BUSINESS AS A SYSTEM

System will:
Draw Input
Process it Internally and
Releases output into environment

Business
Draw Input – Material , Energy , Information
Process it Internally - Into different Material , energy and Information
Releases output into environment – Tangible, Intangible and
Information

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 Business & Environment Interface
Interaction of Business & its Surroundings

I. Micro environment of business.

1) Suppliers
Supply raw materials and other components
(Inputs)

Importance
- Reliable supply – continuous supply for
smooth functioning
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 Business & Environment Interface
Micro environment of business.

2) CUSTOMERS
Different categories of customers
i. Industrial customers
ii. Wholesale customers
iii. Retail customers
iv. Government customers
v. Foreign customers
3 Contd …
 Business & Environment Interface
Micro environment of business.
3) Market intermediaries
i. Middlemen.
ii. Physical distribution Firms: (warehouses and
transport firms)
iii. Marketing service agencies (Advertising
agencies market research firms, media firms,
consulting firms)
iv. Financial intermediaries

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 Business & Environment Interface
Micro environment of business.
 4. Competitors:

 The Threat of entry of new firms

 The Power of Buyers
 The Power of Suppliers
 The Power of Substitutes

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 Business & Environment Interface
Micro environment of business.
• Economies of Scale
 Competitors:
• Unit cost Inverse to units produced
Measured by ‘ Minimum Efficient Scale ‘
1. The Threat of entry of new firm
Or Market share
1. Economies of scale
Strategy : ‘Just in time ‘ & Lean
manufacturing to counter
economies of scale

2. Capital Requirement • Capital requirement

• Internet / Knowledge based services
less costly

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 Business & Environment Interface
Micro environment of business.
Expected Retaliation
 Competitors: GSM Players like Airtel ,Spice retaliated
1. The Threat of entry of new firm entry of CMDA player Reliance
Communication to operate in GSM
3. Access to Channel
field
4. Expected Retaliation
Government Policy
5. Government Policy
Import of sugar, Edible oils, Steel ,
Liberation of Insurance & other
Access to Channel sectors
Self help groups / Social networks –
New channels of distribution

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 Business & Environment Interface
Micro environment of business.
Concentration of buyers
 Competitors: Small no. of buyer + High Volume
purchase – High buyer power
2. The Power of Buyers: Coca-Cola – cannot bargain with Malls
1. Concentration of buyers Alternative source of supply
2. Alternative source of supply More supply source – high buyer power
3. Component cost as a Bajaj Scooter – Honda, Suzuki, TVS etc
percentage of total cost Component cost as a % of total cost
4. Possibility of backward High proportion of component/material
integration cost to finished goods leads to looking
for alternatives.
Possibility of backward integration
Buyer’s own supply chain – more
buyer power – Co-opratives , Self
help groups, MLM
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 Business & Environment Interface
Micro environment of business.
Concentration of Sellers
 Competitors: Small no. of Sellers– High selling power
Like Monopoly & Oligopoly
3. The Power of Sellers: Switching Costs
1. Concentration of Sellers High switching cost to other seller
2. Switching costs source - Seller power increase
3. Brand power High-Tech & Specialised goods
4. Possibility of forward integration Brand Power
5. Dependence on customers High brand power – High power
Dependence on customers Ariel , Rin - Supermarkets have to sell it
Not depending on High volume Possibility of forward integration
small no.of buyers – more seller Seller’s own distribution operation –
power More power

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 Business & Environment Interface
Micro environment of business.
Relative performance & Price of
 Competitors: Substitutes
4. Threat of Substitution: Substitutes with same cost – High
Non-essential goods where there is the threat – Email replaced Post Offices
ultimate substitute of doing without Switching costs
That: The Cheaper switching cost - High
threat
1. Relative Price & Performance of
substitutes Pet foods , Fast foods , Malls
2. Switching Costs Buyer’s Willingness to substitute
3.Buyer’s willingness to substitute Low-cost articles & infrequent purchase
of articles – little effort made to go
for substitutes
Match box – Lighter

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 Business & Environment Interface
Macro environment of business.
 1. Demography: Drivers of Population Changes
 Quantitative aspects of
population. Birth Rate – No. of births per 1000 population
 Qualitative aspects of Fertility Rate- Av. No. of birth per women
population. Death Rate - No. of deaths per 1000
Migration – Country to Country movement
1. Population Growth
2. Drivers of Population Changes Implication – Consumer, Labour , Employment
participation
3. Ethnicity of Population
4. Implications of Demographic
Changes
Population Growth:
Year 1000 – Estimated 300 million
Year 1750 – Actual 728 million
Year 1900 – Actual 1500 million
Year 1960 – Actual 3 billion
Year 2000 – Actual 6 billion
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 Business & Environment Interface
Macro environment of business.

2. Economic environment
i. Economic conditions- GDP, Business Cycle, Unemployment,
Inflation, Balance of Payment, Fiscal Policy, Monetary Policy,
Exchange rate Policy, Interest Rate.
ii. Economic policies
a) Budget
b) Industrial policy
c) Trade policy
d) Agricultural policy
iii. Economic system- Capitalistic, Socilalsitic, Mixed

12 Contd …
 Business & Environment Interface
Macro environment of business.

3.Political environment
i. Legislature - Labour Laws like Factories Act, EPF Act, ESI
Act, Industrial Disputes Act, Minimum Wages Act, Payment of
Wages Act, etc
MRTP Act, Law of Contracts, Companies act, IDRA Act, FERA,
Import & Export Control act, Tax Laws

i. Executive- Administrators
ii. Judiciary - District, High Courts, Supreme Court, Tribunals

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 Business & Environment Interface
4. Socio cultural environment
Macro environment of business.
i. Attitude of people towards work and
health.
ii. Role of family.
iii. Marriage.
iv. Religion.
v. Education
vi. Ethical issues
vii. Social responsibility of business

14 Contd …
 Business & Environment Interface
Macro environment of business.

5. Natural environment
i. Natural resources.
ii. Weather and climatic conditions.
iii. Locational aspects.
iv. Nearness to port facilities.

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 Business & Environment Interface
Macro environment of business.

6. Technological environment
i. Nature of technology
ii. Scope for innovation

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 Business & Environment Interface
Macro environment of business.

7. International environment
i. Economic
ii. Political
iii. Legal
iv. Demography
v. Technology

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 Business & Environment Interface

Uses of environment studies

1) Awareness
2) Policy decisions
3) Demand forecasting
4) Competitor’s strategies.
5) To innovate

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 Business & Environment Interface

Techniques for environmental studies

i. Verbal and written information
ii. Search and scanning
iii. Forecasting and formal studies

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 Business & Environment Interface

Limitations of environmental analysis

a) Unexpected events
b) Future is not a guarantee
c) Too much of information.
d) Overcautions approach

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 Business Sectors

Primary Sector – Agriculture, Mining

Secondary sector - Manufacturing Industries
Manufacturing activities – Electricity Generation and Construction

Tertiary Sector – Services industries

Trade , Commerce, Insurance, Banking,Repair, Transport

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 Classification of Business – Based on Scope of Business
1. Business which Produce Goods:
Two categories of Goods:
a. Commodities – Goods produced by Primary sector
- Will not undergo any processing
- Agriculture , Fisheries, Mining,
b. Products - Goods produced by Secondary sector
– Conversion of Raw material into another form
- Farms, Diaries,
-Manufacturing Enterprises – Machinery, Materials for
-other business, Producing goods for consumption

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 Classification of Business – Based on Scope of Business

2. Business which Produce Services:

Transport , Telephone , Electric Light ,Hotels ,Entertainment
3. Business which Distribute Goods:
Wholesale merchants
Retail Merchants
Importers & Exporters
4. Business which Facilitates Distribution of Goods:
Warehouse, Auction Houses, Advertising, Financing
5. Business which Deals in Finance:
Commercial Banks, Co-Operative Banks, Development Bankd, Insurance Stock
Exchange

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 Classification of Business – Based on the Nature of Activity

1.Extractive Industries:
Extract goods from natural resources- Oil extraction, Farming, Fishing
2. Genetic Industries:
Produce goods by breeding- Poultries, Bio Tech
3. Manufacturing Industries:
Process Raw materials into finished goods – 4 Types
1. Basic Industries : Iron, Steel
2. Capital goods Industries : Machines
3. Intermediate Industries : Tyre , Tubes
4.Consumer goods Industries : Soap
4. Construction Industries
Canals, Dams, Road, Buildings, Road
5. Service & IT Industries
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Classification of Business – Based on Uses of Goods Produced

1. Basic Industries :
Provide essential inputs to other industries
Iron, Steel, Fertilizer, Chemicals

2. Capital goods Industries :

Instrumental in producing goods and services
Do not directly produce goods for consumption
Capital intensive
Machines, Tools,

3. Intermediate Goods Industries :

Goods already had undergone manufacturing process but which forms input for other
industries for further processing

Tyre , Tubes

4.Consumer goods Industries : For consumption – Durable / Nondurable goods

Durable – Usage for more than 3 years

Non-durable – Usage within 3 years

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Classification of Business – Based on Competitive Structure
1. Monopoly :
Single –Firm Industry
Bilateral Monopoly – single Buyer and Single seller
MRTP Act

2.Duopoly
Two sellers
3. Oligopoly
Only few firms holding 80 to 85 % market share
4.Monopolistic competition
Large sellers & similar but not Substitute products – Textile

5.Perfect competition

Large sellers & Homogeneous & free entry , exit & no single firm has any control
over the market & Perfect knowledge about market & no transport cost &
complete mobility of factors of production between industries.26
 Business Motives & Objectives

Objective:
The end actions

Motive:
The desire which stimulate action

Motive – Profit, Non-Profit

Objective – Supply Quality Products, Customer Satisfaction, Exploit labour,
Tax evasion

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 Business Motives & Objectives

Importance of Objectives

1. Justifies existance

2. Provide Direction

3. Help coordination

4.Provide standards for assesment & control

5. Help decentralisation

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 Business Motives & Objectives

I. Economic Objectives
a) Earning of adequate profit.
b) Creation of customers
c) Innovation
d) Generation of employment
e) Control of inflation
f) Economic development
g) Reduction of inequalities of income

29 Contd …
 Business Motives & Objectives

II. Social Objectives

a) Supply of goods and services.
b) Good treatment of customers.
c) Fair treatment of employees.
d) Good working environment
e) Customer Counseling
f) Social responsibility.
g) Pollution control.

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 Business Motives & Objectives

III. National Objectives

a) Implement of government laws.
b) Payment of taxes.
c) Democratic practices.

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 Business Ethics

Study of good and evil ,right and

wrong actions of Business

Dishonest :Unethical –being dishonest with

employees, Customers and shareholders is
unethical.
Protecting others from harm – Ethical- recalling
defective products is ethical action.

32 Contd …
 Business Ethics

Sources of Business Ethics :

Religion
Culture &
Law
Religion : Advocate orderly social system
Culture : Rules and standards transmitted among
generations to produce behaviours- Sathi, Child
marriage, Untouchability, Joint family
Law : Rules of conduct approved by Legislators –
Companies act , Labour laws etc

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 Business Ethics

Codes of Business Ethics :

Codes of conducts of business
1. Business must maintain highest standard of
behaviour for the benefit of industry, employees,
customers, shareholders
2. Goods and services must conform to committed
quality
3. Customers must be treated with respect and
fairness

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 Business Ethics

UnEthical Actions :
1.Kentucky Fried Chicken ( KFC ) – Use of Harmful
hormons & Monosodium glutamate to fatten the
chicken
2. Women Harassment – Sacking of Chief Executive of
Infosys

35 Contd …