OVERVIEW OF BUSINESS ENVIRONMENT

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, the purpose of
business goes beyond earning profits.
It is an important institution in society and the role of business is crucial.
o Be it for the supply of goods and services
o Creation of job opportunities
o Offer of better quality of life
o Contributing to the economic growth of the country and putting it on the global map

Scope of Business
o 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.

Characteristics of Today’s Business

Business during the 21st Century

• 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
 • Three types of diversification maybe distinguished : Concentric, horizontal and
conglomerate diversification. Concentric diversification refers to the process of
adding new, but related products or services. Eg : HLL which as Liril, Pears,
Rexona, Lux and Lifebuoy. Horizontal diversification is adding of new,
unrelated products or services for present consumer base. Conglomerate
diversification refers to adding new and unrelated products or services.

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 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 ENVIRONMENT
Internal Environment

Any business has certain vision, mission and objectives and a strategy to achieve them.
Formulation of strategy is defined as establishing a proper firm-environment fit.
Indeed the objectives should be based on an assessment of the external environment
and the organizational factors (internal environment).
o Vision
o Mission
o Objectives
o Management Structure
o Human Resources
o Financial Factors
o Company Image and Brand Equity

Macro Environment
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 it’s environment. Macro Environment includes:
 Political Environment
 Economic Environment
 Technological Environment
 Socio-cultural Environment
 Global Environment.

Technological Environment
 Technological is the systematic application of scientific or other organized knowledge to
practical tasks.
 Technological environment hold new technological innovation, new products, the state of
technology, the utilization of technology for maximum inputs and outputs, the
obsolescence of technology and the dynamic changes that frequently occur in
technologies which enable firms 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 technological advances around
them
 Technology leads to introduction of new products and older products becoming outdated
and redundant.
 Technological advances leads to high expectations of consumers in terms of quality
 Leads to system complexity
 Demand for capital

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

Global Environment:
The global environment refers to those factors which are relevant to business, such as the
WTO principles and agreements; other international 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 people’s attitude to business and work.
 Caste system
 Spirit of collectivism
 Education
 Ethics in business
 Social responsibility
 Social audit
 Corporate governance

External Environmental Analysis

Environmental 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 anticipate opportunities and to
plan to take optional responses to these opportunities. It also helps strategists to develop an
early warning system to prevent threats or to develop strategies which can turn a threat to a
firm’s advantage”. Firms which systematically analyse and diagnose the environment are
more effective than those which do not.

Process of Environmental Analysis:

The analysis consists of four steps:
 Scanning : Detect early signals of possible environmental change and detect
environmental change already underway.
 Monitoring : Purpose of monitoring is to assemble sufficient data to discern whether
certain trends are emerging, identification of the trends and identification of areas for
further scanning.
 Forecasting : It is concerned with developing projections of the direction, scope and
intensity of environmental change.
 Assessment : To determine implications for the organisation’s current and potential
strategy.

ENVIRONMENTAL ANALYSIS AND STRATEGIC MANAGEMENT

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 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 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.

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
 Cost Disadvantages: Cost advantages enjoyed by established firms may discourage entry of
new firms such as learning curve, favorable location etc.
 Product Differentiation: Characterized by brand image, customer loyalty etc. may deter new
firms from entering the market.
 Monopoly Elements
 Capital Requirements : High capital intensive nature of the industry is an entry barrier to
small firms

Threat of substitutes
 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.
 Perceived level of product differentiation in the minds of the consumer is also a highly
influential factor.

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 buyer’s 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
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; accreditations
• qualifications, 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?
• Could any of your weaknesses seriously threaten your unit?
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
below the poverty line
• High unemployment rate
• Inequality in prevailing socio
economic conditions, rural –
urban 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
Threats
firms in various sectors of
• High fiscal deficit
business
• Threat of government
• Inflow of FDI
intervention in some states
• Huge foreign exchange
• Growing import bill
prospects in IT / ITeS
• Population explosion, rate of
• Investment in R & D
growth of population
• Area of infrastructure
• Agriculture excessively
• Huge domestic market :
dependent on monsoon
Opportunity for MNCs
• Huge agricultural resources