Business

• An organization or economic system where goods and services are exchanged

for one another or for money.
Every business requires some form of investment and enough customers to
whom its output can be sold on a consistent basis in order to make a profit.
 Where the Profits Come From

• For example, assume that you have decided to offer to tutor other students in
the basics of developing a website because you know that many students would
be willing to pay for this service. During this year, you receive $5,000 from
students for tutoring, and you pay a total of $1,000 in expenses to advertise
your service in the college newspaper. Your profit is shown below:
Revenue $5,000
-Expenses $1,000
Profit $4,000
 How to do business?
1) First, there needs to be a demand for the service that you offer. If there is no
demand, you will not generate any revenue and, therefore, will not earn a profit.
2) Second, you need to attract customers, meaning that they choose you instead of
your competitors (other tutors). If you offer a better service or a lower price than
your competitors, the customers who need your service may choose you instead of
your competitors.
3) Third, to earn high profits, you need to keep your expenses low. If you can run your
business efficiently, your expenses should be relatively low, and you will be
rewarded with higher profits.
 Resources a business uses to produce a product or service.

• To produce a product or service, firms rely on the following factors of

production:
 Natural resources
 Human resources
 Capital
 Entrepreneurship
• Natural Resources:- Natural resources include any resources that can be used in their
natural form. The most obvious natural resource that is commonly used by businesses
to produce products or services is land. Agricultural businesses rely on land to grow
crops. Other businesses rely on land to establish a site for their production.
• Human Resources:- Human resources are the people who are able to perform work for
a business. They may contribute to production by using their physical abilities, such as
working in a factory to construct a product. Alternatively, they may contribute by using
their mental abilities, such as proposing a change in the existing production process or
motivating other workers.
• Capital:- Capital includes machinery, equipment, tools, and physical facilities. All of these
types of capital are commonly used by human resources to produce products. Physical
facilities are typically necessary to produce many services as well as products. Especially
in recent years, technology has enabled businesses to use their capital more effectively.
• Technology:- can be defined as knowledge or tools used to produce products or services.
The Internet is an obvious example of technology. By using technology to improve their
capital, many businesses are able to produce products and services more quickly and at a
higher quality. Thus, they are better able to meet the needs of consumers.
 Business Environment
• The definition of business environment means all of the internal and external
factors that affect how the company functions including employees, customers,
management, supply and demand and business regulations. An example of a part
of a business environment is how well customers' expectations are met.

• 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.
 Components of Business Environment
• Social environment
• Industry environment
• Economic environment
• Global environment
• Economic Environment consists of Gross Domestic Product, Income level at
national level and per capita level, Profit earning rate, Productivity and
Employment rate, Industrial, monetary and fiscal policy of the government etc.

• Social Environment consists of the customs and traditions of the society in

which business is existing. It includes the standard of living, taste, preferences
and education level of the people living in the society where business exists.
• Industry Environment :-The overall economic, regulatory, social and political conditions that
affect all participants in an industrial market in a similar way and cannot readily be
influenced by marketing. The industry environment experienced by a business can include
such things as demographics, lifestyle shifts and economic cycles.

• Global Environment:- The analysis of the global environment of a company is called global

environmental analysis. This analysis is part of a company’s analysis-system, which also
comprises various other analyses, like the industry analysis, the market analysis and the
analyses of companies, clients and competitors. This system can be divided into a macro and
micro level. Except for the global environmental analysis, all other analyses can be found on
the micro level. Though, the global environmental analysis describes the macro environment
of a company. Obviously, a company is influenced by its environment. Many environmental
factors, especially economical or social factors, play a big role in a company’s decisions, 
 Economic Environment

• Economic conditions have a strong impact on the performance of each business. When the
economy is strong, employment is high, and compensation paid to employees is also high. Since
people have relatively good income under these conditions, they purchase a large amount of
products. The firms that produce these products benefit from the large demand. They hire many
employees to ensure that they can produce a sufficient amount of products to satisfy the demand.
They can also afford to pay high wages to their employees.
• When the economy is weak, firms tend to lay off some of their employees and cannot afford to pay
high wages. Since people have relatively low income under these conditions, they purchase a
relatively small amount of products. The firms that produce these products are adversely affected
because they can not sell all the products that they produce. Consequently, they may need to lay
off some employees. Under these circumstances, some firms fail, and all of their employees lose
their jobs. The unemployment rate rises as a result.
 Internal Environment

• Internal environment of business includes physical assets, technological capabilities, human, financial
and marketing resources, management structure, relationship among various constituents, goods,
objectives and value system prevailing.
• Although business is undertaken with profit-maximization motive even then the top positions in
modern corporate enterprises maintain some sense of values which usually influence the policies,
practices and general internal environment of business. However, there are certain deviations, where
the executives and management have been showing scant regards towards well being of the people.
• The traditional theory of business firm assumed profit maximization as the sole objective of the firm.
But the behavioural theory of the firm seeks to attain satisfactory overall performance reflected in
terms of set aspiration goals, rather than maximize profits, production, sales or some other issues.
• Goals and objectives of different firms vary widely leading to a wide difference in their overall internal
environment along with its direction of development, policies and priorities.
 External environment
• External environment of business is composed of various organisations,
institutions and forces operating outside the company, which exert influence
individually and collectively as well on this environment. External environment
of business is broadly classified into micro environment and macro environment.
 Suppliers

• An important factor in the external environment of a firm is the suppliers of its inputs such as raw
materials and components. A smooth and efficient working of a business firm requires that it should
have ensured supply of inputs such as raw materials. If supply of raw materials is uncertain, then a
firm will have to keep a large stock of raw materials to continue its transformation process
uninterrupted. This will unnecessarily raise its cost of production and reduce its profit margin.
• To ensure regular supply of inputs such as raw materials some firms adopt a strategy of backward
integration and set up captive production plants for producing raw materials themselves.
• Many large firms such as Reliance industries have their own power generating plants so as to ensure
regular supply of electricity for their manufacturing business. However, small firms cannot adopt
this strategy of vertical integration and have to depend on outside sources for supply of needed
inputs.
 Customers

• The people who buy and use a firm’s product and services are an important part
of external micro-environment. Since sales of a product or service is critical for a
firm’s survival and growth, it is necessary to keep the customers satisfied. To
take care of customer’s sensitivity is essential for the success of a business firm.
• A firm has different categories of customers. For example, a car manufacturing
firm such as Maruti Udyog has individuals, companies, institutions, government
as its customers. Maruti Udyog, therefore, has catered to the needs of all these
types of customers by producing different varieties and models of cars.
 Marketing Intermediaries

• In a firm’s external environment marketing intermediaries play an essential role of selling and
distributing its products to the final buyers. Marketing intermediaries include agents and
merchants such as distribution firms, wholesalers, retailers.
• Marketing inter­mediaries are responsible for stocking and transporting goods from their
production site to their destination, that is, ultimate buyers. There are marketing service agencies
such as marketing research firms, consulting firms, advertising agencies which assist a business
firms in targeting, promoting and selling its products to the right markets.
• Thus, marketing is an important link between a business firm and its ultimate buyers. A disloca­tion
of this link will adversely affect the fortune of a company. A few years ago chemists and druggists
in India declared a collective boycott of a leading pharma company because it was providing a low
retail margin. They succeeded in raising this margin. This shows that a business firm must take
care of its intermediaries if it has to succeed in this age of intense competition.
 Public
• For example, a consumer protection firm in Delhi headed by Sunita Narain came out with an
amazing fact that cold drinks such as Coca Cola, Pepsi Cola, Limca, Fanta had a higher contents of
pesticides which posed threat to human health and life. This produced a good deal of adverse
effect on the sale of these products in 2003-04. The Indian laws are being amended to ensure that
these drinks must not contain pesticides beyond European safety standards.
• Similarly, environmentalists like Arundhi Roy have been campaigning against industries which
pollute the environment and cause health hazards. Women in some villages of Haryana protested
against liquor shops being situated in their localities.
• Many citizen groups are actively campaigning against cigarette manufactures for their advertising
campaigns luring the people to indulge in smok­ing. Thus, the existence of various types of publics
influences the working of business firms and compels them to be socially responsible.
 External Macro Environment

• The external macro environment determines the opportunities for a firm to exploit for promoting
its business and also presents threats to it in the sense that it can put restrictions on the expansion
of business activities. The macro-environment has thus both positive and negative aspects.
• An important fact about external macro-environmental forces is that they are uncontrollable by the
management of a firm. Because of the uncontrollable nature of macro forces a firm has to adjust or
adapt itself to these external forces.
• External macro-environmental factors are classified into:
(1) Economic,
(2) Social,
(3) Techno­logical,
(4) Political and legal, and
(5) Demographic.
• Economic Environment:
• Economic environment includes the type of economic system that exists in the
economy, the nature and structure of the economy, the phase of the business
cycle (for example, the conditions of boom or recession), the fiscal, monetary
and financial policies of the Government, foreign trade and foreign investment
policies of the government. These economic policies of the government present
both the opportunities as well as the threats (i.e. restrictions) for the business
firms.
• Social and Cultural Environment:
• Social and cultural environment refers to the immediate
physical and social setting in which people live or in
which something happens or develops. It includes
the culture that the individual was educated or lives in,
and the people and institutions with whom they interact.
It is a set of beliefs, customs, practices and behaviour
that exists within a population. International companies
often include an examination of the socio-cultural
environment prior to entering their target markets.
 Political Environment
• The political environment can impact business
organizations in many ways. It could add a risk factor
and lead to a major loss. Changes in the government
policy make up the political factors. Increase or
decrease in tax could be an example of a political
element. Your government might increase taxes for
some companies and lower it for others. The decision
will have a direct effect on your businesses. So, you
must always stay up-to-date with such political factors.
Government interventions like shifts in interest rate can
have an effect on the demand patterns of company.
 Technological Environment

• The nature of technology used for production of goods and services is an important factor
responsible for the success of a business firm. Technology consists of the type of machines
and processes available for use by a firm and the way of doing things. The improvement in
technol­ogy raises total factor productivity of a firm and reduces unit cost of output.
• The use of a superior technology by a firm gives it a competitive advantage over its rival
firms. The use of a particular technology by a firm for its transformation process
determines its competitive strength. In this age of globalisation the firms have to compete
in the international markets for sales of their prod­ucts. The firms which use outdated
technologies cannot compete globally. Therefore, technological development plays a vital
role in enhancing the competitive strength of business firms.
 Demographic Environment

• Demographic environment refers to the study of human populations it includes the

size and growth of population, life expectancy of the people, rural-urban distribution
of population, the technological skills and educational levels of labour force. All these
demographic features have an important bearing on the functioning of business firms.
Since new workers are recruited from outside the firm, demographic factors are
considered as parts of external environment.
• The skills and ability of a firm’s workers determine to a large extent how well the
organisation can achieve its mission. The labour force in a country is always changing.
 Environmental Analysis
• Environmental analysis is a strategic tool. It is a process to identify all the
external and internal elements, which can affect the organization’s performance.
The analysis entails assessing the level of threat or opportunity the factors might
present. These evaluations are later translated into the decision-making process.
The analysis helps align strategies with the firm’s environment.
 Need of Environment Analysis
• 1. Identification of strength:
• Strength of the business firm means capacity of the firm to gain advantage over its
competitors. Analysis of internal business environment helps to identify strength of the
firm. After identifying the strength, the firm must try to consolidate or maximise its
strength by further improvement in its existing plans, policies and resources.
• 2. Identification of weakness:
• Weakness of the firm means limitations of the firm. Monitoring internal environment
helps to identify not only the strength but also the weakness of the firm. A firm may be
strong in certain areas but may be weak in some other areas. For further growth and
expansion, the weakness should be identified so as to correct them as soon as possible.
• 3. Identification of opportunities:
• Environmental analyses helps to identify the opportunities in the market. The firm should
make every possible effort to grab the opportunities as and when they come.
• 4. Identification of threat:
• Business is subject to threat from competitors and various factors. Environmental
analyses help them to identify threat from the external environment. Early identification
of threat is always beneficial as it helps to diffuse off some threat.
• 5. Optimum use of resources:
• Proper environmental assessment helps to make optimum utilisation of scare human,
natural and capital resources. Systematic analyses of business environment helps the firm
to reduce wastage and make optimum use of available resources, without understanding
the internal and external environment resources cannot be used in an effective manner.
• About the company
• Haley’s Vintage Hats is an online-only
business that sells unique and affordable
replicas of vintage designer hats.
• Although the business is new, owner Haley
Truit has been a milliner for many years.
She operates Haley’s Vintage Hats through
an Etsy storefront and hopes that it will
become successful enough that she can
quit her other job and run her dream
company full-time.
 Process of Environment Analysis
• 1)Scanning :It involves information gathering for assessing the nature of the environment in terms
of uncertainly, complexity and dynamism it : Identifies early signs of future environmental
changes. They are indicated by trends and events. Detects changes already underway. They are
happening. Gathering data by:-
• Through market research studies;
• Having informal conversations with other executives;
• Reading secondary sources such as web articles, newspapers, magazines and journal literature;
• Monitoring demographic data.
2)Monitoring :It involves tracking environmental trends and events. It is auditing of environment.
The likely impact  of environmental influences on business performance are identified.
• 3)Forecasting :This step forecast what is likely to happen. It lays out of path for anticipated
changes.  Forecasting is the process of estimating the relevant events of future based on the
analysis of their past and present behavior. It is necessary to anticipate future events before any
strategic plans are formulated. Forecasting can focus on future aspects of the environment which
affects the organization. Forecasts are made for economic, social, political and technological
elements of environment, Several technique like time series analysis, econometric model, scenario
building, Delphi method, etc. are used for the purpose of forecasting
• 4)Assessment :This step identifies key opportunities and threats. The competitive position of
business analyzed in terms of how the organization stands in relation to other organizations.
competing for some resources of customers. Environmental factors are assessed in terms of their
impact on the organization. Some factors in the environment may entail an opportunity while
others may pose a threat to the organization. The degree of impact may also vary from one factor
to another. SWOT analysis, ETOP and other such techniques are used for environmental diagnosis.
 Environmental Analysis Techniques

1. ‘SWOT’ or ‘TOWS’ analysis

2. PEST/ PESTEL analysis
3. Porter’s 5 force model
 SWOT/ TOWS ANALYSIS

• TOWS and SWOT are acronyms for different arrangements of

the words Strengths, Weaknesses, Opportunities and Threats.
• By analyzing the external environment(threats and
opportunities), and your internal environment (weaknesses
and strengths), you can use these techniques to think about
the strategy of your whole organization, a department or a
team. You can also use them to think about a process, a
marketing campaign, or even your own skills and experience.
 At a practical level, the only difference between TOWS and
SWOT is that TOWS emphasizes the external environment
while SWOT emphasizes the internal environment. In both
cases, this analysis results in a SWOT (or TOWS) Matrix.
• This helps you identify strategic alternatives that address the following additional
questions:
• Strengths and Opportunities (SO) – How can you use your strengths to take advantage
of the opportunities?
• Strengths and Threats (ST) – How can you take advantage of your strengths to avoid
real and potential threats?
• Weaknesses and Opportunities (WO) – How can you use your opportunities to
overcome the weaknesses you are experiencing?
• Weaknesses and Threats (WT) – How can you minimize your weaknesses and avoid
threats?
 PEST Analysis
• PEST analysis (political, economic, socio-
cultural and technological) describes a
framework of macro-environmental factors
used in the environmental scanning
component of strategic management.
PESTEL or PESTLE, which adds legal and
environmental factors.
 Component of PEST Analysis
• Political factors are basically how the government intervenes in the economy. Specifically,
political factors have areas including tax policy,  labour law, environmental law,  trade
restrictions, tariffs, and political stability. Political factors may also include goods and services
which the government aims to provide or be provided (merit goods) and those that the
government does not want to be provided (demerit goods or merit bads). Furthermore,
governments have a high impact on the health, education, and infrastructure of a nation.
• Economic factors include economic growth, interest rates, exchange rates, the inflation rate.
These factors greatly affect how businesses operate and make decisions. For example,
interest rates affect a firm's cost of capital and therefore to what extent a business grows
and expands. Exchange rates can affect the costs of exporting goods and the supply and
price of imported goods in an economy.
• Social factors include the cultural aspects and health consciousness, population
growth rate, age distribution, career attitudes and emphasis on safety. High trends in
social factors affect the demand for a company's products and how that company
operates. For example, the ageing population may imply a smaller and less-willing
workforce (thus increasing the cost of labour). Furthermore, companies may change
various management strategies to adapt to social trends caused from this (such as
recruiting older workers).
• Technological factors include technological aspects like R&D activity, automation,
technology incentives and the rate of technological change. These can
determine barriers to entry, minimum efficient production level and influence
the outsourcing decisions. Furthermore, technological shifts would affect costs,
quality, and lead to innovation.
 Porter's 5 Forces
Porter identified five undeniable forces that play a part in
shaping every market and industry in the world. The forces
are frequently used to measure competition intensity,
attractiveness and profitability of an industry or market.
These forces are:
1. Competition in the industry;
2. Potential of new entrants into the industry;
3. Power of suppliers;
4. Power of customers;
5. Threat of substitute products.
• Competition in the Industry
• The importance of this force is the number of competitors and their ability to threaten
a company. The larger the number of competitors, along with the number of
equivalent products and services they offer, the lesser the power of a company. When
competitive rivalry is low, a company has greater power to do what it wants to do to
achieve higher sales and profits.
• Potential of New Entrants Into an Industry
• A company's power is also affected by the force of new entrants into its market. The
less time and money it costs for a competitor to enter a company's market and be an
effective competitor, the more a company's position may be significantly weakened.
An industry with strong barriers to entry is an attractive feature for companies that
would prefer to operate in a space with fewer competitors.
• Power of Suppliers
• This force addresses how easily suppliers can drive up the price of goods and services. It is affected by the
number of suppliers of key aspects of a good or service, how unique these aspects are, and how much it
would cost a company to switch from one supplier to another. The fewer the number of suppliers, and the
more a company depends upon a supplier, the more power a supplier holds.
• Power of Customers
• This specifically deals with the ability customers have to drive prices down. It is affected by how many buyers
or customers a company has, how significant each customer is, and how much it would cost a customer to
switch from one company to another. The smaller and more powerful a client base, the more power it holds.
• Threat of Substitutes
• Competitor substitutes that can be used in place of a company's products or services pose a threat. For
example, if customers rely on a company to provide a tool or service that can be substituted with another
tool or service or by performing the task manually, and if this substitution is fairly easy and of low cost, a
company's power can be weakened.
 History of Nestle
• Nestle is a multinational company. It
was initially introduced in 1867 with
the launch of its first product that was
dehydrated kids food and this was
very successful at that time and thus
Nestle got the high profits within no
time.
• Nestlé’s founder, German-born
pharmacist Henri Nestlé, launches his
‘farine lactée’ (‘flour with milk’) in
Vevey, Switzerland. It combines cow’s
milk, wheat flour and sugar, and Nestlé
develops it for consumption by infants
who cannot be breastfed, to tackle high
mortality rates.
Product Diversification
 Scanning Methods
1. Trend Extrapolation/ ‘Trend–Impact analysis’
2. Scenario Writing
3. Expert opinion: The Delphi method
4. Cross-impact matrices
 Trend Extrapolation
• Trend extrapolation is essentially a technique for predicting the future based on
an analysis of the past. Accordingly, extending present trends into the future is
seen as a useful means of anticipating forthcoming events and tends to be one of
the techniques most frequently used by business organisations seeking a
relatively simple and inexpensive means of forecasting.
• At its simplest level, trend analysis tends to be used to predict changes over time
(e.g. in the likely demand for a product), a process which can sometimes prove
relatively accurate where there are sufficient historical data to allow seasonal
and cyclical fluctuations to be taken into consideration.
• The fundamental drawback in the use of trend analysis as a forecasting tool is
that there is no guarantee that the trends identified from historic patterns will
continue in the future.
• In a majority of cases, trends are based on a series of patterns or relationships
among a wide range of variables, a change in any one of which can drastically
alter the future course of events
 Scenario Writing
• Scenario writing is essentially an attempt to paint a picture of the future; it is
designed to provide a realistic description of possible future developments
within the environment and/or an industry and to consider their likely impact on
the organisation should they occur. This technique – which often includes ‘best
case’, ‘worst case’, ‘most likely case’ predictions – helps organisational decision
makers to anticipate potential changes in the environment and to consider
appropriate responses should such changes occur; as such it can be a useful
stimulus to risk analysis and contingency planning in a corporate context.
 Delphi Method
• Delphi approach involves eliciting opinions from a group of experts who operate individually,
and anonymously, unaware of the other members of the group. Each expert is asked to
respond to an initial set of questions and the answers are clarified and tabulated by a neutral
investigator who uses them to generate a more refined set of questions that are then put to
the expert. These experts often operate as a group to produce an analysis which is presented
to management in the form of a report or which emanates from a discursive technique
known as ‘brainstorming’.
• As a technique the Delphi method tends to be expensive and time-consuming and there is
no guarantee that a clear view will emerge. It can, however, be used to investigate any
aspect of a firm’s environment and to identify not only the effects of predicted changes, but
also their causes, and this information may be incorporated into other forms of
environmental analysis of both a qualitative and quantitative kind.
 Cross-impact matrices
• Under this approach, analysts identify a set of
events that are forecast to occur within a
given time period, and specify not only the
expected timing of each event but also its
probability of occurrence. Arranging these
events in anticipated chronological order in
rows and columns of a matrix permits
attention to be focused on the interaction
between the events and, in particular, on the
extent to which one may influence the timing
or likely occurrence of another