Chapter-01: Nature and Scope of Business Environment

Business enterprises do not function in isolation. They operate within charging environment.
Various elements of this environment and changes in them exercise a significant influence
on the working and performance of business firms

2.1 Meaning of Business Environment:

The term business environment means “the aggregate of all the forces, factors and
institutions which are external to and beyond the control of an individual business
enterprise but which exercise a significant influence on the functioning and growth of
individual enterprises.” Keith Davis defines business environment as “the aggregate of all
conditions, events and influences that surround and affect business.”

According to Bayord O. Wheeler, business environment refers to “the total of all things
external to firms and industries which affect their organisation and operation”. In the words
of Arthtur M. Weimer, “business environment encompasses the climate or set of conditions,
economic, social, political, or institutional in which business operations are conducted”.

Thus, business environment means all those internal and external factors that have an
impact on business.

2.2 Nature (Characteristics) of Business Environment:

Business environment is characterised by the following features:
1. Aggregative – Business environment is the totality of all the internal and external forces
which influence the working and decision-making of an enterprise.

2. Inter-related – Different elements of business environment are closely inter-related and

interdependent. A change in one element affects the other elements. Economic
environment influences the non-economic environment which in turn affects the economic
conditions.

For example, economic liberalisation in India since 1991 has opened up new opportunities
for private sector and foreign entrepreneurs. Similarly, social pressures against pollution led
to the enactment of anti-pollution laws. Therefore, managers should not consider
environmental factors in isolation from one another. A holistic approach is necessary for
proper understanding of business environment.

3. Dynamic – Business environment is dynamic in nature as it keeps on changing from time

to time.
4. General and Specific Forces – Business environment consists of both general and
specific forces. General forces such as economic, social, political, legal, natural and
technological conditions influence all business enterprises. Specific forces such as investors,
customers, competitors, suppliers, etc. affect individual enterprises directly.

5. Relative – Business environment is a relative concept. It differs from country to country

and even region to region. Capitalist economies like those of USA and UK have a different
kind of environment than communist economies. The nature of economic system in a
country affects the environment of business.

6. Inter-temporal – Business environment is also an inter-temporal concept as it changes

over time. For example, business environment in India today is much different from that
prevailing before 1991. In the short run business environment may remain static. But in the
long run, it does change.

7. Uncertain – Business environment is largely uncertain because it is very difficult to

forecast the future environment. When the environment is volatile, i.e. changes very fast,
uncertainty increases.

8. Contextual – Business environment provides the macro framework within which the
business firm (a micro unit) operates. The environmental forces are largely those given
within which an individual enterprise and its management must function.

Business environment exercises tremendous influence on the working and success of

business firms. Different elements of business environment have different types and degrees
of influence on business. A factor that has a favourable impact on one firm may adversely
effect another firm.

Therefore, management of a business enterprise must have a deep understanding and

appreciation of the environment. The changes taking place in environment must be
continuously monitored to judge their impact on business. Appropriate and timely steps
must be taken to face the environmental changes.

2.3 Significance of Business Environment:

The survival and success of any enterprise depends upon its inherent capabilities (physical,
financial, human and other resources) and its ability to adapt to the changing environment.

It is very important for business firms to understand their environment and changes
occurring in it. Business enterprises which know their environment and are ready to adapt to
environmental changes would be successful. On the other hand, firms which fail to adapt to
their environment are unlikely to survive in the long run.

For example, some Indian firms suffered considerably because they failed to appreciate the
tightening regulations against environmental pollution. Knowledge of environmental
changes is very helpful in the formulation and implementation of business plans. A business
can obtain this knowledge through environmental scanning.

Environmental scanning is the process by which organisations monitor their relevant

environment to identify opportunities and threats affecting their business. With the help of
environmental scanning, an enterprise can consider the impact of different events, trends,
issues and expectations on its business operations. Firms which systematically analyse and
diagnose the environment are more effective than those which do not.

Some of the direct benefits of understanding the environment are given below:
(i) First Mover Advantage – Awareness of environment helps an enterprise to take
advantage of early opportunities instead of losing them to competitors. For example, Maruti
Suzuki became the leader in small car market because it was the first to recognise the need
for small car on account of rising petroleum prices and a large middle class.

(ii) Early Warning Signal – Environmental awareness serves as an early warning signal. It
makes a firm aware of the impending threat or crisis so that the firm can take timely action
to minimise the adverse effects, if any.

For example, ‘when new firms entered in the mid segment cars (threat), Maruti Suzuki
increased the production of its Esteem threefold. Increase in production enabled the
company to make faster delivery. As a result the company captured a substantial share of
the market and became a leader in this segment.

(iii) Customer Focus – Environmental understanding makes the management sensitive to

the changing needs and expectations of consumers. For example, Hindustan Unilever and
several other FMCG companies launched small sachets of shampoo and other products
realising the wishes of customers. This move helped the firms to increase sales.

(iv) Strategy Formulation – Environmental monitoring provides relevant information about

the business environment. Such information serves as the basis for strategy making. For
example, ITC realised that there is a vast scope for growth in the travel and tourism industry
in India and the Government is keen to promote this industry because of its employment
potential. With the help of this knowledge, ITC planned new hotels both in India and
abroad.
Study of environment enables an organisation to analyse its competitors’ strategies and
thereby formulate effective counter strategies. All strategic decisions such as what business
to do, whether to expand or reduce a business, and so on require a thorough understanding
of the internal and external environment of the organisation.

(v) Change Agent – Business leaders act as agents of change. They create a drive for
change at the gross root level. In order to decide the direction and nature of change, the
leaders need to understand the aspirations of people and other environmental forces
through environmental scanning. For example, contemporary environment requires prompt
decision-making and power to people. Therefore, business leaders are increasingly
delegating authority to empower their staff and to eliminate procedural delays.

(vi) Public Image – A business firm can improve its image by showing that it is sensitive to
its en-vironment and responsive to the aspirations of public. Leading firms like Reliance
Industries, ICICI Bank and others have built good image by being sensitive and responsive
to environmental forces. Environmental understanding enables business to be responsive to
their environment.

(vii) Continuous Learning – Environmental analysis serves as broad based and ongoing
education for business executives. It keeps them in touch with the changing scenario so that
they are never caught unaware. With the help of environmental learning managers can react
in an appropriate manner and thereby increase the success of their organisations.
Knowledge of changing environment can keep the organisation dynamic in its approach.

There are two major components of business environment-micro and macro.

2.4 Meaning and Elements of Micro Environment:

Micro environment or task environment refers to those individuals, groups and agencies
with which the organisations comes into direct and frequent contact in the course of its
functioning. In the words of Philip Kotler, “micro environment consists of the actors in
company’s immediate environment that affect the performance of the company.” Micro
environmental factors exercise a direct and intimate influence on the operations of the
enterprise. Therefore, it is also known as Direct Action Environment or specific forces or
Stakeholders.

Micro environment consists of the groups in the company’s immediate operating

environment which have a stake in the company. However, the micro forces may not
influence all the firms in a particular industry in the same manner.
For example, one firm’s supplier environment may be entirely different from that of another
firm which has in house supplies. Even when all the competing firms in an industry have
similar micro environment, their relative success depends on how effectively they face the
micro forces.

Micro environment consists of the following elements:

1. Customers – The people who buy a firm’s products and services are its customers. A
business exists to create and satisfy customers. A firm may have different types of customers
like individuals, households, Government departments, commercial establishments, etc. For
example, the customers of a paper company may include students, teachers, educational
institutions, business firms and other users of stationery.

In order to be successful a company must understand and meet the needs and expectations
of its customers. A firm can select the target customer group or market segment on the
basis of factors like profitability, elasticity of demand, dependability, degree of competition
and growth prospects.

It is generally risky to depend upon a single customer group. The customer environment is
becoming global due to increasing globalisation and liberalisation of the economy. With the
opening up of Indian market and foreign markets, the customer is becoming more global in
the matter of shopping.

2. Competitors – A company may have both direct and indirect competitors. Direct
competitors are the other firms which offer the same or similar products and services. For
example, Sony TV faces direct competition from other brands like LG, Samsung, Onida,
Videocon, BPL, etc.
Indirect competition comes from firms vying for discretionary income. For example, a
cinema house, faces indirect competition from Casino, and other firms marketing
entertainment. Due to economic liberalisation and globalisation, Indian companies are now
facing competition from both domestic firms and multinational corporations. In order to
understand the full range of its competition, a company must look at from buyers
viewpoint.

3. Suppliers – Suppliers refer to the people and groups who supply raw materials and
components to the company. Reliable sources of supply enable the company to carry on
uninterrupted operations and to minimise inventory carrying costs. Suppliers also influence
quality levels and costs of manufacturing. It is very risky to depend on a single supplier.

A strike or any other production problem of the supplier may cause interruptions in
manufacturing. Therefore, it is advisable to develop and sustain multiple sources of supply.
Some companies like Maruti Suzuki undertake vendor development to ensure timely and
regular supply of materials and parts. The relationship between the suppliers and the firm
reflects a power equation which is based on the extent to which each of them is dependent
on the other.

4. Marketing Intermediaries – Several marketing intermediaries help a company in

promoting, selling and distributing its products to consumers. Middlemen like agents,
wholesalers, and retailers serve as a link between the company and its customers.

Transportation firms and warehouses assist in the physical distribution of products.

Advertising agencies, marketing research agencies and insurance companies are other types
of marketing intermediaries. Countrywide retail distribution network has contributed
significantly to the success of companies like Hindustan Unilever and Dabur India.

5. Financiers – The shareholders, financial institutions, debenture holders and banks provide
finance to a company. Financial capacity, policies and attitudes of financiers are important
factors for the company. For example, the company cannot raise funds through shares if the
financiers are not risk taking.

6. Publics – Publics include all those groups who have an actual or potential, interest in the
company or who influence the company’s ability to achieve its objectives. Media groups,
environmentalists, non-government organisations (NGOs), consumer associations and local
community are examples of publics.
These publics can have both positive and negative impact on a business firm. For example,
media groups can be used to disseminate useful information. A company can cooperate
with the local people to improve its image as well as to provide some benefit to the people.

On the negative side, local community concerned with public health can force a company to
suspend operations or to take pollution control measures. Non- government organisations
often organise protests against firms suspected of being guilty for child labour, cruelty
against animals and damage to nature.

For example, one of the leading companies in India was attacked by the media for writing
advertisements on rocks near a famous hill station. Such activities of publics can tarnish the
image of business.

7. Workers and Trade Union – Workers and their union are an important component of
micro environment. A firm’s relations with its workers and trade union have a significant
impact on its functioning and performance. Company’s work environment and industrial
relations system must be conducive to efficient functioning.

According to Philip Kotler, “companies must put their primary energy into effectively
managing their relationships with their customers, distributors and suppliers. Their overall
success will be affected by how other publics in the society view their activity. Companies
would be wise to spend time monitoring all their public, understanding their needs and
opinions and dealing with them constructively.”

2.5 Meaning and Elements of Macro Environment:

Macro environment refers to the general environment or remote environment within which
a business firm and forces in its micro environment operate. A company does not directly or
regularly interact with the macro environment. Therefore, macro environment is also known
as Indirect Action Environment. Forces in the macro environment, however, create
opportunities for and pose threats to the company.

The macro environment forces are less controllable than the micro forces. Therefore, success
of an enterprise depends on its ability to adapt to the macro environment. For example,
when there is a substantial increase in the cost of imported raw materials due to
depreciation of the Rupee, production of such materials within the country may become
necessary.

Macro environment consists of the following components:

 Demographic environment
  Political and legal environment
 Social and cultural environment
 Economic environment
 Technological environment
 Natural environment
 Global environment.
1. Demographic Environment: Demographic environment means various dimensions of
country’s population. The demographic environment is important to business because
people constitute the market for a business. Moreover, business management involves
management of people and the efficiency of business depends largely on the competence
and motivation of its people.

Business firms often use demographic factors (e.g., age, sex, family size, occupation, family
life cycle, education, social class, income distribution) as the basis of market segmentation.
The demographic environment differs from country to country and from one place to
another within a country.

The demographic factors which have very significant implications for business are as follows:

 Size and growth rate of population,

 Age and sex composition of population,
 Life expectancy,
 Rate of employment,
 Density of population,
 Rural urban distribution,
 Family size,
 Ethnic composition,
 Literacy levels, and
 Income levels.
2. Economic Environment – The economic environment comprises all those economic
forces which influence the functioning of business enterprises, e.g., the nature and structure
of the economy, the stage of economic development, economic resources, the level of
income, economic policies, distribution of income, etc.

The main components of economic environment are as follows:

 The nature of economic system-capitalist, socialist or mixed economy.

 Economic structure-occupational distribution of labour force, structure of
national output, capital formation, investment pattern, composition of trade,
balance/imbalance between different sectors, five year plans.
  Economic policies-industrial policy, export-import policy, monetary policy,
fiscal policy, for-eign investment and technology policy.
 Organisation and development of the capital market-banking system,
securities markets, etc.
 Economic indices-gross national product, per capita income, rate of savings
and investment, price level, balance of payments position, interest rates, etc.
 Economic infrastructure and stage of development of the economy.
 Product markets and factor markets-degree of competition, market size, etc.
3. Political and Legal Environment – Political environment comprises the elements relating
to Government affairs. It serves as the regulatory framework of business. The main
constituents of a country’s political and legal environment are as follows:

 The constitution of the country.

 Political organisation-organisation and philosophy of political parties,
ideology of the Government, nature and extent of bureaucracy, influence of
primary groups, business donations to political parties, political
consciousness, etc.
 Political stability-structure of military and police force, election system, law
and order situation, President’s Rule, foreign infiltrations, secessionist
activities, etc.
 Image of the country and its leaders.
 Foreign policy-alignment or non-alignment, relations with neighbouring
countries.
 Defence and military policy.
 Laws governing business, and legal system.
 Flexibility and adaptability of laws-constitutional amendments and direction
of public policies. (ix) The judicial system-implementation and effectiveness of
laws.
4. Social and Cultural Environment – Social environment refers to the characteristics of the
society in which a business firm exists. Social and cultural environment consists of the
following:

 Social institutions and groups.

 Caste structure and family organisation.
 Educational system and literacy rates.
 Customs, attitudes, beliefs, values and life styles.
 Tastes, preferences of people, and their buying behaviour.
 Religions, etc.
Family, marriage, education, religion, attitudes to work and wealth and ethics are some
examples of socio-cultural factors.

5. Technological and Physical Environment – The main elements of technological and

physical environment are the following:

 Sources and types of technology.

 Rate of technological change*.
 Approaches to production of goods and services.
 New processes and equipment.
 Research and Development (R&D) systems.
6. Natural Environment – The main natural forces are as follows:

 Climatic and geographical conditions.

 Agricultural, commercial and other natural resources.
 Ecological system.
 Levels of pollution.
7. Global Environment – International agencies (World Bank, IMF, WTO, EEC, etc.),
international conventions, treaties and agreements, economic and business conditions in
other countries, etc. Certain developments such as a hike in the crude oil price have global
impact. Developments in information and communication technologies facilitate rapid
spread of culture across countries. Economic conditions abroad affect Indian firms. For
example, exports increase when markets expand abroad. International political factors can
also affect business. For example, improvements in relations between India and Pakistan has
led to higher trade between the two countries. WTO regulations have far reaching impact
on business in India. Import and investment liberalisation by WTO has led to greater
competition in India.
The main determinants of international environment are as follows:

 The state of the world economy and distribution of world output.

 International economic cooperation.
 International market structure and competition.
 Barriers to international trade and investment.
 National economic policies of different countries.
 Role of multilateral economic institutions.
 International economic laws, treaties, agreements, codes and practices.
 Political system and conditions in different countries.
 Cultural factors in different countries.
 Growth and transfer of technology.
 Growth and spread of multinationals.

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 will be very useful in formulating
strategies.

According to Michael Porter’s well-known model of structural analysis of industries, the state of
competition in an industry depends on five basic competitive forces, viz.

1. Rivalry among existing firms 2. Threat of new entrants

3. Threat of substitutes 4. Bargaining power of suppliers 5. Bargaining power of buyers.

Fig. 1.3 depicts the five forces competitive structure of industry. The diagram is a slightly
modified presentation of the one provided by Porter. The arrows in the diverse directions
indicate opposing forces. For example, just as the buyers and suppliers may have bargaining
power over the firm, the firm may also have some bargaining power over the buyers and
suppliers.

A growing industry often faces threat of new entrants that can alter the competitive environment.
There may, however be a number of barriers to entry. Potential competition tenor to be high if
the industry is profitable or critical, entry barriers are low and expected.
Fig 1.3 Five Force competitive Structure of Industry

Threat of Entry

The following are some of the important common entry barriers:

1. Government Policy: In many cases government policy and regulation are important entry
barriers. For example, prior to the economic liberalization in India, government dictated entry
barriers were rampant, like reservation. of industries products for public sector and small scale
sector, industrial licensing, regulations under MRTP Act, import restrictions, restrictions on
foreign capital and technology etc.

2. Economies of Scale: Economies of scale can deter entry in two ways: it keeps out small
players and discourages even potentially large players because of the risk of large stakes.

3. Cost Disadvantages Independent of Scale: Entry barrier may also arise from the cost
advantages, besides that of economies of scale, enjoyed by the established firms which cannot be
replicated by new firms, such as proprietary product technology, learning or experience curve,
favorable access to raw materials, favorable location, government subsides etc.

4. Product Differentiation: Product differentiation characterized by brand image, customer

loyalty, product attributes etc. may form an entry barrier forcing new entrants to spend heavily to
overcome this barrier.

5. Monopoly Elements: Proprietary product / technology, monopolization / effective control over

raw material -supplies, distribution channels etc. are entry barriers which are insurmountable or
difficult to overcome.
6. Capital Requirements: High capital intensive nature of the industry is an entry barrier to small
firms. Further, the risk of huge investment could be a discouraging factor even for other firms.

Rivalry among Existing Competitors

Rivalry among existing competitors is often the most conspicuous of the competitions. Firms in
an industry are "mutually- dependent" - competitive moves of a firm usually affects others and
may be retaliated. Common competitive actions include price changes, promotional measures,
customer service, warranties, product improvements, new product introductions, channel
promotion etc.

There are a number of factors, which influence the intensity of rivalry. These include:

1. Number of Firms and their Relative Market Share, Strengths etc.: Rivalry is likely to be
affected by the number firms, their relative market shares, competitive strengths, etc.

2. State of Growth of Industry: In stagnant, declining and, to some extent, slow growth industries
a firm is able to increase its sales only by increasing its market share, i.e., at the expense of
others.

3. Fixed or Storage Costs: When the fixed or storage costs are very high, firms are provoked to
take measures to increase sales for improving capacity utilization or reducing storage costs.

4. Indivisibility of Capacity Augmentation: Where there are economies of scale, capacity

increases would be in large blocks necessitating, in many cases, efforts to increase sales to
achieve capacity utilization norms.

5. Product Standardization and Switching Costs: When the product of different firms is
standardized, price, distribution, after-sales service, credit etc. become important strategic
variables of competition. Absence of switching costs makes firms more vulnerable.

6. Strategic Stake: Rivalry in an industry becomes more volatile if a number of firms have high
stakes in achieving success there. For example, a firm which regards a particular industry as its
core business will give great importance to success in that industry.

7. Exit Barrier: High exist barriers. (For example, compensation for labor, emotion! attachment
to the industry etc.) tend to keep firms competing in an industry even thou~ the industry is not
very attractive.

8. Diverse Competitors: Rivalry becomes more complex and unpredictable when competition are
very diverse in their strategies, origins, personalities, relationships to- their parents etc

9. Switching Costs: In some cases a barrier to entry is created key switching costs (i.e., on time
costs facing the buyer of switching from one supplier's product to another's) such

as cost of retraining the employees, cost of new ancillary equipment etc.

10. Expected Retaliation: The potential entrants' expectations about the reactions of the existing
competitors may also sometimes deter entry.

Threat of Substitutes

An important force of competition is the power of substitutes. Substitutes limit the potential
returns in an industry by placing a ceiling on the price firms in the industry can profitable charge.
The more attractive the price performance alternative offered by substitutes, the firmer the lid on
industry profits.

Firms in many industries face competition from those marketing close or distant substitute.
Porter points out that substitute products that deserve the most attention are those that (1) are
subject to trends improving their price-performance trade off with the industry's product, or (2)
are produced by industries earning high profits.

Bargaining Power of Buyers

For several industries, buyers are potential competitors they may integrate backward. Besides,
they have different degrees of bargaining power. Buyers compete with the industry forcing down
prices, bargaining for higher quality or more services, and playing competition against each other
- all at the expense of industry profitability".

Important determinants of the buyer power, explained by Porter, are the following.

1. The volume of purchase relative to the total sale of the seller.

2. The importance of the product to the buyer in terms of the total cost.
3. The extent of standardization or differentiation of the product.
4. Switching costs.
5. Profitability of the buyer (low profitability tends to pressure costs down).
6. Potential for backward integration by buyer.
7. Importance of the industry's' product with respect to the quality of the buyer's product or
services.
8. Extent of buyer’s information.

Bargaining Power of Suppliers

The important determinants of supplier power are the following:

1. Extent of concentration and domination in the supplier industry

2. Importance of the product to the buyer.

3. Importance of the buyer to the supplier
4. Extent of substitutability of the product

5. Switching costs.
6. Extent of differentiation or standardization of the product.
7. Potential for forward integration by suppliers.

Porter's analysis, thus, shows that competition in an industry goes well beyond the established
players. "Knowledge of these underlying sources of competitive pressure highlights the critical
strengths and weaknesses of the company, animates its positioning in its industry, clarifies the
areas where strategic changes may yield the greatest payoff, and highlights the areas where
industry trends promise to hold the greatest significance as either opportunities or threats.
Understanding these sources will also prove to be useful in considering areas for diversification,
though the primary focus here is on strategy in individual industries. Structural analysis is the
fundamental underpinning for formulating competitive strategy.

COMPETITOR ANALYSIS

Competitor analysis is necessary for formulating right strategies and determining the right positioning for
the firm in the industry.

Competitor analysis seeks to find answers to certain basic questions such as:

1. Who are the competitors of the firm?

2. What are the current strategies of the competitors?

3. What are their future goals and likely strategies?

4. What drives the competitor?
5. Where is the competitor vulnerable?
6. How are the competitors likely to respond to the strategies of others?

Porter has suggested a framework for competitor analysis, consisting of four diagnostic
components, viz., future goals, current strategy, assumptions and capabilities.

As Porter observes, its goals, assumptions, and current strategy will influence the likelihood,
timing, nature, and intensity of competitor's reactions. Its strengths and weaknesses will
determine its ability to initiate or react to strategic moves and to deal with environmental or
industry events that occur

Competitor Response Profile

An analysis of these components will help to formulate what Porter calls competitor's response
profile, i.e., answers to critical questions such as: What moves or developments will provoke the
competitor and how is the competitor likely to respond or retaliate?

The competitor response profile seeks to predict the competitor's offensive moves and defensive
capabilities.

Future Goals
Analysis of future goals would be helpful to identify the attitude and behavior of the competitor
and likely strategies. As Porter observes, a knowledge of goals will allow predictions about
whether or not each competitor is satisfied with its present position and financial results and,
thereby, how likely that competitor is to change strategy and the vigour with which it will react
to outside events or to moves by other firms?

Knowledge of competitor's goals may help to predict its reactions to strategic changes. Goals of
both the business unit and corporate parent need to be examined.

Assumptions

It is critical to understand:
1. The competitor's assumptions about itself.
2. The competitor's assumptions about the industry and the other companies in it.

A firm may perceive itself as a socially conscious organization, the industry leader, quality
conscious firm, highly ethical etc. Such assumptions will, obviously, guide the way the firm
behaves, including reactions to competitors' moves.

A firm would also have assumptions about the industry and competitors like the industry
prospects; competitors' goals, capabilities and weaknesses competitors' possible behaviors and
reactions etc.

The strategies and moves of a firm will be influenced by the above two assumptions. The
assumptions mayor may not be correct.

Current Strategy

Identification of the current strategies of the competitors is a very important component of

competitor analysis. A competitor's strategy is most usefully thought of as its key operating
policies in each functional area of the business and how it seeks to interrelate the functions.

Capabilities

The ability of a firm to accomplish its goals and to respond to competitor's moves depends on its
strengths and weaknesses. Analysis of the strengths and weaknesses of the competitors is,
therefore, very important.

VALUE CHAIN

Porter points out that a firm’s value chain is an important determinant of competitive advantage.

Value is the amount buyers are willing to pay for what a firm provides them. The total revenue reflects
the value. Creating value for buyers that exceeds the cost of doing so is the goal of any generic strategy.
The value chain displays total value and consists of value activities and margin. Value activities are the
physically and technologically distinct activities a firm performs.

There are, broadly, two types of value activities, namely, primary activities and support activities.

Primary activities include: (i) inbound logistics (activities associated with receiving, storing and
disseminating inputs to products); (ii) operations (processing activities); (iii) marketing and sales; and iv)
Outbound logistics (v) services,

Support activities include: (i) procurement (purchasing of inputs); (ii) technology development; (iii)
human resource management and (iv) firm infrastructure (includes general management, planning,
finance, accounting, legal and government affairs and quality management).

Each of these activities may be subdivided into several activities. For example, marketing and sales
include activities such as advertising, sales promotion, sales force management, marketing research etc.

A firm gains competitive advantage by performing these strategically important activities more cheaply or
better than its rivals. A firm should strive to understand not only its own value chain activities but also of
the competitors’, distributors’ and suppliers’. This has important implications for the business marketers.