BUSINESS ENVIRONMENT

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

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.

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.

Similarly, the organizational environment has two components ie. strengths and weaknesses of the organization. A SWOT analysis is thus the first step in strategy formulation

Business DecisionInternal Environment External Environment

Factors influencing Business Decision

Business Decision

Internal Environment

Mission / ObjectivesManagement StructureInternal Power RelationshipPhysical Assets & facilities

Company imageHuman resourcesFinancial CapabilitiesTechnological CapabilitiesMarketing Capabilities

FinanciersSuppliersCustomersCompetitorsPublicMktg Intermediaries

Micro Environment

EconomicTechnologicalGlobalDemographicSocio-CulturalPolitical

Macro Environment

BUSINESS ENVIRONMENT

Business decisions are influenced by two sets of factorsInternal factors (The Internal Environment External Factors( The External Environment)

Business Environment presents two challenges to the enterpriseThe challenge to combat the environmental threatsExploit the business opportunities

1) INTERNAL ENVIRONMENT2) EXTERNAL ENVIRONMENT

BUSINESS DECISION

INTERNAL FACTORS

EXTERNAL FACTORS

Important internal factors are1) Value System

The value system of founders and those at the helm of affairs has important bearing on the choice of business, the mission and objectives of the organization, business policies and practices.

2) Mission and ObjectivesThe business domain of the company , priorities , direction of development, business philosophy, business policy etc. are guided by the mission and objectives of the company.

3) Management Structure and NatureThe organizational structure, the composition of the Board of Directors, extent of professionalization of management etc. are important factors influencing business decisions.

4) Internal Power RelationshipFactors like the amount of support the top management enjoys from lower levels and workers, share holders and Board of Directors have important influence on the decisions and their implementation.The relationship between the members of Board of Directors is also a critical factor.

5) Human ResourcesThe characteristics of the human resources like skill, quality, morale, commitment, attitudes etc. could contribute to the strength and weakness of the organization.The involvement, initiative etc. of the people at different levels may vary from organization to organization.6) Company Image and Brand EquityThe image of the company matters while raising finance, forming joint ventures or other alliances, soliciting market intermediaries, entering purchase or sale contracts , launching new products etc.

OTHER FACTORS1.Physical Assets and Facilities2.R&D and Technological Capabilities3.Marketing Resources4.Financial Factors

Two Typesa)Micro Environment

Consists of actors in the company’s immediate environment, that affects the performance of the company.

b)Macro EnvironmentConsists of larger societal forces that affect all the actors in company’s micro environment.

Also known as task environment and operating environment

IncludeThe suppliersMarketing intermediariesCompetitorsCustomersPublics

More intimately linked with the company than macro factors

The micro forces need not necessarily affect all the firms in a particular industry in the same way.

Some of the micro factors are particular to a firm

Those who supply the inputs to the company. Source/Sources should be Reliable Uncertainty regarding the supply or other

supply constraints compel companies to maintain high inventories causing cost increases.

Very risky to depend on a single supplier The purchasing department should “market”

itself to suppliers, to obtain favourable treatment during the periods of shortages.

Major task of business is to create and sustain customers

Different categories of consumers IndividualsHouseholds Industries and other commercial establishmentsGovernment and other institutions

Depending on single customer is too risky Choice of customer should be done by considering

Relative profitabilitydependabilitystability of demandgrowth prospectus extent of competition

A firm’s competitors include not only the other firms which market the same or similar product but also all those who compete for the income of the consumersDesire competitionGeneric competitionProduct form competitionBrand competition

Firms that aid the company in promoting, selling and distributing its goods to final buyers.

Include the middlemen and merchants who “help the company find

customers or close sales with them”Physical distribution firms which “ assist the company in

stocking and moving goods from their origin to their destinations”

Marketing service agencies which “assist the company in targeting and promoting its products to the right markets”

Financial intermediaries which “finance marketing activities and insure business risks”

Vital links between the company and the final consumers.

Any group that has an actual or potential interest in or impact on an organization’s ability to achieve its interests

E.g. Media publics, citizens action publics, local publics Media attack on any company can influence the

government decisions affecting the company. Environmental pollution is an issue often taken up

by number of local publics Publics are not always threat to the business. Fruitful cooperation between a company and the

local publics may be established for the mutual benefit.

Consists of larger societal forces that affect all the actors in company’s micro environment-namely the demographic, economic, natural, technological, political and cultural forces

Also known as Societal EnvironmentThe Societal Environment includes general forces that do

not directly touch on short-run activities of the organization but that can, and often do, influence its long-run decisions.

Important factors are:Economic conditionsEconomic policiesEconomic systems

Economic conditionThe economic conditions of a country –for example,

the nature of the economy, the stage of development of the economy, economic resources, the level of income, the distribution of income and assets, etc.- are among the very important determinants of business strategies.

In a developing country, the low income may be the reason for the very low demand for the product.

Economic policiesSome types or categories of business are favourably

affected by government policy, some adversely affected, while it is neutral to some others.

E.g. a restrictive import policy may greatly help the import competing industries, while a liberalisation of the import policy may create difficulties for such industries

Economic SystemThe scope of the private business depends on the economic

system.The freedom of the private enterprise is the greatest in the

free market economy.

Has close relationship with the economic system and economic policy.

In many countries regulations to protect consumer interests have become stronger.

Some governments specify certain standards for the products to be marketed in the country; some even prohibit the marketing of certain products.

Promotional activities are subject to various types of controls.

E.g.: In India, Advertisement of alcoholic product is prohibited and the packages must carry “injurious to health” warnings

Major factors are: the buying and consumption habits of people, their language beliefs and values, customs and traditions, tastes and preferences, Education

Strategy should be appropriate in the socio-cultural environment.Eg: nestle brews a very large variety of instant

coffee to satisfy different national tastes

ColourBlue: feminine and warm in Holland ; but

masculine and cold in SwedenGreen: favourite in Muslim world; but represents

illness in MalaysiaRed: popular in communist countries; but

represents disaster in AfricaWhite: death and mourning in China and Korea;

but it expresses happiness in some countries.

Factors: Size, growth rate, age composition, sex

composition of population, family size, educational levels, economic stratification of the population, language, caste, religion, etc.

E.g. Decline in birth rates in USA have affected the demand for baby products. So Johnson &Johnson repositioned their products like baby shampoo and baby oil, to the adult segment, particularly to females.

Business prospects demands availability of certain physical facilities E.g. demand for electrical appliances is affected by the extent of

electrification and the reliability of power supply. Demand for LPG stoves depend on rate of growth of gas connections

Differing technological environment of different markets may call for product modifications E.g. Many appliances are designed for 110 V in USA. They should be

converted for 240v in India Technological developments may increase or decrease the

demand for some existing products E.g. voltage stabilizers help increase in sale of electrical appliances in

markets characterised by frequent voltage fluctuations Introduction of TVs, Refrigerators, etc. with in-built stabilizers adversely

affects the demand for voltage stabilizers.

Particularly important for the industries directly depending on imports or exports and import-competing industries

Recession, economic boom, liberalization Major international developments have their

spread effects on domestic business.E.g. Oil price hikes increased the cost of production

and the prices of certain products such as fertilizers , synthetic fibres. So usually, the demand for natural fibres and manures increased.

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; accreditationsqualifications, 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?

  POSITIVE/ HELPFUL

to achieving the goal 

NEGATIVE/ HARMFUL

to achieving the goal

 INTERNAL Originfacts/ factors of the

organization 

StrengthsThings that are

good now, maintain them, build on them

and use as leverage

WeaknessesThings that are bad

now, remedy, change or stop

them.

 EXTERNAL Originfacts/ factors of the

environment in which the

organization operates

OpportunitiesThings that are

good for the future, prioritize them, capture them, build on

them and optimize

ThreatsThings that are bad

for the future, put in plans to

manage them or counter them

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:

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 firms Buyers

Substitutes

New Entrants

Suppliers

Threat of new entrants

Threat of substitutes

Bargaining powerBargaining power

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.

Product standardization

New entrants are newcomers to an existing industry. They

typically bring new capacity. A desire to gain market share

and substantial resources. Therefore they are threats to an

established corporation.

The threat of entry depends on the presence of entry

barriers and the reaction that can be expected from

existing competitors .

An entry barrier is an obstruction that makes it difficult

for a company to enter an industry.

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: Government can limit entry into industry through licensing requirements by restricting access to raw materials.

Product Differentiation: Characterized by brand image, customer loyalty etc. may deter new firms from entering the market.

Capital Requirements : High capital intensive nature of the industry is an entry barrier to small firms .

Economies of Scale : Scale economies in production and sales of microprocessors, gave Intel a significant cost advantage over any new arrival.

Switching Costs : Once a software program such as excel or word becomes established in Office, office managers are reluctant to switch to a new program because of high training costs.

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.

Substitutes limit the potential returns of an industry by

placing a ceiling on the prices firms in industry can

profitably charge.

Buyers affect an industry through their ability to force down prices , bargain for higher quality or more services and play competitors against each other.

A buyer or distributor is powerful if some of the following factors is true : A buyer purchases a large proportion of sellers product or service

(eg : oil filters purchased by a major automaker) A buyer has the potential to integrate backward by producing the

product itself (eg: a newspaper chain could make its own paper) Alternate suppliers are plentiful because the product is standard or

undifferentiated. Changing suppliers cost title. (eg: office supplies are sold by many

vendors) The purchased product is unimportant to the final quality or a price

of a buyers products (eg: electric wire bought for use in lamps)

Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and services.

A buyer or distributor is powerful if some of the following factors is true : Supplier industry is dominated by a few companies but it sells too

many(eg: petroleum industry) Service is unique or it has built up switching costs (eg: word

processing software) Substitutes are not readily available (eg: electricity) Suppliers are able to integrate forward and compete directly with

their present customers (eg: a microprocessor producer like Intel could make the complete PC)

A purchasing industry buys only a small portion of the suppliers groups goods (eg: sales of lawn mower tires are less important to the tire industry than are sales of auto tires)

“The process by which strategists monitor the economic, governmental/legal, market/competitive,technological, geographic and social settings to determine opportunities and threats to their firms”

Stages of Environmental Analysis:

The analysis consists of four steps:

Scanning : It is process of analyzing environment for

the identification of factors which impact or have

implications for business.

Monitoring : It involves more in-depth analysis of

environmental trends identified at the scanning stage .

Purpose of monitoring is to assemble sufficient data to

discern whether certain patterns are emerging.

Forecasting : Anticipating future is essential for

identifying future threats and opportunities and

formulating strategic plans.

Assessment : It involves drawing up

implications/possible impacts

• The concept of strategic groups–Within an industry, a competitor grouping using

similar strategies that differ from other industry groups.

• Implications of strategic groups– The closest industry competitors are those in the

group.– The various industry groups are differentially and

competitively advantaged and positioned.–Mobility barriers inhibit the movement of

competitors from one strategic group to another.

• Both models are static and ignore innovation.

• Their focus is on industry and group structures rather than individual companies.– Innovation creates change in

industry structures, altering thecompetitive environment.

– Industry structure cannot fully explain the performance differences between industry competitors.

The demand for primary industry products depends on the size of the total market for complementary products.

◦ Network economics result inpositive feedback loops that foster rapid demand increases.

◦ Market competitors are protected by switching cost entry barriers.

• Globalization– Globally dispersed production lowers

costs and increases quality.– Global markets are replacing

national markets.• Trend implications– No isolated national markets– More competitors, more intense competition– More rapid innovation and shorter product life cycles

The determinants of competitive advantage:

Factorendowments

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