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Nature of Business Environment
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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, thepurpose 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
Scope of Business Business includes 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.
Society cannot do without business and vice versa.
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Characteristics of Todays Business
Business
Information
Competition
Change - TransitionOpportunities
Diversification
Globalisation
Technology
Business during the 21stCentury 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 conglomeratediversification. Concentricdiversification refers to the process of adding new, but related products orservices. Eg : HLL which as Liril, Pears, Rexona, Lux and Lifebuoy. Horizontal diversification is adding
of new, unrelated products or services for present consumer base. Conglomeratediversification refersto adding new and unrelated products or services.
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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 andtheir 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 twocomponents 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
Business DecisionInternal Environment External Environment
Factors influencing Business Decision
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Business
Decision
Internal Environment
Mission / Objectives
Management Structure
Internal Power RelationshipPhysical Assets & facilities
Company imageHuman resources
Financial Capabilities
Technological Capabilities
Marketing Capabilities
Financiers
Suppliers
CustomersCompetitors
Public
Mktg Intermediaries
Micro Environment
Economic
TechnologicalGlobal
Demographic
Socio-Cultural
Political
Macro Environment
BUSINESS ENVIRONMENT
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Internal Environment
Any business has certain vision, mission and objectives and astrategy to achieve them. Formulation of strategy is defined asestablishing a proper firm-environment fit. Indeed the objectivesshould be based on an assessment of the external environmentand the organizational factors (internal environment).
Vision
Mission
Objectives
Management Structure
Human Resources
Financial Factors Company Image and Brand Equity
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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 its environment.
Macro Environment includes:
Political Environment
Economic Environment
Technological Environment
Socio-cultural Environment
Global Environment.
Macro Environment
Micro Environment
The Micro environment consists of different types of stakeholders -
customers, employees, suppliers, marketing intermediaries, competitors. It isalso 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.
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Technological Environment
Technological is the systematic application of scientific or otherorganized knowledge to practical tasks.
Technological environment hold new technological innovation, newproducts, the state of technology, the utilization of technology formaximum inputs and outputs, the obsolescence of technology and the
dynamic changes that frequently occur in technologies which enablefirms 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 technologicaladvances around them
Technology leads to introduction of new products and older productsbecoming outdated and redundant.
Technological advances leads to high expectations of consumers interms of quality
Leads to system complexity
Demand for capital
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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
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Economic Environment
Economic Environment refers to all forces which have an economicimpact on Business.
The economic environment consists of the demand dynamics, supplysituation, pricing factors, degree of competitiveness, and impact ofprofitability. It includes the fiscal policy, monetary policy and the taxationpolicy, 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
.
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Global Environment:The global environment refers to those factors which are relevant to
business, such as the WTO principles and agreements; otherinternational 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 peoples attitude to business and work. Caste system
Spirit of collectivism
Education
Ethics in business
Social responsibility
Social audit
Corporate governance
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External Environmental AnalysisEnvironmental 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 anticipateopportunities and to plan to take optional responses to these opportunities. Italso helps strategists to develop an early warning system to prevent threats or todevelop strategies which can turn a threat to a firms advantage. Firms whichsystematically analyse and diagnose the environment are more effective thanthose which do not.
Process of Environmental Analysis:The analysis consists of four steps:
Scanning: Detect early signals of possible environmental change and detectenvironmental change already underway.
Monitoring: Purpose of monitoring is to assemble sufficient data to discern
whether certain trends are emerging, identification of the trends andidentification of areas for further scanning.
Forecasting : It is concerned with developing projections of the direction, scopeand intensity of environmental change.
Assessment : To determine implications for the organisations current andpotential strategy.
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Environmental Analysis and Strategic Management
Defining Business Mission and Objectives
SWOT AnalysisEnvironmental Analysis + Self Appraisal
Strategic Alternatives and Choice of Strategy
Implementation of Strategy
Evaluation and Control of Strategy
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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 ofindustries, the state of competitions depends on:
Porters 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 firms Buyers
Substitutes
New Entrants
Suppliers
Threat of new entrants
Threat of substitutes
Bargaining powerBargaining power
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Rivalry among Existing firms:
Firms in an industry are mutually dependentcompetitivemotives of a firm usually affects others and may beretaliated. Factors influencing the intensity of rivalry are:
Number of firms and their Relative market share
State of Growth of Industry: In stagnant, declining andslow growth industries, a firm is able to increase its salesby 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 largeblocks necessitating, efforts to increase sales to achievecapacity utilization norms.
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Rivalry among Existing firms:
Product standardization, after sales service: In caseof firms which have standardized products; it is price,distribution and after sales service which become thedistinguishing factors.
Strategic stake: Rivalry becomes more intensive if
the firms have high stakes in achieving successthere.
Exit Barrier: If exit barriers are high, firms would keepcompeting in the same industry even though it mightnot be very attractive.
Diverse Competition: Competitors with diversestrategies make the industry highly competitive.
Switching costs: One time costs that the buyer faceson switching from one suppliers product to that ofanother ie cost of new ancillary equipment etc.
Expected Retaliation
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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 barriersare:
Government Policy
Cost Disadvantages: Cost advantages enjoyed by established firmsmay discourage entry of new firms such as learning curve, favorablelocation etc.
Product Differentiation: Characterized by brand image, customer loyaltyetc. may deter new firms from entering the market.
Monopoly Elements
Capital Requirements : High capital intensive nature of the industry isan entry barrier to small firms
Threat of substitutes
An industry which has close substitutes available is highly competitivein nature. Existence of close substitutes increases the propensity ofconsumers to switch to alternatives in response to price increases.
Perceived level of product differentiation in the minds of the consumeris also a highly influential factor.
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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 buyers 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
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SWOT Analysis
SWOT stands for Strengths, Weaknesses,Opportunities and Threats
Identification of the threats and opportunities inthe external environment and strengths andweaknesses in the internal environment of the firmsare the cornerstone of business policy formulation.
It is the SWOT analysis which determines thecourse of action to ensure the growth / survival ofthe firm.
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Strengths
Strengthsinternal to the unit; are a units 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 units 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
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WeaknessesWeaknessesinternal force that could serve as a barrier to maintain orachieve a competitive advantage; a limitation, fault or defect of the unit;It should be truthful so that they may be overcome as quickly aspossible
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 donemore 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 functionmore effectively, what would you change?
Examples: gaps in capabilities, financial, deadlines, moralelack of competitive
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OpportunitiesOpportunitiesany favorable situation present now or in thefuture 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
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ThreatsExternal force that could inhibit the maintenance or attainment of acompetitive advantage; any unfavorable situation in the externalenvironment 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; marketdemands; 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?
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POSITIVE/
HELPFUL
to achieving thegoal
NEGATIVE/HARMFUL
to achieving thegoal
INTERNALOrigin
facts/ factors of theorganization
StrengthsThings that are
good now,maintain them,build on them
and use asleverage
Weaknesses
Things that are badnow, remedy,change or stop
them.
EXTERNAL Originfacts/ factors of the
environment inwhich the
organizationoperates
OpportunitiesThings that are
good for thefuture, prioritizethem, capturethem, build on
them andoptimize
ThreatsThings that are bad
for the future,put in plans to
manage them orcounter them
SWOT Analysis of Indian Economy
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SWOT Analysis of Indian Economy
Strengths Huge pool of labor force
High percentage of cultivable land
Diversified nature of the economy
Availability of skilled manpower
Extensive higher education system
High growth rate of economy
Rapid growth of IT / ITes Sector
Abundance of natural resources
Weaknesses High percentage of workforce involved
in agriculture
Approx a quarter of population belowthe poverty line
High unemployment rate
Inequality in prevailing socio economic
conditions, ruralurban divide
Low productivity
Huge population leading to scarcity of
resources Low level of mechanization
Red tapism, Bureaucracy
Low literacy rates
Opportunities
Scope for entry of private firms in varioussectors of business
Inflow of FDI
Huge foreign exchange prospects in IT / ITeS
Investment in R & D
Area of infrastructure
Huge domestic market : Opportunity for MNCs
Huge agricultural resources
Threats
High fiscal deficit Threat of government intervention in
some states
Growing import bill
Population explosion, rate of growth of
population
Agriculture excessively dependent on
monsoon
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