Part-1

Environment of Business
CH-1 Business Environment

Chapter

Business
Environment
1 Copyright © 2007, Vivek Mittal

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Environment of Business
CH-1 Business Environment

Environment literally means the surroundings, external objects, influences or

circumstances under which someone or something exists. The environment of
any organization is "the aggregate of all conditions, events and influences that
surround and affect it" - Davis, K, The Challenge of Business, (New York:
McGraw Hill, 1975), P43Environment refers to all external forces that have a
bearing on the functioning of a business. Jauch and Gluecke define environment
thus: "The environment includes factors outside the firm which can lead to
opportunities or a threat to the firm. Although there are many factors, the most
important of these sectors are socio-economic, technological, supplier,
competitor and the government."
Business is all about reaping profits from the opportunities available in the
environment. Opportunity can manifest themselves in the form of short supply,
excess demand, latent need or new, better and economical sources of supply or
manufacturing. Cont….
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Environment of Business
CH-1 Business Environment

Characteristics of Environment

1. Environment is Complex

2. It is Dynamic

3. Environment is multi –faceted

4. It has a far-reaching impact

5. Its impact on different firms with in the same industry differs

6. It may be an opportunity as well as a threat to expansion

7. Changes in the environment can change the competitive scenario

8. Sometimes developments are difficult to predict with any degree of

accuracy
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Environment of Business
CH-1 Business Environment

Environmental Scanning
The process by which organizations monitors their environment to identify
opportunities and threats affecting their business, is known as environmental
scanning.
The following factors to be considered for environmental scanning:
1. Events: Important and specific occurrences that taking place in a certain
sector.
2. Trends: The general tendencies or courses of action along which these
events take place.
3. Issues: The current concerns that arise in response to events and trends.
4. Expectations: The demands made by interested groups in the light of their
concern for issues.
(Azhar Kazmi, TATA McGraw Hill, p 118)
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Environment of Business
CH-1 Business Environment

Type of Environment

The environment can be divided into three broad categories:

1. Internal Environment

Internal environment refers to that of the organization and is controllable.

Some internal factors are:

1. Culture and Value System

2. Mission and Objectives

3. Management Structure and Nature

4. Human Resource
Cont….

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Environment of Business
CH-1 Business Environment

2. Macro Environment
The Macro/General environment consists of factors external to the industry
that may have a significant impact on the firm's strategies. Here we will look
at six broad dimensions: demographic, socio-cultural, political/legal,
technological, economic and global.

Demographic Socio Culture

Dimensions
in General
Political/ Business Technological
Legal
Environment

Economic Global Cont….

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Environment of Business
CH-1 Business Environment

This shows that a single political change in 1991 has changed all the
components of the macro environment. So while studying macro environment,
one should not only concentrate on how this factor will influence business but
also on how this will influence other components of the environment and what
will be the impact of these changes in the business. Only then can one design
long term strategies.
1. Political Environment
2. Regulatory and Legal Environment
3. Demographic
4. Socio Culture
5. Global Environment
6. Economic Environment
Cont….
7. National Competitive Advantage Copyright © 2007, Vivek Mittal

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Environment of Business
CH-1 Business Environment

Michael Porter's International Competitiveness Model

Firm Strategy, Structure

& Rivalry

Factor Local Demand

Endowment Condition

Relating and Supporting

Industries
Cont….

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Environment of Business
CH-1 Business Environment

In a study of national competitive advantage, Michael Porter identified four

attributes of a national or country-specific environment that have an important
impact on the global competitiveness of companies located within that nation.
a. Factor Endowments: A nation's position in the factors of production such
as skilled labor, capital, technology or the infrastructure necessary to
compete in a given industry.
b. Demand Condition: The nature of home demand for the industry's
products and services.
c. Relating and Supporting Industry: The presence and absence in a nation
of supplier industries and related industries that are internationally
competitive.
d. Firm strategy, structure and rivalry: The conditions in the nation that
govern how companies are created, organized and managed and the nature
of domestic rivalry. Cont….

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Environment of Business
CH-1 Business Environment

3. Micro Environment
Micro environment or the competitive environment refers to the environment
which an organization faces in its specific arena. This arena may be an industry,
or it may be what is referred to as a strategic group.
All the business decisions-what business, pricing, distribution channel, promotion
strategy, product portfolio, etc., depends on the competitive position of the firm.
The Five Forces of Competition
a. Threat of Competitors: The rivalry among sellers in the industry.
b. Threat of New Entrants: The potential entry of new competitors.
c. Threat of Substitutes: Market attempts of companies in other industries to
win customers over to their own substitute products.
d. Bargaining Power of Suppliers: The competitive pressure stemming from
the supplier-seller collaboration and resultant bargaining.
e. Bargaining Power of Buyers: The competitive pressure stemming from Cont….
seller-buyer collaboration and bargaining. Copyright © 2007, Vivek Mittal

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Environment of Business
CH-1 Business Environment

Michael Porter's Five Forces Model

Threat of
Substitutes

Bargain Power
Bargain Power of
of Supplier Threat of Competitor Buyer

Threat of
New Entrants

Cont….

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Environment of Business
CH-1 Business Environment

Marketing Intermediaries
These are firms and persons that help in distribution, promotion, selling, and
provides services like consultancy. Almost every business has to take the help of
these intermediaries. Some times they play a decisive role.
Financial Institutions(FIs)
For any business, FIs plays a critical role. FIs not only make available the
finance but also create an environment for investment. They also give expert
opinion and consultancy to the corporate. Every corporate is dependent on FIs-
whether it is banks or consultancies or NBFCs-for its financial needs.
Strategic Group
Strategic groups are conceptually defined as clusters of competitors that share
similar strategies and therefore compete more directly with one another than with
other firms in the same industry. A strategic group is to identify a more defined
set of organizations so that each grouping represents those with similar strategic
characteristics. Cont…. Copyright © 2007, Vivek Mittal

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Environment of Business
CH-1 Business Environment

Critical Success Factors (CSFs)

Many industries have small but extremely important set of factors that are
essential for successfully gaining and maintaining a competitive advantage.
Critical success factors are those areas in which good results will help ensure an
organization's success against competition and where poor results usually lead
to declining performance.
Driving Force

Behind every change in environment there is some driving force and these
driving forces lead to a sequential change in environment. To understand and
forecast future trends it essential to understand the driving force behind them. In
fact, sometimes changes in segment A can be the result of changes in segment
B and on the other hand, to influence B one has to influence A.
Cont….

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Industry Life Cycle Analysis

Industry Life Cycle model identifies five sequential stages in the evolution of an
industry that lead to five distinct industry environments: embryonic, growth,
shakeout, mature and decline. The manager's task is to analyse which stage the
industry is in. Stages in Industry Life Cycle

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Environment of Business
CH-1 Business Environment

Environmental Analysis
Collection of Information
Analysis is done by means of a search of verbal and written information, spying,
forecasting and formal studies and information system.
Deciding Priorities
Various changes take place in the environment and it is difficult, cumbersome
and a costly affair to keep a regular eye on every aspect of these changes. So it
is essential for a strategist to rate the environmental factors on the basis of
criticality and then invest time and resources in environmental analysis. The
Nine-cell Matrix is one method of deciding priorities regarding environmental
issues. Impact on Business

High Medium Low

Probability of Actions

High Medium Low

Critical High Priority Low Priority

High Priority High Priority Low Priority

To be Watched Low Priority Low Priority Cont….

Identifying High Priority Environmental Sector Copyright © 2007, Vivek Mittal

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Environment of Business
CH-1 Business Environment

Environmental Analysis can be divided into two:

i. Environmental Evolution: There are three components that are useful to
describe changes in the environmental segments:
 Type of Change
 Forces driving change
 Type of future evolution.
ii. Process of Environmental Analysis: The process of environmental analysis
can be divided into four parts:
 Scanning the environment to detect warning signals
 Monitoring specific environmental trends
 Forecasting the direction of future environmental changes and
 Assessing current and future environmental changes for their organizational
implications. Cont….

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Environment of Business
CH-1 Business Environment

Forecasting
Information about the future is essential for planning. All managerial decisions
are future oriented. Decisions like planning and scheduling production, purchase
of raw material, acquisition of finance, decision regarding product portfolio,
distribution and advertising strategy, pricing, recruitment of human resource, etc.,
all require forecasting of the external environment.
Following are some techniques of environmental forecasting:
a. Scenario Planning
b. Issue Analysis
c. Expert Opinion
d. Delphi Method
e. Market Experiments
f. Survey
g. Time Series Analysis
h. Trend Projections Copyright © 2007, Vivek Mittal

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Environment of Business
CH-1 Business Environment

Benefits of Environmental Analysis

1. Environmental analysis gives an idea of organization's environment.
2. Environmental analysis gives a brief about competitors.
3. Environmental analysis tells us about opportunities to reap profits.
4. Environmental analysis gives details about threats in the environment.
5. Environmental analysis keeps the manager informed and alert.
6. Business is all about making the right decision at the right time. Without
proper environmental analysis, the right decision can't be made.
7. Environmental analysis helps in predicting the future.
8. Environmental analysis helps in suitable modification of strategies, as and
when required.
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Environment of Business
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Limitations of Environmental Analysis

1. Today the environment is turbulent and dynamic and it is difficult to forecast
or predict the environment.
2. Business environment is global and any development in any part of the
world can influence the business. Even a small political move can have a
drastic impact, which is very difficult to scan and assess. A sudden
disintegration of USSR had very adverse impact on many exporters in India.
A sudden attack of Al Qaeda on the Twin Towers in the US resulted in the
hike of global petroleum prices. After signing the WTO, all of a sudden the
toy market of India was captured by Chinese products. Today it is extremely
difficult to predict the external environment.
3. The Effectiveness of environmental analysis depends upon how it is
practiced, i.e., whether it is a systematic approach, ad hoc or processed.
Under a systematic approach, information for environmental scanning is
collected, scanned and monitored on a continuous basis and forecast and is
assessed for the relevant factor. Copyright © 2007, Vivek Mittal

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