Emerging Trends in Business Environment Mod 1

Emerging Trends in Business environmentModule-1: Theoretical Frame work of Business Environment.

1. Concept, Significance and Nature of Business Environment

2. Elements of business environment.

3. Changing dimensions

4. Environmental scanning and monitoring

ETBE-Module-1: Theoretical Framework of Business Environment

1. Concept, Significance and natureAn environment can be defined as anything which surrounds a system. Therefore, the business environment is anything which surrounds the business organization. It affects the decisions, strategies, processes and performance of the business. The micro environment consists of different types of stakeholders - customers, employees, suppliers, board of directors and creditors. The macro environment consists of factors which are beyond the control of the business (STEP) - Social, Technological, Economical and Political Changes in the macro environment will directly affect and impinge on the firm's activities. Changes in the macro environment will indirectly affect the business . For example, a change in legislation such as the smoking ban indirectly affects pubs and restaurants.

ETBE-Module-1: Theoretical Framework of Business Environment

Every business operates in a particular environment and each business unit has its own environment. A change in environment presents opportunity to some and threats to others. The recent changes in tariff rates have changed the toy industry of India with the market now being dominated by Chinese products. A slight change in the Reserve Bank of India’s monetary policy can increase or decrease interest rates in the market.

ETBE-Module-1: Theoretical Framework of Business Environment

• The new barons of Indian business are those who predicted the changes in the environment and reacted accordingly. Azim Premji of Wipro, Narayana Murthy of Infosys, Subhash Goyal of ZEE, the Ambanis of Reliance, L.N.Mittal of Arcelor Mittal, and Sunil Mittal of Bharti Telecom are some of them.

• Characteristics of environment: Environment is complex, dynamic, and multifaceted; has far reaching impact on organizations in that the growth and profitability of an organization depends critically on the environment in which it exists; may be an opportunity or a threat-e.g. liberalization in 1991 opened lot of opportunities for companies like Hindustan Uniliver.

ETBE-Module-1: Theoretical Framework of Business Environment

• The company took the advantage to acquire companies like Lakme, TOMCO, KISSAN etc. Changes in the environment can change the competitive scenario and many times difficult to predict with any degree of accuracy.

2. Elements of business environment: These are three as mentioned below-

• Internal Environment• Macro Environment and• Micro Environment

ETBE-Module-1: Theoretical Framework of Business Environment

• Now let us discuss these three one by one: Internal Environment: refers to that of the

organization and is controllable. Some internal factors are:-

• Culture and Value System: Organizational Culture can be viewed as the system of shared values and beliefs that shape a company’s behavioral norms. A value is an enduring preference as a mode of conduct or an end state. The value system of the founding fathers of the organization has a lasting impact on it.

ETBE-Module-1: Theoretical Framework of Business Environment

• Mission and Objectives: Guide the priorities, direction of development, business philosophy and business policy.

• Management Structure and nature : Structure is the manner in which the tasks and sub-tasks of the organization are related. Structure is concerned with the hierarchical relationship and the relationship between the management of different functional areas like the structure of the top management and the pattern of share holding.

ETBE-Module-1: Theoretical Framework of Business Environment

• Human Resource: Man power planning, recruitment and Selection, compensation, communication and appraisal, corporate resources, production of goods and services, financing and accounting systems and methods, marketing and distribution.

• Macro environment consists of the following factors(external to the industry).

• Political environment• Regulatory and legal environment• Demographic• Socio culture• Technological environment• Global Environment• Economic Environment• National Competitive Advantage

ETBE-Module-1: Theoretical Framework of Business Environment

Political Environment: Political environment of the country decides the fortune of businesses in a country. Russian revolution in 1917 transformed the equation of doing business in that country. After the change of regime in the early1990s, business equations changed once again in Russia. In India in 1977, the Janata government came to power because of which Coca Cola and IBM had to leave the country. When P.V. Narasimha Rao came to power in 1991, a new industrial policy was put in place. This new policy brought in liberalisation, privatisation and globalisation in the Indian economy and opened up new opportunities for the Indian business.

ETBE-Module-1: Theoretical Framework of Business Environment

Regulatory and legal environment:• The political environment governs the legal and

regulatory environment of the country. The regulatory environment plays a vital role by dictating the dos and don’ts of a business. Every country has a different legal environment. In India we have the Companies Act, the MRTP Act, which restricts monopoly, various laws regarding shares, the Consumer Protection Act, Environmental Acts and so on.The implementation of GATS has resulted in the implementation of international laws regarding patents.

ETBE-Module-1: Theoretical Framework of Business Environment

Demographic: Demography is the study of the structure of human populations using statistics of births, deaths, wealth etc. It is the demographic environment which decides the marketing mix for an organization. It decides the type of product the organization comes out with. In India a lot of research and efforts are undertaken to reduce the cost of products and to launch products at the cheapest possible rates .e.g. shampoo sachet for rupee1/-, cooking oil, tea, biscuits for Rs.2/- in the shapes of sachets and packets to cater to the needs of the lower segment of the market. Demographic data reveal that 70%of our population live in the villages; of these 70% are youths and this is the reason why every business organization is launching new products for rural markets.

ETBE-Module-1: Theoretical Framework of Business Environment

Socio-culture• :Socio culture variables like the beliefs, value system,

attitudes of people and their demographic composition have a major effect on their personality and behaviour style. The consumer’s preferences have undergone a sea change through the 1990s. This has led to the production of more cars, refrigerators, air conditioners, cell phones and other articles- once considered ostentatious and luxurious. Typical patterns of socio-culture dictate the preference of consumers in different regions. For example, when McDonalds and KFC started restaurants in India they had to make adjustments in their menu for North and South India.

ETBE-Module-1: Theoretical Framework of Business Environment

Technological: Technological forces present a wide range of opportunities and threats. Technological advancement may affect an organization’s products, services, markets, suppliers, distributors, competitors, customers, manufacturing process, marketing practices, financial composition and competitive position. Organizations have to modify products according to the level of technological knowledge of the target customer, because in developing nations complex household machines that need programming will not work. So, they have to be technologically more and more focused.

ETBE-Module-1: Theoretical Framework of Business Environment

Global Environment: The international environment consists of all factors that operate at the transnational, cross –cultural level and across the borders. The World is a global village today. For the sake of business countries are burying their differences and forging economic relationships. Former enemies like Russia and America are now friendly and economically cooperating. India and China have friendly economic relationship. India is a signatory of WTO which has a multilateral trade agreement among more than100 nations. Globalization brings along with that the danger of global competition.

ETBE-Module-1: Theoretical Framework of Business Environment

Economic Environment: The economic structure of a country, whether it is socialist, mixed or capitalist, has great impact on the economy. Economic policies such as foreign trade policy, industrial policy, fiscal policy, GDP growth rate, policy of licensing, monetary policy, development of financial institutions, development of money and stock market and the extent of globalization are some of the aspects of an economy that reflect on business in an economy. A slight change in monetary policy can release crores of rupees into the economy that may result in a decrease in interest rate, which further increases investment as well as inflation.

ETBE-Module-1: Theoretical Framework of Business Environment

National competitive Advantage: Despite globalization, industrialization is clustered in a small and specific number of countries. Most successful computer and biotechnology firms are based in the US, the successful chemical and engineering industries are based in Germany and the cream of electronics industry is based in Japan. Smart call centers and customized software companies are wide spread in the Indian landscape.

ETBE-Module-1: Theoretical Framework of Business Environment

• Michael Porter’s international competitiveness Model:- In a study of national competitive advantage Michael Porter identified four attributes which have important impact on the global competitiveness of companies located within that nation. These are:

• Factor endowments- skilled labor, capital, technology and infra structure necessary to compete in a given industry.

• Home demand for industry’s products & services.• The presence or absence in a nation of supporting

industry-supplier industries which are internationally competitive

• Firm strategy, structure and rivalry-Conditions in the nation that govern how companies are created, organized and managed and the nature of domestic rivalry.

ETBE-Module-1: Theoretical Framework of Business Environment

ADDITIONAL INFORMATION:• 1.MRTP Act. Monopolistic and Restrictive Trade

Practices Act. 1969. Applies to the whole of India except J&K(now replaced by Competition Act, 2000).

• 2. GATS: General Agreement on Trade in Services- is a treaty of the WORLD TRADE ORGANIZATION(WTO) that came into force in January 1995.

ETBE-Module-1: Theoretical Framework of Business Environment

MICRO ENVIRONMENTMicro environment or the competitive environment refers to the environment which an organization faces In its specific arena. Professor Michael Porter of Harvard Business School has identified five forces of competition. These are as follows:-i)Threat of competitors-The rivalry among sellers in the marketii)Threat of new entrants- The potential entry of new competitorsiii)Threat of substitutes-Other industries attempting to win over customers to their substitute products

ETBE-Module-1: Theoretical Framework of Business Environment

iv)Bargaining power of Suppliers-competitive pressure building up as a result of supplier-seller collaboration and resultant bargainingv)Bargaining power of Buyers- competitive pressure stemming from seller-buyer collaboration and bargaining.Now let us get into some details.

• Threat of competitor: Rivals adopt tactics to win over customers by cutting prices, adding attractive features, extended customer service, longer warranties, special promotional offers and introduction of new products. All these efforts are undertaken to improve market share and profitability.

ETBE-Module-1: Theoretical Framework of Business Environment

• Threat of new entrants: New entrant poses a threat to the incumbents because he adds new capacity. However, the new entrants have to face lot of challenges; incumbents enjoy economies of scale, proprietary product knowledge, patents, favourable access to raw materials, favourable location, lower borrowing cost and government subsidies. Customers prefer new look products. Distributors are wary of handling new products.

ETBE-Module-1: Theoretical Framework of Business Environment

• Threat of substitutes: Road transport services compete with the railways, makers of eye glasses compete with the makers of contact lenses, scooter producers compete with manufacturers of motor cycles and so on.

• Bargaining power of suppliers: Suppliers have no bargaining power when there are many suppliers and when supply exceeds demand. Bargaining power is high when it comes to high technology and the supplier has expertise; has significant cost advantage, constantly improves the product or finances the buyer.

ETBE-Module-1: Theoretical Framework of Business Environment

• Bargaining power of the buyer: Consumer is king; He enjoys significant bargaining power when there are many sellers, few buyers and production exceeds demand. The buyer can bargain reduction of price, quantity discount, better quality at the same price, better after sales service, credit and finance facility.Andrew Grove, the former CEO of Intel argues that Porter’s model ignores the sixth force; the power, vigor and competence of complementors like the demand for personal computers depends on the availability of user friendly software.

ETBE-Module-1: Theoretical Framework of Business Environment

• We should also be aware of the roles played by Marketing intermediaries such as distributors, promoters of products, sellers of products and services and consultants. Financial institutions like banks and NBFCs (Non Banking Financial Companies) provide finance to the business organizations.

Critical Success Factors(CSFs)• Critical success factors are those areas in which good

results will ensure an organization’s success against competition. CSFs are determined by a variety of environmental and firm specific considerations. For an FMCG, distribution network is a critical success factor; for a pharmaceutical company, it is R&D; for a generic product manufacturing company (steel or aluminum plant) cost is a Critical Success Factor; for a food chain organization like McDonalds, logistics and supply chain management is a CSF.

ETBE-Module-1: Theoretical Framework of Business Environment

3. Changing Dimensions: Behind every change in environment there is a driving force. To understand and forecast future trends it is important to understand the driving force behind them. Industry Life Cycle model identifies five sequential stages in the evolution of an industry. Now we will discuss the various stages.

ETBE-Module-1: Theoretical Framework of Business Environment

• Industry Life Cycle analysis: consists of the following stages in the life of an organization:-

• a)Embryonic stage• b) Growth• c)Shakeout• d) Maturity• e)Decline• EMBRYONIC STAGE:• Beginning of the industry; customers know little

about the product; high price, and creating awareness among consumers for volume sales.

ETBE-Module-1: Theoretical Framework of Business Environment

Embryonic Growth Shakeout

MaturityDECLINE

Stages in Industry Life Cycle

Dem

and

ETBE-Module-1: Theoretical Framework of Business Environment

• GROWTH:Demands expand rapidly due to new customers entering the market; e.g., cell phone, internet. Economies of scale attained, high growth and profit; many competitors enter the field; prices fall.

• INDUSTRY SHAKE OUT:Demand reaches saturation level, mainly for replacement; rivalry becomes intense and inefficient companies are driven to bankruptcy. No new entrants venture in this field.

• MATURITY: Here the market is saturated, growth is very low or nil. Firms reduce prices and resort to sales promotion campaigns; e.g. Airlines introducing frequent flier programs.

ETBE-Module-1: Theoretical Framework of Business Environments

• DECLINE: Growth becomes negative for various reasons: technology changes-audio and video tape recorders and players are going out of the market; vanaspati, being a saturated fat is not purchased by health conscious customers. Demographic (declining birth rate is hurting baby and child products) ; International competition -Cheap Chinese toys and electronic goods and components push Indian products towards decline.

ETBE-Module-1: Theoretical Framework of Business Environments

4. Environmental analysis-Scanning and Monitoring: The first step in environmental analysis is collection of information.