Business Environment & Legal Aspect of Business

KMBN201
UNIT-1

Introduction to Micro Environment

Meaning of Business
A business is defined as an organization or enterprising entity engaged in commercial, industrial, or
professional activities. ... The term "business" also refers to the organized efforts and activities of
individuals to produce and sell goods and services for profit.

Meaning of Business Environment

The term 'business environment' connotes external forces, factors and institutions that are beyond
the control of the business and they affect the functioning of a business enterprise. These include
customers, competitors, suppliers, government, and the social, political, legal and technological
factors etc.

Types of Business Organizations

1. Sole Proprietorship
 A type of business unit where one person is solely responsible for providing the
capital and bearing the risk of the enterprise, and for the management of the
business.
 A sole proprietorship is a business owned by only one person.
2. Partnership
 A partnership is a business owned by two or more persons who contribute
resources into the entity.
 The partners divide the profits of the business among themselves.
3. Corporation
 A corporation is a business organization that has a separate legal personality from
its owners. Ownership in a stock corporation is represented by shares of stock.
 The owners (stockholders) enjoy limited liability but have limited involvement in
the company's operations.
 The board of directors, an elected group from the stockholders, controls the
activities of the corporation.

4. Limited Liability Company (LLC)

 Limited liability companies (LLCs) in the USA, are hybrid forms of business that
have characteristics of both a corporation and a partnership. An LLC is not
incorporated; hence, it is not considered a corporation.

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  Nonetheless, the owners enjoy limited liability like in a corporation. LLC may elect
to be taxed as a sole proprietorship, a partnership, or a corporation.
 Limited liability means that investors can only lose money they have invested.
 Encourages people to finance company.
 Limited liability means that they can only recover money from existing assets of
business. They cannot claim personal assets of shareholders to recover amounts
owed by company.
5. Cooperative
 Cooperative Society is defined as “a society, which has its objectives for the
promotion of economic interests of its members in accordance with cooperative
principles.”
 A cooperative is a business organization owned by a group of individuals and is
operated for their mutual benefit. The persons making up the group are called
members.
 Cooperatives may be incorporated or unincorporated. Some examples of
cooperatives are: water and electricity (utility) cooperatives, cooperative banking,
credit unions, and housing cooperatives.
6. Non-profit Organization
 A non-profit organization is pretty self-explanatory, in that it's a business organization
that's intended to promote educational or charitable purposes.
 The "non-profit" aspect comes into play in that any money earned by the company
must be kept by the organization to pay for its expense, programs, etc.
 Keep in mind that there are several types of nonprofits available, many of which can
receive "tax exempt" status. This process requires filing paperwork, including an
application, with the government for them to recognize you as a non-profit
organization.

SWOT analysis
SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate
a company's competitive position and to develop strategic planning. SWOT analysis assesses internal
and external factors, as well as current and future potential.

SWOT Table
Strengths Weaknesses
1. What is our competitive advantage? 1. Where can we improve?

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2. What resources do we have?
3. What products are performing well?
Threats
1. What new regulations threaten
operations?
2. What do our competitors do well?
3. What consumer trends threaten business?
2. What products are underperforming?
3. Where are we lacking resources?
Opportunities
1. What technology can we use to improve
operations?
2. Can we expand our core operations?
3. What new market segments can we explore?

Internal and External Environment

Internal Environment pinpoints in-house factors of the firm, which are often constitutional in
nature. On the flip side, External environment is composed of those factors which are exterior to
the firm.

I. Internal Environment

Internal Environment is that part of the business environment which is concerned with the different
factors present within the organization. It comprises of conditions, forces, members and events
which has the capability to influence the company’s decisions and operations.

It determines the procedures and methods in which activities are carried out in the organization, as
well as it include all of the immediate and information resources, such as technical, financial and
physical resources of the organization. These factors are:

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  Value System: Value system can be defined as a set of rules and the logical and consistent
values adopted by the firm, as a standard guide, so as to regulate the conduct in any type of
circumstances.
 Vision, Mission and Objectives: Vision refers to the overall picture of what the enterprise
wants to attain, whereas mission talks about the organization and its business, and the
reason for its existence. Lastly, objectives refer to the basic milestones, which are set to be
achieved within the specific period of time, with the available resources.
 Management structure and Internal Power Relationship: Management structure implies
the organizational hierarchy, the way in which tasks are delegated and how they relate, a
span of management, relationship amidst various functional areas, the composition of the
board of directors, shareholding pattern and so forth. On the other hand, internal power
relationship describes the relationship and cordiality between the CEO and board of
directors.
 Human Resource: Human resources are the most important asset of the organization, as
they play a critical role in making or breaking the organization. The skills, competencies,
attitude, dedication, morale and commitment, amounts to the company’s strengths or
weakness.
 Brand value: It is simply the sale or replacement value of a brand. This definition may be
relevant for investors and for folks who need to include a "goodwill" term in the right hand
side of the balance sheet.
 Tangible and Intangible Assets: The tangible assets refer to the physical assets which are
owned by the company such as land, building, machinery, stock etc. Intangible assets
amount to the research and development, technological capabilities, marketing and financial
resources etc.
 Corporate Culture and Style of Functioning of Top Management: Corporate culture and
style of functioning of top managers is important factor for determining the internal
environment of a company. Corporate culture is generally considered as either closed and
threatening or open and participatory.
 Labour Unions: Labour unions are other factor determining internal environment of a firm.
Unions collectively bargain with top managers regarding wages, working conditions of
different categories of employees. Smooth working of a business organisation requires that
there should be good relations between management and labour union.
 Physical Assets and Technological Capabilities: Physical resources such as plant and
equipment, and technological capabilities of a firm determine its competitive strength which

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 is an important factor determining its efficiency and unit cost of production. R and D
capabilities of a company determine its ability to introduce innovations which enhance
productivity of workers.
 Facility: It is a formal financial assistance program offered by a lending institution to help a
company that requires operating capital. A facility is essentially another name for a loan
taken out by a company.
 Research and development (R&D): It includes activities that companies undertake to
innovate and introduce new products and services. It is often the first stage in
the development process.
 Corporate image (Company Image): It is the reputation of the firm with the various
audiences that are important to it. These groups that have a stake in the company are
known as stakeholders. Thus, if customers develop a negative perception of a company or its
products, its sales and profits assuredly will decline.
 Competitive advantage: It refers to factors that allow a company to produce goods or
services better or more cheaply than its rivals. These factors allow the productive entity to
generate more sales or superior margins compared to its market rivals.

II. External Environment

External Business environment comprises of all the extrinsic factors, influences, events,
entities and conditions, often existing outside the company’s boundaries but they have a
significant influence on the operation, performance, profitability and survival of the business
enterprise.
For the purpose of continuous and uninterrupted functioning of the business, the enterprise
has to act, react or adjust according to these factors. These factors are not under the control
of the enterprise. The elements of the external environment are divided into two categories:

1. Micro Environment

Otherwise called as task environment, these factors directly influence the company’s operations, as
it covers the immediate environment that surrounds the company. The factors are somewhat
controllable in nature. It includes:

 Competitors: Competitors are the business rivals, which operate in the same industry,
offering the same product and services, and cater to the same audience.
 Suppliers: To carry out the production process, the raw material is required which is
provided by the suppliers. The behaviour of the supplier has a direct impact on a company’s
business operations.
 Customers: Customers are the target audience, i.e. the one who purchases and consumes
the product. The customers are given the most important place in every business, because,
the products are created and promoted for customers only.
 Market Intermediaries: There are a number of individuals or firms that help the business
enterprise in the promotion, selling, distribution and delivery of the product to the end
buyer, which are called as marketing intermediaries. It includes agents, distributors, dealers,
wholesalers, retailers, delivery boys, etc.
 Shareholders: Shareholders are the actual owners of the company, as they invest their
money in the company. They get their share in the profits also, in the form of a dividend. In
fact, they have the right to vote at the company’s general meeting.
 Employees: Employees refers to the company’s staff, which is hired to work for the company
to help the company reach its mission. Therefore, it is very important for the firm, to employ
the right people, retain and keep them motivated so as to get the best out of them.

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  Media: Media plays an important role in the life of every company because it has the
capability to make the company’s product popular overnight or it can also defame them, in
just one go.

2. Macro Environment

Otherwise called as general environment, macro environment affects the entire industry and not the
firm specifically. That is why these factors are completely uncontrollable in nature. The firm needs to
adapt itself according to the changes in the macro-environment, so as to survive and grow. It
includes:

 Economic Environment: The economic conditions of the region and the country as a whole
have a significant bearing on the company’s profitability. This is because the purchasing
power, saving habits, per capita income, credit facilities etc. depends greatly on the
country’s economic conditions, which regulates the demand for the company’s products.
 Political and Legal Environment: The political and legal environment consists of the laws,
rules, regulations and policies which the company needs to adhere. The changes in these
laws and government may affect the company’s decisions, open doors of new opportunities
for the business or pose a threat to the business.
 Technological Environment: Technology is ever-changing; as everyday a new and improved
version of something is launched which is created with the state-of-the-art technology. This
can be a plus point if the company is the first mover in the race, subject to the success of the
product. However, if it turns out as a failure, it will prove as wastage of time, money and
efforts. Further, every company has to keep itself updated with the changing technology.
 Socio-Cultural Environment: Socio-cultural environment consist of those factors which are
concerned with human relationships such as customs, traditions, beliefs, values, morals,
tastes and preferences of the society at large. The company must consider these factors on
various matters such as the hiring of employees, advertising the product and service,
decision making etc.
 Demography: As the name suggests, the demographic environment covers the size, type,
structure, education level, and distribution of population in a geographical area. The
knowledge of this environment will help the firm in deciding the optimal marketing mix for
the target population.
 Global Environment: Due to liberalization domestic company’s can offer their products and
services for sale to other countries. In fact, there are many companies which are operating in
a number of nation’s worldwide. Hence, such companies’ norms must be in alignment with
the global environment.

Michael Porter’s Five Forces Analysis

The tool was created by Harvard Business School professor Michael Porter, to analyze an industry's
attractiveness and likely profitability. Since its publication in 1979, it has become one of the most
popular and highly regarded business strategy tools.
Porter recognized that organizations likely keep a close watch on their rivals, but he encouraged
them to look beyond the actions of their competitors and examine what other factors could impact
the business environment. He identified five forces that make up the competitive environment, and
which can erode your profitability. These are:

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1. Competitive Rivalry. This looks at the number and strength of your competitors. How many
rivals do you have? Who are they, and how does the quality of their products and services
compare with yours?
2. Supplier Power. This is determined by how easy it is for your suppliers to increase their prices.
How many potential suppliers do you have? How unique is the product or service that they
provide, and how expensive would it be to switch from one supplier to another?
3. Buyer Power. Here, you ask yourself how easy it is for buyers to drive your prices down. How
many buyers are there, and how big are their orders? How much would it cost them to switch
from your products and services to those of a rival? Are your buyers strong enough to dictate
terms to you?
4. Threat of Substitution. This refers to the likelihood of your customers finding a different way of
doing what you do. For example, if you supply a unique software product that automates an
important process, people may substitute it by doing the process manually or by outsourcing it.
A substitution that is easy and cheap to make can weaken your position and threaten your
profitability.
5. Threat of New Entry. Your position can be affected by people's ability to enter your market. So,
think about how easily this could be done. How easy is it to get a foothold in your industry or
market? How much would it cost, and how tightly is your sector regulated?
aIf you have strong and durable barriers to entry, then you can preserve a favourable position
and take fair advantage of it.

Four Types of Competitive Strategy: Michael Porter’s Four Generic Strategies

A firm's relative position within its industry determines whether a firm's profitability is above or
below the industry average. The fundamental basis of above average profitability in the long run is
sustainable competitive advantage. There are two basic types of competitive advantage a firm can
possess: low cost or differentiation. The two basic types of competitive advantage combined with
the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for
achieving above average performance in an industry: cost leadership, differentiation, and focus. The
focus strategy has two variants, cost focus and differentiation focus.

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1. Cost Leadership
In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of
cost advantage are varied and depend on the structure of the industry. They may include the pursuit
of economies of scale, proprietary technology, preferential access to raw materials and other
factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve
and sustain overall cost leadership, then it will be an above average performer in its industry,
provided it can command prices at or near the industry average.

2. Differentiation
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are
widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive
as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness
with a premium price.

3. Focus
The generic strategy of focus rests on the choice of a narrow competitive scope within an industry.
The focuser selects a segment or group of segments in the industry and tailors its strategy to serving
them to the exclusion of others.
The focus strategy has two variants.
(a) In cost focus a firm seeks a cost advantage in its target segment, while in
(b) Differentiation focus a firm seeks differentiation in its target segment.
Both variants of the focus strategy rest on differences between a focuser's target segment and
other segments in the industry. The target segments must either have buyers with unusual needs or
else the production and delivery system that best serves the target segment must differ from that of
other industry segments. Cost focus exploits differences in cost behaviour in some segments, while
differentiation focus exploits the special needs of buyers in certain segments.

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