Business Environment in Nepal

MBS 2nd Semester

LH : 48
Questions patterns
Group A- Case /Situational Analysis – 30
Group B- Problem Solving/Critical Analysis- 45
Group C– Concept Based Short Answer Questions- 25
Full Marks: 100, Pass Marks: 50, Time : 4 hrs
Unit Course Contents LH
1 Introduction of Business Environment 3
2 Economic Environment 16
3 Political Environment 4
4 Regulatory Environment 7
5 Socio – Cultural Environment 4
6 Social Responsibility of Business 3
7 Global Environment 7
8 Environment, Energy and Technology 4

References Books : Asmita Publication

M. K. Publishers
Unit : One – Introduction of Business Environment
Concept of Business Environment
• Business Environment refers to the set of all
business conditions that have direct or indirect
impact on the operation, growth and
development of business organization.
• It refers to the institutions or forces that affect
the business organization’s performance.
• It is formed by internal and external factors.
• It is the aggregate of all conditions, events and
influences that surround and affect a business.
• It is complex, dynamic, multi faceted and have
far reaching impact.
 Relationship between business system and its
Environment
• A System is a group of interrelated and interdependent
components or elements which are operated in a proper
sequence to achieve particular objective.
• Business environment is an integral part of business
system.
• Business system is involved to transform input into
output
• Business accumulates inputs from the environment and
transmit and provide output to the environment.
• Business system is largely affected by the internal as
well as external environment of business
• There is a constant interaction between the business
system and its environment
 Business System and its environment

Economic Environment Political Environment

S T
o
c
Organizational goals and policies e
c
i h
o O O n
c o
u
r
g
Input Conversion Output r
g l
l s r o
t t Raw materials Goal e g
u Business Value i
r Technology Product
s
r u chain o c
e c Labor Service u a
e l
n
t Capital Profit r
e
u c
v r Facilities Employment e n
i e Knowledge v
r Social responsibility i
o r
n o
m n
e m
n Feedback e
t n
Organizational culture t

Legal environment Physical environment Global environment

Features of Business Environment
1. Complex : It is difficult to predict the environment
2. Dynamic: It is continuously change in shape and
character
3. Multifaceted: Perceived differently by different
people
4. Far reaching impact: Affect on organization over a
long period
5. Aggregate of factors: Aggregate of events conditions
and trends
6. Interrelatedness : Components are interrelated to
each other
7. Reciprocal: Environment influence business and
business influence environment
Components of Business Environment
1. Internal Environment and its Elements:

a. Board of Directors and owners of the Organization

b. Organizational Resources, Goal and policies

c. Organizational Structure: Job definition, division of work,

Hierarchy of authority and responsibility, co ordination.

d. Organizational Culture: Set of norms and values, Define

what the organization stand for , how it does things, and
what it considers important
2. External Environments and its Elements:
I. Task or operating Environment components:
a. Customers : Customers preference, tastes, demands
and other information need to collect.
b. Suppliers : Should maintain sound relation to obtain
inputs regularly at reasonable price.
c. Competitors: Should identify the business strategy of
competitors to make competitive strength .
d. Creditors or Financial Institutions: Their credit policy
should be identified and maintain sound relation.
e. Pressure groups : Labour union, consumer
association, human rights association, social
institution. environmental association and media
f. Government: Government formulate rules, policies,
regulation and Act. to protect public interest.
II. General or Macro Environment
1. Political - Legal Environment:
a. Political Ideology :(Democratic, Socialism, mixed)
b. Political Institution: ( Legislative, Executive Judiciary)
c. Political Parties (Ideologies, Proclamations declaration)
d. Legal Institution: ( District Court, Appeal Court,
Supreme Court, Attorney General’s office, police
Administration)
e. Constitutions :(Fundamental law acceptable to all the
people of the nation)
f. Government and other constitutional bodies:
(Legislative, Executive, Judiciary, other constitutional
bodies i.e. Commission for the Investigation of Abuse
of Authority , Office of the Auditor General , Election
Commission , National human Right commission )
2 . Economic Environment:
a. Economic System (Free market, Centrally Planned,
Mixed),
b. Economic Policies (Monetary Policy, Fiscal policy,
Industrial policy)
c. Economic Conditions (Gross Domestic Product, Inflation,
Employment Indicators , Balance payment, Income
Distribution, Business Cycle)
d. Capital Markets: (Banks and finance companies,
Insurance, Stock markets
e. Economic Integration ( Regional and Global organization
i.e. SAARC, EU, WTO, Association of South East Asian
Nation(ASEAN
3. Socio- Cultural Environment
a. Demography: (Size and distribution of population, age
group, gender, urbanization, migration of people)
b. Lifestyle: ( change in level of income, Fashion
education Social inter-relationship )
c. Social values: (Beliefs , norms, attitude, education,
family structure)
d. Social Institutions: ( Family, reference groups and
social class-upper, middle, lower)
e. Religion: ( Belief and Trust that people have accepted
since long ago)
f. Language: ( Medium of expressing views, ideas,
knowledge, experience)
g. Education:( Continuous process of learning helps to
develop culture)
4. Technological Environment
1. Level or nature of technology: ( It may be
manual or labor based and automatic or
capital based i.e. mechanized, computerized ,
robotized )
2.Pace of technology change: ( it is the stage and
speed of the technological change)
3.Technology transfer: ( Imported from foreign
country transfer from one organization to
another.
4.Research and Development Budget: ( For
technological adaptation, up gradation and
development)
Process and techniques of Environmental Analysis
1. PEST LEG Analysis
(Political,Economic, Socio-culture,Technological, Legal, Evironmental,Global)
Under this analysis following components of External Environment
are analyzed:
1. Political Environment: Political Structure, Government stability,
Taxation policy, foreign trade policy, social welfare policy,
structure of bureaucracy, assumptions and system of governance,
public opinion, business government relation.
2. Economic Environment: System of economic planning and control,
monetary policy, fiscal policy, industrial and trade policy, current
status of agriculture, industry and trade, business cycle, interest
trade, money supply, inflation, unemployment.
3. Socio-cultural Environment: Social institution, social class, social
values, demographics, income distribution, social mobility,
lifestyle changes, attitudes to work, consumerism, level of
education.
4. Technological Environment: Government investment in
research, government and industry focused
technology, new discoveries and development, speed
of technology transfer.
5. Legal Environment: Current legal status, process of law
formulation and implementation, institutions
involved.
6. Environmental or physical components: Environment
protection laws, waste disposal, energy consumption,
environmental awareness, environmental protection
groups.
7. Global Environment: Relevant global market,
international political events, degree of regional and
global integration
2. Scenario Planning: Picture of possible Future
• It shows how the future might unfold and affect the
business issues.
• It is used for environmental analysis if the traditional
forecasting techniques fail to predict the changes in
environment.
• The scenarios may be favorable, unfavorable and
probable scenario. It is also called contingency planning.
• Scenario planning is developed by analyzing the
probable impacts of environmental factors to a
particular industry.
• It is detailed and imaginable or probable view of how
the business environment of an organization might
develop in the future.
• It helps to link the likely future uncertainties to the
decisions that are made today.
Scenarios are normally built under the following
situations:
1.The environmental changes is rapid and
turbulent.
2.There is difficulty in gathering information or it
is limited.
3.The information gives no indication of future.
Features of Scenario Planning
1.Depicts or represent or picture future possibility
2.Use in environmental volatility or haphazard
3.Involves selection of suitable strategies
4.Builds longer term view
5.Intellectual process
6.Top management activities
Process of Scenario Planning
1. Examine possible shifts in the natural environment and in
social variables globally
2. Identify uncertainties in each of the forces of the task
environment
3. Make a range of probable assumptions about future trends
4. Combine assumption about individual trends into
internally consistent scenarios.
5. Analyze the industry situation that would prevail under
each scenario.
6. Determine the source of competitive advantage under
each scenario.
7. Predict competitors behavior under each scenario.
8. Select the scenario that are either most likely to occur or
most likely to have a strong impact on the future of the
company
Porter’s Five forces model or analysis of industry environment
• According to porter an industry environment is composed of
1. The threat of new entrants or arrival, 2. Bargaining power of
suppliers, 3. Bargaining power of buyer, 4. Threats of product
substitutes and 5. competition among competitors.
• The interaction among these five factors determine an industry’s
profit potential that eventually determines the strategic options
of the firms.
1. Threat of new entrants : a. Barriers to entry and b. Expected
retaliation or counter- attack.
a. Barrier to entry: Some of the factors that create barriers for the
competition are: Economies of scale, capital requirement,
product differentiation, Access to distribution channel, switching
costs, government policy and cost disadvantages.
b. Expected Retaliation: It creates entry barrier to the new firms.
When the existing firms have a major stake in the industry with
substantial resources and the industry growth is slow or
constrained
2. Bargaining Power of supplier:
• Suppliers exert pressure over firms on prices and quality of the
products .
• The suppliers power is high under the following conditions.
1. Large and monopoly Supplier: If the suppliers are large,
they enjoy monopoly, their bargaining power is high.
2. Few Substitutes: If the number of substitutes is low the
bargaining power of supplier is high.
3. Powerful Brand: If the product brand of the suppliers is
very strong it makes them more powerful.
4. Fragmented buyers : If the buyers are not organized then
they have less bargaining power which makes supplier
powerful.
5. Forward integration: If the suppliers make forward
integration they become more powerful .
3. Bargaining Power of Buyer
• Buyers always want to buy products with higher quality, greater level of
service and at the lowest possible cost.
• Buyers are powerful in the following situations:
1. Large Buyer : If the buyer purchase a large portion of an industry’s
total output , they become powerful.
2. Large number of suppliers: Buyers get multiple options if the number
of supplier is high. It increases bargaining power.
3. Lack of product differentiation: If there is no differentiation in the
product, it provides freedom to the customers making them
powerful.
4. High material cost: If the cost of material is high in product, buyer
search for more favorable price, they become powerful
5. Low switching (changing brand, product)cost: If the switching cost of
the existing product is low it makes the buyers more powerful.
6. Price sensitive customers: If the buyers are price sensitive they follow
many suppliers and become more powerful.
7. Backward integration: If the buyers have backward integration it
increases their bargaining power.
4. Threats of Product substitutes
• Product substitutes pose a strong threat to a firm when the
switching costs and the price of the substitute products are lower
with similar quality or performance
• The different forms of substitutions are Product for product,
substitution of needs and generic substitution(substitution of
travelling by a motorcycle)
Factors determine the threats of substitution
1. Relative price performance of substitutes: If the substitute
product’s price is lower and its quality and performance are
equal to or greater , there is possibility of substitution.
2. Switching Cost: If such cost is relatively low the threat of
substitution is very high
3. Buyers propensity(tendency) to substitute: If the propensity of
the buyers towards substitutes is high there is a high threat of
substitute.
5. Competitive Rivalry ( competition among competitors)
• The firms normally compete for the same market and customers
• Some of the conditions in which competitive rivalry is high
1. Large number of competitors: It there is a large number of competing
firms the competitive rivalry among then increases.
2. Balance among the competitors: If the size and capacity of the firms in
the industry are similar, their level of competition is increased.
3. High Exit Barrier: If there is a high exit barrier for the firms from the
industry ,they are forced to exit the industry which increase
competition.
4. Lack of product differentiation: If there is lack of product
differentiation among the competitors which makes competition high.
5. Capacity utilization: If the competing firms are operating in full
capacity, it leads to price war making competitive rivalry high.
6. Low market growth: If the product is in maturity stage of its life cycle,
its sales may decrease as a result of which competition among the
firms for market increases.
7. Global Customer: If the customers are global the firms compete with
better resources and strategy to gain market. It increases the
competition at global level.
Importance of Business Environment
1. Provides sustainable competitive advantages to the business.
2. Help to formulate effective strategy through SWOT analysis.
3. Ensure competitive analysis or shows intensity of competition
among firms
4. Serves as the basis of strategic control
5. Ensure adaptation utilizing maximum opportunities and
mitigating threats
6. Ensure stability and sustainability through monitoring
environment regularly.
7. Enhance competitive advantages detecting emerging trend and
scenario from environment.
8. Ensure strong lobbying by forming organized body like industry
and trade federation
9. Help to create good public image enhancing organizational
effectiveness.
Analysis of Business Environment for strategic management
• Environmental analysis is a process by which strategists monitor
the environment to determine strength, weakness ,
opportunities and threat to the firm.
• Strategic management is a set of managerial decisions and
actions that determine the long run performance of an
organization
The major steps of strategic management are :
1. Strategic Planning: Concerned with development of long term
perspectives of an organization. It includes vision, mission, goal
and strategy.
2. Strategy Implementation: In this stage formulated strategies are
translated or turned in to action or implemented.
3. Strategic control: In this stage organizational performance or
activities are monitored to ensure that the direction of
implementation is in the right way.
4. Feedback : Under this stage information is constantly gathered
from the environment to improve the process of strategic mgmt.
 Recent Trend and Emerging Business Environment in Nepal
1. Increase private investment in core business
• Core business are electricity, communication and Transportation
Sectors of business where heave investment is required.
• With the liberalization of economy the private sectors investments
in these business have grown up significantly.
2. Growing urban population
• The rate of urbanization has been growing in Nepal over the year
due to specialization, industrialization and economic
development.
• Urbanization refers to the process of growth in the proportion of
population living in urban area.
3. Rising informed and educated customers
• Education builds individual knowledge and skill which results in
increased income.
• The education level of the people is increasing in Nepal.
• Nepalese customers are being more informed with the access to
information technology which pressure to the business to
enhance productivity and value.
4. Changing role of the government
• With the result of liberalization and globalization, the role of
government is changed from regulator to facilitator.
• The government has brought private sector friendly laws and policies
for the development of business sectors in Nepal.
5. Rising Economic agenda
• The constitution of Nepal 2072 has given more emphasis to the private
sector for economic development of the country.
• The momentum of economic issues creates a favorable situation for the
development of trade and business in Nepal.
6. Use of Modern Technology
• The manufacturing industries, Health organizations, Educational
institutions are using latest technology in their operation.
• The improving level of technology adopted by the Nepalese business
organization is increasing over the years.
7. Integration to the world economy
• Nepal has become the member of WTO, SAARC, BIMSTEC( Bay of Bengal
Initiative for Multi - Sectoral Technical and Economic Cooperation)
• These are the effort of Nepal to integrate its economy to the global
economy which helps to diversify the Trade.
8. Shifting socio Cultural values
• Nepalese Societies are found to be affected by the western
culture and values .
• Western festivals are getting popularity in Nepal and the
consumption of food habit and fashion of the Nepalese
consumers are shifting rapidly.
9. Shift towards service industry
• The service sectors like Banks or financial institutions, Hospitals,
Colleges, Consultancy , Hotel, Travel Agencies , Insurance
Companies have grown up rapidly in the recent year.
10. Workforce diversity
• It is increasing in Nepalese Organization due to population
dimensions.
• It may be the source of conflict within organization
• The work force being diverse over the years in terms of age
gender and ethnicity.
Case
Tea industry in Nepal is growing rapidly due to the active participation of the private sector. Now Nepal is self sufficient in
CTC tea. There is a huge international market for Orthodox tea. According to Nepal Tea and Coffee Development Board
twenty million kg of tea produced in the country annually. Out of this only four million kg is orthodox. About eight
million kg of tea produced in the country is consumed domestically and the rest twelve million kg are exported.
The National Agriculture Research Centre (NARC) has started research on production of Nepali variety of tea. The Centre
which is based at local Pakhribas Muncipality has initiated the research for developing a unique Nepali brand of tea that
would stand out in the world tea market.
Likewise after 154 years of tea cultivation Nepal’s traditional tea has finally got an international trademark and its own
logo in the international market. After numerous attempts of the Nepal Tea and Coffee Development Board,
organizations associated with tea production and experts in the field Nepali tea has received its own logo and trademark.
International demand for tea produced in Nepal was hit hard in Europe and USA when a test in Germany few months ago
revealed that it contained a harmful chemical called ‘anthraquinone’. However the situation has now improved.
Organic has become a minimum quality acceptable in Western markets. Western customers have started seeking other
standards in tea production, such as eco-friendliness and bio-friendliness. In the past few weeks, Indian tea producers
and traders have been seeking ban on import of non –organic orthodox tea from Nepal in their country.
Keeping health issues in mind some organic tea producers in the country have demanded the government to make all the
production of tea organic in Nepal. They have argued that this step not only have health benefits for consumers but also
helps the economy grow.
However those in opposition say that the move could do more harm than good. Organic production takes at least three
years to complete. And with the lengthy time, the production can be affected by fertilizers shortage and other
challenges, according to non organic tea producers.
Frequently strikes by the workers effect of climate change low labour productivity , poor support from the government,
high cost of capital, use of modern technologies, competition with Indian tea, and promotion at international market are
some of the major issues confronting the Nepalese tea industries.
Study the above case carefully and give the answer of the following questions
1. Identify two components of the task and general environment each of the Nepalese tea industry.
2. In your opinion , what are the opportunities and threats for Nepalese industries?
3. In view of the growing globalization , what strategies should Nepalese tea industries adopt to remain competitive in
the market?
4. Write how innovation is being important factors for Nepalese tea industries.