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CHAPTER 1 Business Environment & Importance

of Strategic Planning for Business Success

Learning Objectives

To familiarize the readers with the meaning of business organization & how different types of environmental forces affects its success.

Introduction
How do we define Business Organization? & How it differs from other types of organization?

On comparing various business organization, say a local grocery store where we go to buy our regular provisions or a local garment shop that

sells a ready made shirts.

But We find certain common characteristics among them.


Organization has to go to specific market to acquire goods & service. This purchased goods are transformed & new shapes and forms given to them. finally in another market these produced goods will be sold.

Markets for Inputs

Markets for Outputs

Society

Business Organization

Society

An organization consists of group of people who jointly work on the goods

that they acquire from society to transform in to some valued goods.


Business organization can have one or more owner They employ people but they dont have property rights over organization. Entrepreneur funds are used to procure physical resources like plants &

building of the organization.

T-1 Business Organization as a system


IN MARKET ECONOMY LANGUAGE

A business organization is that which initiates the process of taking goods from one market, converting them into some other goods (Added Value), and then giving the final product back to the society.

This process can be performed by any kind of organization whether it is individual, government or non government organization.

This business organization initiate process of conversation & adds wealth to society by generating surplus (profit).

How it is done???

Take a Example:
There is high demand for ready made shirts by local market & fabrics are
available in burabazar but local population did not have time & energy to go their & to buy the fabric & stitch it to make final shirts.

BUT
They could pay higher amount for the shirts which they want.

Here, local garment shop owner simply took advantage of this hidden demand of local population & buy fabric, appoint tailor, stitch shirt & sell to the society.

Ex: Shop keeper bought 200 meter cloth at 100/meter,

Appoints 2 tailors worth salary per 3000/month,


Selling at price of 100 rs.

Manager or agents will make systematic activities or operations.


An organization to claim itself as business organization, it must be able to do the job of meeting the needs of group of people repeatedly over some time.

It can be created by formulating rules & regulation. What advantages organization will receive?

It ensures consistency in action across members, and across time periods also.

T-2 Business Organization as an Efficient Arrangement to create Wealth

Org. create wealth for the society. It does so by buying certain goods & services at a lesser price & then selling the same goods back to the society at higher price. Moreover, Society is comprise variety of people with variety it needs, its needs get meet when business org. produce & distribute different type of goods for different type of individual. This leads to the decentralization of decision making as they are nearer to the end users.

How Business considered as an Efficient Arrangement?

Imagine situation when an individual sitting in delhi make decision about how much what is to be bought from the market to make bread to meet its requirement of different population.

What might be prospect conditions that might prevailing:


- Too much bread remaining in the factory warehouse -Too little bread reaching the people

What could be the reason for such a situation?

Reason is population are not homogenous & population at different place have different amount of needs / demands.

Under a pure socialist system of governance (China) production decisions are taken at central level.

As demographic profile, consumer taste & preference will get


changed so it become to difficult to measures precise demand

Still Question:- Why an business Org. not any local level cooperative society can be considered as efficient wealth creator?

- A business org. is one that has clear ownership right & goal.
-

They have property rights because they are the individuals who provide

finance to from the organization & goal of org. is to generate simple


financial wealth.
-

EX:- Bought Products @ 100 Rs, Sold @ 150 Rs.


50 rupees surplus generated by using plants & Employees.
Those organsaiton which generate more surplus is considered as more efficent organization.

T-3 Sources of Efficiency of Business Organization

A business org. arrangements are more efficient because of clear ownership based business is faster making decision in comparison to a multi owner co-operative arrangement.

1st Source: Time Consume for making decision. 2nd Source: Pre-determined behavior of all its members. 3rd Source: it is located close to the customer, it generates goods that

are liked by the customers.


4th Source: It is driven by a very well recognized and visible goal of creating financial wealth.

T-4 Measures of Efficiency & Governance Issues

Production & Distribution of goods according to business org. is an efficient arrangement for meeting the requirements of people. In a business organization, there are two types of members; the owners and the employees; :Debatable aspects to measure the efficiency: Is this best arrangements for distribution of tasks, responsibilities, and wealth among owners? How does this arrangements allocate different jobs & responsibilities to different employees? What process they used to divide the wealth generated by the firm?

How it done in Capitalistic Economy System:

The owners provide initial capital for forming the organization and the employees provide service to run it; Employees are hired on a fixed contract and they are paid their dues first; Once the employees due are paid the rest of the wealth are distributed to the owners or the share holders.

Member Share (First Rights)

Owner Share (Residual Rights)

T-5 What is Business Success ?


Traditional measures: Surplus fund generated per unit of asset of related investment in the firm. One can use many other measures for evaluating the success of a firm e.g. Ratio of total employment to asset, ratio of revenue to asset etc. No matter what measure of success one uses, an organizations success would depend on many forces operating in the environment from where it procures and sells its goods and

T-6 What is Strategy?


Strategy is a set of intended actions e.g. Building a new plant or closing an existing one; Expanding ones distribution network; Acquisition of new business or selling off an existing business; Launching of new products; Going into new markets; Expanding or contracting manpower in a selected division or dept. Many of these decisions are taken with incomplete information about the state of the world. But for some companies and industries these issues are becoming very critical now. Why ?

How the success of a business organization could get affected?


If it is unable to keep people working for it because of poor internal governance policy; If it is unable to find goods in its inputs side; If it is unable to sell the goods produced by it; If Govt. and public concern for its actions places extra burden on its operation. If others have found superior means to reach out the customers.

Environmental Discontinuities & Importance of Strategic Planning

We have seen business as a small system operating within a sea of No. of interacting & conflicting forces.

If this forces are stable or slowly changing, a business manager

has less reason to worry about the future business prospects.

But when these same business environments become unstable due to actions of other agents, or due to autonomous change in the social environment, entrepreneur can no longer stick with decisions made in past.

A Few such notable discontinues were seen in industries:


- Replacement of cumbersome electric valves by tiny transistors. - Displacements of big photocopying system by instant photocopying system. - Intranet, E-Mail in place of paper-mode communication.

One Recent example of Serious Discontinuity was Recession in 2008-09. (Implications was): - Many Companies failed to perform their business like tatas

A countrys Social & Political Environment may also leads to sudden Changes.

T-7 Environmental Forces Affecting Business Organization

As per definition of business organization:

We can assume that an owner of a business has free reign to expand the size of orgn. to any size owner wishes.

Orgn. Can hardly know or predict the current composition & future evolution of external forces that are likely to have an effects on it. So, to understand this environmental factors for growth & sustain is must, and it is also complex to understand. How Much to Invest in Business? is critical decision.

7.1 The Regulatory System of the Country or The Government

A country Government is the most influential agents in a business environment.

Government will provides regulatory & policy framework


business activities will be carried out.

within which

To carry out business, Producer & buyer are needed. However, Transactions carried out between two practices may faces problems. Ex. Malpractices, Ethical dilemma and it requires third parties interventions and that will be done by government rules & regulation like Government Act.

If not, business parties can take opportunism, exploitation or discrimination. Sometime you will be charged high price for goods if you are unaware.

A Regulatory system is like a referee in a football match

To reduce conflicts & maintain transparency government will formulate policies & regulations. Various Policies includes: - Investment in industries (FDI, TRAIs) - Labour Legislations - Company Governance - Industry Policies

- Trade Policies

A policies formulated in country also represent the political trends in country. (Refer Exhibit 1.1)

7.1.a Economic Liberalization & Instability of Business Environment


Indian economy has been considered as mixed economy.

Government owned assets either in the form of PSU or Joint Venture with
private sector industrial houses.

There are 1300 public sector undertaking mainly into defense & railway industry.

Apart from this government control economy by laying down policies.

Ex: license for business, subsidy policy, and reservation of industry for
small players.

By 1980s, state has realized that without relaxing some of its control

growth of Indian economy were unlikely to pick up.

Impact of liberalization has encountered on Indian domestic players by increasing no. of players. What are other threats that faced due to liberalization?

MNCs are coming late so they bring innovation by having technology & skilled workforce. Market Share: it has been also observed that existence players market share has reduced an even some of the companies has closed their units.

Ex: Telecom Sector..

7.1.B. Active State Legislatures for protection of consumer Rights, and Living Environment:

Increase Industrialization & consumption of various manufactured goods around us our living is becoming more polluted & unfair for healthy living.

Increase No. of people in urban area demand pressure on well infrastructure like Road, Health Care Facility, Water Supply.

More Automobiles running on road rise as well as considerable rise in No.

of people drawing high salaries & demanding better Quality of Life.

These all have given sense to Government agents towards changing demand of people & their concern for protection of consumer.

Thus, Gov. has passed various lesiglasation to protect interest of consumer as well as Environment.

Ex of Gov. Lesiglasation are Ban of DDT for mosquito eradicator.

- Sales of Tobbaco Products


- Ban of product which is not follow Bharat Basel II Norms.

7.1.C. Government Tax Policy in Annual Budget:

Tax policy represent allocation of funds for developing nations like India. It has significance way How One Business should run their business Organization?

Major aim of having various Tax Incentive Scheme , Subsidies, government want to channelize private resources in to public interest. Ex: Transferring tax from Sales Priced based tax regime to Value Added Tax Regime.

7.1.D. Change in Labour Laws:


Skilled workforce is essential for success of an organization. So, orgn. Will enter in to contracts with an individuals to ensure regular service from them.

In General Way, employer will do Economic Exploitation of


Employees.

When employer hire employees current labour legislation has to be considered.

Ex: Minimum Wages, PF, Factory Act, and others..

7.1.E. Environmental Regulations:


Some of natural resources that lead to industrial development are getting depict at rapid rate. Nature has a Mechanism by which it tries to maintain a balance if its natural resources. EX: when urban waste was dumped, the land on which it dumped used to get converted through natural bacterial decomposition process into fertile agricultural land BUT Non- decomposable plastics & chemical are becoming parts of Non-Waste, it not only pollute land but also underground water to.

In Earlier Trends, in Europe & North America certain chemical

Industrialization is having harm impact on environment. Some companies have already started taking measure to reduce the emission of Green House Gas. In fact, Many Orgn. Considered it as an opportunities.

United Nations Framework Convention on Climate Control

Any company try to reduce omission of Co2 they will get carbon credit and than they can trade with another company. Apart from International Regulations, National Laws are also their.

7.2. Social Forces

How business interacts with society?


Suppliers for parts & components Employees for manpower service

Customers providing goods

All above are parts of social systems and changing slowly & these change are cumulative in nature Take example:- If societal level change there might be significance shift that will be faced by some industry.

7.2.A. Slower Population Growth & Other Demographic Changes:

Demand of industrial goods is directly proportional to the No. of people living in country, their income, age, cultural orientation. All the above forces growing population have increase in potential buyers. Ex. Increase in born rate demand for baby setter, toy industry increase boon period. On the other hand, an ageing (Mature) population, will not only have less income to spend, but also less needs for life & living.

Though some kinds of goods & services will be having more demands like Healthcare Services, Insurance and Security products. Next factors slowing rate of population :Growth rate was 2.22% during 1981 which came down to 2.14% in 1991 and still it reduced to 1.93% in 2001. Keep Table 1.1. (Population Distribution by age) Population who will seek job will increase in the period of 2001 2011.

Individuals requirements will be different at different age, such changes will have significant effects on the growth potentials of certain industries. Ex.:- If young population is increasing, the demand for housing facility, education, transportation & electronics industries will be growing. Similar for ageing population

7.2.B. Consumer Income, Education, Awareness of Rights & changing preferences:How Education level affects an organization:Year Details of Universities No. of Students

1981

132 Universities & Deemed Universities 272 Universities & Deemed Universities

2.3 Million Students

2001

7 Million

It is believed that education raise ones capacity to acquire & process information required for making decision of life

Educated individual contribute to and participates in forming public opinion on utility or disutility of many industrial products.
Gap has identify between CONSUMER EXPECTATION & PRODUCT UTILITY. A consumer as an individual does not have power to stop sale & distribution of a product that does not meet consumer expectation. Although, Education has no direct relation to preference & taste for a product, but an individual with good educational level: - will draw good salary, - which has direct bearing on his / her choice of lifestyle & needs. How Educational Level arise awareness of consumer?

7.2.C. Political Process & Its effect on Business:

People select & express their wishes in the form of Government they elect.

Unstable National Government creates uncertainty about business regulation. Ex: Tax or Subsidiary policy for different sector of economy.

In Heterogeneous Society, people have strong holds towards their respective ethnic groups. Hence, planning should be done carefully by considering political forces for investment decisions.

7.2.D. Cultural Changes & Its effects on Business:

It is an unwritten code of conduct on acceptance behavior expected by the member of a social group. This codes are developed through cumulative experiences & beliefs of people.

Ex: In Most cities most of these functions are managed by business organizations irrespective of their social & religious affiliation.

Over a period of time, these culture have been changed as peoples from different societies & culture interacts with each others. When people of 2 countries interest with each other, they

Ex:

demand for personal health, hygiene, or cosmetic products in India. Reason Our contacts & acquisition of Western Value System.

The culture also affects different peoples Value System. Considered, while HR Policies & practices are designed in the organization employees motivation to work & respond to orgn. Policies are heavily influenced by his / her cultural background.

7.3 Forces Of Competition:


7.3.A. Economic Liberalization & Change in Structure of Industry:

Changes in govn. Policy sometimes alters the nature of competition that an industrial orgn. Faces. Before Liberalization, PSUs were operating with limited competition. As an implications, they were enjoying monopoly. (BSNL
Connection)
So, consumer had faced certain problems due to regulatory restriction on investment. As, Regulation were lifted, competition has been arised in the industry & many orgn.

7.3.B. Vanishing Industrial Boundary:

In 1980s, communication revolution removed the boundaries of computer industry. Organization which produces computer equipments faced challenges. As Regulatory restrictions get relaxed, the banking business get merged. In earlier times such additional business would have been considered as a strategy of diversification. As industrial boundary is falling apart, this requires more skill manpower.

7.3.C. Merger Competitors:

&

Acquisition

&

New

This strategy used to go inorganic growth to its own stagnant organization by acquired another highly efficient & growing industry.

7.3.D. Joint Venture, Strategic Alliance & Competitive Pressure:


M&A Joint Venture

7.3.E. Entry of Large Corporations with operations in Many Countries:

Entry & Exist of one or more players in an industry is continuous process, yet the same cannot be with major / big organization. With open economy, more no. of big player coming is increased. Some of these new players are having operations in many countries & they are having advantages over single countrybased competitors.

ADVANTAGES: Availability of Raw Materials from different country.

7.4. Technological Change:


A)

Technological Change with its effects on Product Life Cycle: Technology is appearing at a much faster pace. - As an effect of this PLC is getting compressed every year.

EX: any company which is planning to launch new product will get fewer years to reap revenue from sales of products. - Cost of Developing new product has been increased.

B) Product Standardization, Widespread of IT, and Decline in Manufacturing Plant Size:

Manufacturing Industry has gone from major changes