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ECONOMIC ENVIRONMENT OF BUSINESS
INTRODUCTION• Every business organization has to interact and transact with
its environment. • Business environment has a direct relation with the business
organization. • Effectiveness of interaction of an enterprise with its
environment primarily determines the success or failure of a business.
• Identify the environment in which it operates • Formulate its policies in accordance with the forces • Business organization has to tackle its internal and external
environment. • The economic activities are still considerably controlled by the
government.
Concept of business environment
Business environment is the aggregate of all conditions, influences that affect its life
and development.
Business environment consist of all those factors that have a bearing on the business.
Survival and success of any individual depend upon
his capability as to cope with environment
Survival and success of an individual firm depend upon -
Innate strength resources at its command ( Financial and human
resources)
Survival and success of the firm depend on two sets of factors
• Internal factors• External Factors
Business Decision
External Environment
Internal Environment
Business decision
Co. image/brand equity
Human resources
Financial capabilities
Technological capabilities
Marketing capabilities
Macro (General/Remote) Environment
Political/Govt. environment Legal Environment
Micro (Task/Operating) EnvironmentFinanciers
Demographic Environment
Suppliers
Publics
Marketing intermediaries
Customers
Competitors
Global Environment
Social/Cultural environment Technological/Natural environment
Promoters’/shareholders’ values
Mission/Objectivesmanagement Structure
Internal power relationship
Physical assets & facilities
Internal Environment
INTERNAL ENVIRONMENT
Important Internal factors1. Value System
2. Mission and objectives
3. Management Structure and Nature
4. Internal Power Relationship
5. Human Resources
6. Miscellaneous Factors
EXTERNAL ENVIRONMENT
External environment consists of
1. Micro environment
The microenvironment consists of factors in the companies immediate environment that affects the performance of the company.
Factors
1. Suppliers
2. Marketing intermediaries
3. Competitors
4. Customers
5. Public
Macro environment consists of larger societal forces that affect all the factors in the company’s micro-environment
1. Demographic environment
2. Economic environment
3. Political and Government environment
4. Natural environment
5. Physical and Technological environment
6. International environment
7. Socio-cultural environment
Importance of the study of business environment
• To adjust according to the changes takes place in the external environment .
• Development of action plans to deal with technology advancement.
• To adjust to prevailing conditions and influence the environment to make it suitable for the firm.
• To see the impact of the socio-economic changes at the National and International level.
• To analyze the competitors strategy and to formulate counter strategies.
• To help the organization to develop its broad strategies.• To help to prepare the long term policies.
Need of the study of business environment • It is essential for the business firm to keep all the
information about its surrounding environment because – One should care about the environmental changes if
disregard for environmental changes proves very costly.– If the environmental changes are favorable a business
enterprise can expand itself according to changing environment.
– The success of the business enterprise depends on its awareness surrounding environment.
– The business enterprise can become dynamic if she has the knowledge about change in the environment.
Need of the study of business environment
– The business enterprise adjust itself according to the information about changes taking place in the environment .
– If a business enterprise is aware of the fact that environment is getting hostile it individually or along with other business enterprises can make efforts to make the environment hospitable according to the requirement of the business.
Nature of Business Environment• Aggregative: B E is the totality of all the external
forces which influence the working and decision making of enterprises
• Inter Related : Different elements of B E are closely inter – related and inter dependent . A change in one element affects the other elements . Economic environment affects non economic environment which in turns affect the economic conditions. Ex economic liberalization in India since 1991has opened up new opportunities for private sector and foreign entrepreneurs . Social pressures against pollution led enactment of anti pollution act.
• Relative : Business environment is a relative concept . It differs from country to country and even region to region. Capitalist economies like those of US A have a different kind of environment than communist economies . The economic system in a country affects the business environment.
• Inter-Temporal: B.E. is also an inter-temporal concept as it change over time. For business environment in India today is much different from that prevailing before 1991. In short run business environment may remain static .But in long run ,it does change.
• Uncertain : B.E.is largely uncertain because it is very difficult to forecast the future environment . When environment is volatile ,i.e. .changes very fast , uncertainty increases .
• Contextual : B.E. provides the macro frame work within which the business firm (micro unit)operates. The environmental forces are those given within which an individual enterprises and its management must function.
B.E. exercises tremendous influence on working environment. The change taking place in environment must be continuously monitored to judge on business . Appropriate and timely steps must be taken to face E .changes
Coping with environmental changes
1. Buffering : Buffering techniques are used to soften the impact of environment on the organization. Stocking materials , Preventive maintenance , employee training . These precautionary measures enable the organization to avoid damage due to changes in environment .
• Levelling : Whereas buffering absorbs environmental fluctuations , levelling or smoothing attempts to reduces fluctuations in environment . E.g. retail firms faced seasonal fluctuations offers price cuts in order to spread sales more evenly throughout the year . Special air fares for night flights is another example of levelling .
• Anticipation: It means acquiring information about probable changes in the environment . Manufacturing firm tries to anticipate demand for its product before deciding production schedule and related matters. Other areas in which firm can anticipated changes are customer needs , competition , technology and availability of human resource
• Rationing: Allocation of organizational resource according to a system of priorities . Rationing is resorted to when an org. is unable to meet all demand. E.g demand exceed supplies
• Dominating: The organization attempts to control event in the environment and reduces its dependencies on them.
• Changing: an organization may change itself ,its operations and output. May change product line as per changing preferences of customer.
• It is difficult changing strategy
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ENVIRONMENTAL SCANNING (ANALYSIS)
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CONCEPT OF ENVIRONMENTEnvironment literally means surroundings which influence the body or organization.The environment of any organization is the aggregate of all conditions, events and influences that surround and affect it.Since the environment influences an organization in many ways, its understanding is of crucial importance.
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Characteristics of Environment
Environment is complexEnvironment is dynamicEnvironment is multifacetedEnvironment has a far-reaching impact.Since the environment is complex, dynamic, multi-faceted and has a far reaching impact, dividing it into external and internal components enables us to understand it better.
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Meaning of environmental Scanning
Environmental analysis ( scanning ) is the process by which corporate planners monitor the economic, governmental, supplier, technological and market environment to determine the opportunities and threats to their enterprise.
The fortunes of organizations is determined by changes in social, economic, political, business and industrial conditions.
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Influence of environmentOpportunityThreatStrengthWeakness
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Approaches to Environmental Scanning
Systematic approach
Formats for various issues are developed and scanning is done systematically in a step by step Faison.
Process Information Approach
Information is available from trade papers, trade magazines, internet and such data is summarized and used in strategic management
Ad Hoc ApproachAd Hoc ApproachSpecific information on selected environmental Specific information on selected environmental factors is collected by conducting special studiesfactors is collected by conducting special studies
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Need /Importance/Benefit of Environmental Analysis
Technological forecasting indicative of future opportunities and challengesRisk IdentificationStrategic PlanningOpportunities forecastingEnvironmental –organization linkage identification
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Role of environmental Scanning in Organizations
Function-Oriented RoleTo improve organizational performance by providing environmental information concerning effective performance of specific organizational functions
Integrated Strategic Planning RoleTo make top mangement aware of the issues that arise in the firm’s environment and having a impact on planning.
Policy Oriented RoleTo make top management informed about major trends emerging in the environment
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Sources of information for environmental scanning
Documentary or secondary sources of informationMass MediaInternal SourcesExternal agenciesFormal StudiesSpying and surveillance
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Factors affecting environmental appraisal
Strategy-related factorsAge of the organizationSize and power of the organizationGeographic dimension of the
organizationType of businessInfluence of business organizationVolatility of environmentManagerial caliber
Environmental Scanning & MonitoringTechniques
Environmental Scanning & Monitoring
Environmental scanning is a concept from business management by which businesses gather information from the environment, to better achieve a sustainable competitive advantage.
To sustain competitive advantage the company must also respond to the information gathered from environmental scanning by altering its strategies and plans when the need arises.
Environmental Scanning & Monitoring- Techniques
SWOT
Industry Analysis
Techniques
Competitor Analysis
PEST ETOP
SWOT(Strength-Weakness-Opportunity-Threat)
Identification of threats and Opportunities in the environment (External) and strengths and Weaknesses of the firm (Internal) is the cornerstone of business policy formulation; it is these factors which determine the course of action to ensure the survival and growth of the firm.
SWOT Analysis
• The SWOT analysis is an extremely useful tool for understanding and decision-making for all sorts of situations in business and organizations. SWOT is an acronym for Strengths, Weaknesses, Opportunities, Threats.
• SWOT analysis came from the research conducted at Stanford Research Institute from 1960-1970. The background to SWOT stemmed from the need to find out why corporate planning failed. The research was funded by the fortune 500 companies to find out what could be done about this failure. The Research Team were Marion Dosher, Dr Otis Benepe, Albert Humphrey, Robert Stewart, Birger Lie.
SWOT: Studying Internal & External Environment
The aim of any SWOT analysis is to identify the key internal and external factors that are important to achieving the objective. SWOT analysis groups key pieces of information into two main categories:
– Internal factors – The strengths and weaknesses internal to the organization.
–External factors – The opportunities and threats presented by the external environment.
Examples of SWOTs
• Strengths and Weaknesses– Resources: financial, intellectual, location – Cost advantages from proprietary know-how – Creativity / ability to develop new products – Valuable intangible assets: intellectual capital – Competitive capabilities – Big campus selection
• Opportunities and Threats– Takeovers – Market Trends – Economic condition – Mergers – Joint ventures – Strategic alliances – Expectations of stakeholders – Technology – Public expectations – Competitors and competitive actions – Poor Public Relations Development – Criticism (Editorial) – Global Markets – Environmental conditions
Uses of SWOT Analysis
• Corporate planning
• Set objectives – defining what the organization is intending to do
• Environmental scanning – Internal appraisals of the organizations SWOT, this needs to include an
assessment of the present situation as well as a portfolio of products/services and an analysis of the product/service life cycle
Analysis of existing strategies, this should determine relevance from the results of an internal/external appraisal. This may include gap analysis (compare its actual performance with its potential performance which will look at environmental factors)
Strategic Issues defined – key factors in the development of a corporate plan which needs to be addressed by the organisation
Develop new/revised strategies – revised analysis of strategic issues may mean the objectives need to change
• Establish critical success factors – the achievement of objectives and strategy implementation
• Preparation of operational, resource, projects plans for strategy implementation
• Monitoring results – mapping against plans, taking corrective action which may mean amending objectives/strategies.
Also;
Use SWOT analysis for business planning, strategic planning, competitor evaluation, marketing, business and product development and research reports.
PEST Analysis
A scan of the external macro-environment in which the firm operates can be expressed in terms of the following factors:
•Political•Economic•Social•Technological
The acronym PEST (or sometimes rearranged as "STEP") is used to describe a framework for the analysis of these macro environmental factors. A PEST analysis fits into an overall environmental scan as shown in the following diagram:
Environmental Scan
/ \
External Analysis Internal Analysis
/ \
Macroenvironment
Microenvironment
|
P.E.S.T.
Political Factors
Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include:•tax policy•employment laws•environmental regulations•trade restrictions and tariffs•political stability
Economic Factors
Economic factors affect the purchasing power of potential customers and the firm's cost of capital. The following are examples of factors in the macro economy:
•economic growth:•interest rates :•exchange rates :•inflation rate:
Social Factors
Social factors include the demographic and cultural aspects of the external macro-environment. These factors affect customer needs and the size of potential markets. Some social factors include:•health consciousness•population growth rate•age distribution•career attitudes•emphasis on safety
Technological Factors
Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Some technological factors include:•R&D activity•automation•technology incentives•rate of technological change
Industry Analysis
• An industry is a group of firms producing a similar product or service
• An examination of the important stakeholders’ group in a particular corporation’s task environment is a part of industry analysis
Porter’s approach to Industry Analysis
• A corporation is most concerned with the intensity of competition within its industry
• The level of this intensity is determined by basic competitive forces
• In scanning its industry, the corporation must assess the importance to its success of each of the six forces
Forces Driving Industry Competition
Threat of New Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Relative Power of Unions, Governments, etc.
Potential Entrants
Threat of Substitute Products or Services
Industry Competitors
Rivalry Among Existing Firms
Other StakeholdersBuyers
Substitutes
Suppliers
Threat of New Entrants:Some Barriers to Entry
• Economies of Scale• Product Differentiation• Capital Requirements• Switching Costs• Access to Distribution Channels• Cost Disadvantages Independent of Size• Government Policy
Properties of Entry Barriers
• Entry barriers can and do change as the conditions change
• Entry barriers can change for reasons inside the firm : impact of the firm’s strategic decisions
• Some firms may possess resources or skills which allow them to overcome entry barriers into an industry more cheaply than most other firms
Rivalry Among Existing FirmsIntense Rivalry is Related To:
• Number of Competitors: numerous or equally balanced competitors
• Rate of Industry Growth: slow industry growth• Product or Service Characteristics: Lack of
differentiation or switching costs• Amount of Fixed Costs : high fixed or storage costs
• High fixed or storage costs• Lack of differentiation or switching costs• Capacity augmented in large increments (leading to
overcapacity and price cuttings)• Diverse competitors• High strategic stakes• High exit barriers (specialized assets, fixed costs of
exit, strategic interrelationships, emotional barriers, government and social restrictions)
Shifting Rivalry
• The factors that determine the intensity of competitive rivalry can and do change
• As an industry matures, its growth rate declines, resulting in intensified rivalry, declining profits
• An acquisition can introduce a different personality to an industry
• Focusing selling efforts on the fastest growing segments can reduce the impact of industry rivalry
Entry Barriers and Exit Barriers• When entry barriers are high and exit barriers are
low, entry will be deterred, and unsuccessful competitors will leave the industry
• When both entry and exit barriers are high, profit potential is high, but is usually accompanied by more risks, and unsuccessful firms will fight to stay
• The worst case is when entry barriers are low and exit barriers are high (overcapacity, poor profitability)
Pressure from Substitute Products
• Substitutes limit the potential return of an industry by placing a ceiling on the prices firms in the industry can profitably charge
• Identifying substitute is searching for other products that can perform the same function as the product of the industry
• The impact of substitutes can be summarized as the industry’s overall elasticity of demand
Bargaining Power of Buyers
• Buyers compete by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other
• A buyer’s group is powerful if:1. It purchases large volumes relative to seller sales2. The products it purchases from the industry
represent a significant fraction of the buyer’s cost of purchase (shop for good price)
3. The products it purchases from the industry are standard or undifferentiated
4. It faces few switching costs5. It earns low profits (thus sensitive to costs)6. Buyers pose a credible threat of backward
integration7. The industry’s product is unimportant to the quality
of the buyer’s products or services8. The buyer has full information
Bargaining Power of Suppliers• Suppliers can exert bargaining power over participants in
an industry by threatening to raise prices or reduce the quality of purchased goods and services
• A supplier group is powerful if:1. It is dominated by a few companies2. It is not obliged to contend with other substitute products for
sale to the industry3. The industry is not an important customer4. The supplier’s product is an important input to the buyer’s
business
5. The supplier’s group products are differentiated or it has built up switching costs
6. The supplier group poses a credible threat of forward integration
7. Labor must be considered as a supplier that exerts great power in many industries
Government as a force in industry competition
• Government role as supplier and buyer can be influenced by political factors
• Government regulations can set limits on the behavior of firms as suppliers or buyers
• Government can affect the position of an industry with substitutes through regulations, subsidies, or other means
• Government can affect rivalry among competitors by influencing industry growth
Stages of Environmental Analysis 1. Environmental Scanning : Scanning means the process
of analyzing the environment for identifying the factors which may influence the business . Its purpose is to identify the emerging trends or early warning signals . Such trends may have evolved over time or may appeared suddenly . E.S. alters the organization to potentially significant forces in E E so that suitable strategic initiative can be taken before these forces become critical for the organization. Scanning is basically exploratory in nature . There are so many E.F. which influences the operation of a business .All These factors may not be relevant . Therefore critical and high priority factors must be identified .
2. Environmental Monitoring : At this stage information from the relevant environment is collected. Monitoring is a follow up and deeper analysis of relevant environmental forces identified through scanning . Several techniques are used to collect the relevant facts about environmental factors . i.e. company records , publications , spying and verbal talks with employees , customer dealers ,suppliers and competitors are the main sources of data.
3. Environmental Forecasting : Forecasting is the process of estimating the relevant events of future based on the analysis of their past and present behaviour . It is necessary to anticipate future events before any strategic plans are formulated . Forecasting can focus on future aspects of environment which affects the organization . Forecasts are made for economic , social, political and technological element of environment . Several techniques like –Time series analysis, Delphi method ,etc are used for the purpose of forecasting .
4.Diagnosis (Assessment) : Environmental factors are assessed in terms of their impact on the organization.
Thank You