17 to 8 (Reduced further to 3 later on) and the introduction of selective competition in the Reserved area; (ii) Disinvestment of shares of selected public sector industrial enterprises in order to raise resources and to encourage wider participation of general public and workers in the ownership in business; (iii) Improvement in performance through an MOU system by which managements are to be granted greater autonomy but held accountable for specified results. In India, as a result of these steps, the post liberalization phase has witnessed a massive expansion of the private sector business in India. You can have an idea of their expansion from the fact that the total capital employed in top 500 private sector companies rose from Rs. 1, 39,806 crores in 1992-93 to Rs. 2, 34, 751 crores in 1994-95 (an expansion of 68% in just two years).

Globalization means several things for several people.A company is said to be a global company

when:

a) The company continents heavily with several manufacturing locations around the world and

offers products in several diversified industries; and

b) It is able to compete in domestic markets with foreign markets.

A company which has gone global is called a Multinational (MNC) or a Transnational (TNC).

A global company has three characteristics:

i. It is a conglomerate of multiple units but all linked by a common ownership.

ii. Multiple units draw on a common pool of resource, such as money, credit,

information, patents, trade names and control systems.

iii. The units respond to some common strategy. Nestle International is an example of an

enterprise that has become multinational.

A global company, is therefore, one that, by operating in more than one country gains

R&D, production, marketing and financial advantages in its cost and reputation that

are not available to purely domestic competitors. The global company views the world

as one market, minimizes the importance of national boundaries, sources, raises


capital and markets wherever it can do the job best. The different strategic approaches

for globalization by company are as follows:

i. Configuring anywhere in the world: An MNC can locate its different operations

in different countries on the basis of raw materials availability, consumer

markets and low cost- labor.

ii. Interlinked and Independent economies: In terms of economies welfare,

globalization refers to the unique economically interdependent international

environment. Each countrys prosperity is interlinked with the rest of the

world. No nation can any longer hope to lead an existence of solitude and

isolation in which only domestic industries can function.

iii. Lowering of trade and tariffs barrier: The apparent and real collapse of

international trade barriers proposes a new global cooperative arrangement

and a redefinition of roles of state and industry. There trend is towards

increased privatization of manufacturing and services sectors, less government

interference in business decisions and more dependence on the value- added

sector to gain market place competitiveness world over, governments are

pulling out form commercial business. The trade tariffs and custom barriers are

getting towered, resulting in cheaper and abundant supply of goods.

iv. Infrastructural resources and inputs at international prices: Infrastructural

inputs must be ensured at competitive prices, if the companies were to

compete globally. The advantages of cheap labor (and other inputs) evaporate

in the face of continuous inflation and high infrastructural costs.

v. Market side efficiency: Integration of global markets implies that costs, quality,

processing time and terms of business because dominant competition drivers.

Customers can make a genuine choice of products and services on the basis of

maximum value for money. The inexorable pressure of technology and need

for its integration means that customers no longer have to be satisfied with

shoddy products and services provided by the state monopolies.

vi. Formation of regional blocks: Countries, like corporations, have to form

strategic alliances to ward off economic and technological threats and leverage

their respective comparative and competitive advantages. The signing of

NAFTA (North American Free Trade Area) among North America, Canada and

Mexico creates new markets and manufacturing opportunities for these

countries and threatens to disrupt the plans and strategies of world powers

such as Japan.

1. Business Environment

Documents

term business environment

economic environment

business challenges

words business

word business

business firms

business enterprises

microoperating environment