BUSINESS ENVIRONMENT

“It is not the strongest of the species that survive, nor the most intelligent, but the
one most responsive to change”.
Charles Darwin
Business According to Prof. R. N. Owens
“Business is an enterprise engaged in the production and distribution of goods for sale in a
market or rendering of services for a price”.

Business According to L.R. Dicksee

“Business is a form of activity pursued primarily with the object of earning profits for the
benefit of those on whose behalf the activity is conducted”.

Business According to Urwick and Hunt

“Business is any enterprise which makes, distributes or provides any article or service which
other members of the community need and are willing to pay for”

Business According to Haney

“Business may be defined as human activity directed towards producing or acquiring wealth
through buying and selling of goods”.
BUSINESS
Business may be understood as the organized efforts of enterprises to supply consumers
with goods and services for a profit

BUSINESS GOALS IN GENERAL

Change / Risks
• Profit (Bottom-line)
Exchang
• Survival Government goods
• Growth Control services
incom
• Efficiency
• Market Leadership
• Customer satisfaction
Characteristics
• Employee satisfaction Competition of D
Business
• Quality Products & Services
• Service to Society

Profit Motive Globali

A business does not operate in a vacuum

Integral part of ecology and social system

Business decision making

 CLASSIFICATION OF BUSINESS

Business which …

• PRODUCE GOODS Commodities (goods produced by primary sector eg. agriculture)

(wheat) / Products (goods produced by secondary sector) (wheat flour)

• PRODUCE SERVICES (service sector in GDP) (transportation, telephone, hotels, IT…)

• DISTRIBUTE GOODS (wholesalers, retailers…..)

• FACILITATE DISTRIBUTION OF GOODS (warehouse, storage, auction houses….)

• FINANCE AND FINANCIAL SERVICES (banks, merchant bankers, insurance, stock

exchange….)
 CLASSIFICATION OF INDUSTRIES
On the basis of NATURE OF ACTIVITY

• Extractive Industries - which extract goods from nature (eg fishing, mining, lumbering, oil
extraction….)

• Genetic Industries - related to genetics or breeding (eg. BT seeds, poultry, aquaculture)

• Manufacturing Industries - converting raw materials into processed goods

• Construction Industries (eg. Roads, bridges, dams…..)

• Service Industries (eg. Doctors, lawyers, advertising,…..)

• IT Industries `
On the basis of COMPETITIVE STRUCTURE

• Monopoly
-single firm industry

• Duopoly (discussion point no. 11)

- only two firms

• Oligopoly
-few firms holds major market share
- perfect oligopoly (product is homogeneous)
- imperfect oligopoly (some degree of differentiation exists between the products)

• Monopolistic competition
-large number of firms selling products that are close but not perfect substitutes
- Product differentiation is the key

• perfect competition
On the basis of USE

• Basic industries
(which provide essential input for development of other industry) (eg. Iron and steel
industry)

• capital goods industries

(which produces machinery) (do not serve any consumption requirement)

• intermediate goods
(which have already undergon some process but still requires further processing)

• consumer goods industries

(whose output serve final consumption requirements)
On the basis of SIZE

• Small scale
• medium scale
• large scale

On the basis of Input

• agro based
• forest based
• marine based
• metal based
• chemical based, etc……..
BUSINESS ENVIRONMENT

Business Environment consists of all those factors that have a bearing on the business,

such as

• the strengths, weaknesses, internal power relationships and orientations of the

organization;
• government policies and regulations;
• nature of the economy and economic conditions;
• socio-cultural factors;
• demographic trends;
• natural factors; and,
• global trends and cross-border developments

• Modern business is dynamic.

• If there is any single word that can best describe today’s business, it is change.
• This change makes the companies spend substantially on Research and development
(R&D) to survive in the market.
Today’s business is characterized by diversification,

which may be:

• Concentric Diversification – It refers to the process of adding new, but related products
or services.

• Horizontal Diversification – Adding new, unrelated products or services for present

customers is called horizontal Diversification.

• Conglomerate Diversification – It refers to adding new and unrelated products or

services.

Going international is yet another trend followed by modern business houses.

 A business firm is an open system.

It gets resources from the environment and supplies its goods and services to the
environment.

There are different levels of environmental forces.

Some are close and internal forces whereas others are external forces.

External forces may be related to national level, regional level or international level.

These environmental forces provide opportunities or threats to the business community.

Every business organization tries to grasp the available opportunities and face the
threats that emerge from the business environment.
COMPONENTS OF BUSINESS ENVIRONMENT

Business environment of the firms/company or organisation can be classified into two

broad categories

• Internal Environment
• External Environment
 Firm may not sometimes have complete control over all the internal factors.
Also, it is some times possible to change certain external factors.

Some of the external factors have a direct and intimate impact on the firm (like the suppliers
and distributors of the firm).

These factors are classified as micro environment, also known as task environment and
operating environment.

There are other external factors which affect an industry very generally (such as industrial
policy demographic factors etc).

They constitute what is called macro environment, general environment or remote

environment.
INTERNAL ENVIRONMENT

• Value System
o Tata Sons
o After the EID Parry group was taken over by the Murugappa group, one
of the most profitable businesses (liquor) of the ailing Parry group was sold
off as the liquor business did not fit into the value system of the Murugappa
group.

• Vision, Mission and objectives

o Infosys
o Ranbaxy's thrust in to the foreign markets and development has been
driven by its mission "to become a research based international pharmaceutical
company.
INTERNAL ENVIRONMENT

• Management structure and nature

o Wipro vs Tata group
The share-holding pattern could have important managerial implications. There
are very large companies where majority of the share is held by the promoters
(like Wipro) and there are large firms where the promoters' position is very
vulnerable (like the Tata group of companies)

• Internal power relationship

o relationship between the members of Board of Directors and between the
chief executive and the Board
INTERNAL ENVIRONMENT

• Human resources
o Infosys
o Rover Group, observes that a Japanese company of 30,000 employees is
30,000 process improvers. In a Western company, it is 2,000 process
improvers and 28,000 workers.

• Company image and brand equity

o image of the company matters while raising finance, forming joint ventures
or other alliances, soliciting marketing intermediaries, entering purchase or sale
contracts, launching new, products etc.

• Miscellaneous Factors
o Physical assets
o R&D Technological capabilities
o Marketing resources
o Financial factors
 EXTERNAL ENVIRONMENT

Micro Environment Macro Environment

It consists of the factors in the It comprises general trends and forces

company’s immediate environment that may not immediately affect the
that affect the performance of the organization but sooner or later will
company alter the way organization operates.

• Technological environment
• Suppliers • Economic environment
• Customers • Political environment
• Competitors • Natural environment
• Marketing intermediaries • Global or international environment
• Financers • Social and cultural environment
• Public
 Micro Environment of a typical car manufacturer

Potential
Supplier

Local Potential
Communities Customers

Customers

Pressure
Groups

Government

Potential
Dealers

For For
Customers Supplies
MACRO ENVIRONMENT

Economic Environment
The economic environment constitutes to economic conditions, economic policies, and the
economic system that is important to external factors of business.

Import and export policy

Tax rates, Interest rates
Economic system
Government budget deficit & Consumption pattern
Nature of the country economy
Price fluctuations
The monetary and fiscal policies
Global movement of labour and capital
Autonomy of the economy
Stock market trends
Functions of economics
Availability of credits
Factors of productions
Inflation trends in country
Economic trends and structures
Unemployment trends
Economic policy statements and structure
Foreign country economic conditions……
Economic legislation
Economic problems
Cultural Environment
• Social Customs & Rituals and practices
• Lifestyle patterns
• Family structure
• Role & position of men, women, children and aged in family & society

Demographic Environment
• Growth of population
• Age Composition
• Life Expectancy
• Sex Ratio
• Fertility and Mortality rates
• Inter-state migration

Technological Environment
• Sources of technology
• Technological development
• Impact of technology
Political Environment
• Political parties in power
• Political Philosophy

Regulatory Environment
• Constitutional framework
• Policies relating to pricing and foreign investment
• Policies related to the public sector, SSIs, development of backward areas
• control of environmental pollution

International environment
• Growth of world economy
• Distribution of world GDP
• International institutions IMF,WTO ILO
• Economic relations between nations
• Global human resource-nature and quality of skills, mobility of labor
• Global technology and quality standards
• Global demographic patterns
CHARACTERISTICS OF BUSINESS ENVIRONMENT

• Environment is Complex
• Environment is Multi–faceted
• Environment is Dynamic
• Environment has a far reaching impact
ENVIRONMENTAL ANALYSIS

Environment analysis is to analysis changes pattern and impact of business for

decision making.

It will considers to an opportunity to use and time to anticipated the corporate objectives
through proper planning and make optional utilization of available resource in the
company.

These things helps to strategist to form and develop and give warning early system to
prevent threats or to develop strategies which can be turn threat into advantages

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.
 ENVIRONMENTAL ANALYSIS HAS THREE BASIC GOALS AS OUTLINED .

• Environmental analysis must be provided the current and potential changes

• Environment analysis basically provide strategic inputs for strategic decision making. (It
is not mere collection of data)

• Environment analysis is the basic tool and it should make facilitate and foster strategic
thinking in the organisation.
IDENTIFICATION OF STRATEGIC FACTORS

1. Functional approach
2. The value chain approach

Functional approach

Functional approach refers to organisation basic capabilities; characteristics, swot analysis

and limitation are the key strategic factors.

Functional approach key strategic factors are as follows:

• Marketing
• Finance and accounting
• Production /operation/ technical
• Human resource development
• Organisation of general management
THE VALUE CHAIN APPROACH

Value chain approach developed by Michael Porter, he wrote a book “Competitive

Advantage” which identified the value chain approach of the organisation.

A value chain approach is a systematic way of viewing the serious activities of the
organisation that performs to provide a product to its customers. An organisation gains
competitive advantage by performing primary and support activities, these activities
are more important strategically.

• Primary activities
• Support activities
EVALUATION OF STRATEGIC INTERNAL FACTORS

• Comparison with organisation’s past performance

• Stages of product/market evolution

• Comparison with the competitors

• Comparison with key success factors in the organisation’s industry

ENVIRONMENTAL ANALYSIS

STAGES:

• scanning – to identify the factors that impact the organization

• monitoring – in-depth analysis of relevant environmental trends
• forecasting – identifying future opportunities and threat
• assessment – assess the impact of the environmental factors on the organization

APPROACHES:

• Outside IN (macro) approach (broader view)

• Inside OUT (micro) approach (narrow view)
 SWOT ANALYSIS

The internal factors are generally – regarded as controllable factors because the company
has control over these factors;

it can alter or modify such factors as its personnel, physical facilities, organization and
functional means, such as marketing mix, to suit the environment.

Strength weakness

The external factors, on the other hand, are, by and large, - beyond the control of a
company.

The external or environmental factors such as the economic "factors, socio-cultural factors,
government and legal factors, demographic factors, geo-physical factors etc; are, therefore,
generally regarded as uncontrollable factors.

Opportunity threat
 FIVE FORCES MODEL

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.
Entry barriers: Rivalry among existing customers

• government policy • number of firms and their relative market

• economies of scale
• cost disadvantages independent of
scale
• product differentiation
• monopoly elements
• capital requirements
share
• state of growth of industry
• fixed or storage costs
• indivisibility of capital augmentation
• product standardization and switching costs
• strategic stake
• exit barrier
• diverse competitors
• switching costs
• expected retaliation

Threat of substitutes
Bargaining power of buyers
Bargaining power of suppliers
COPMETITOR ANALYSIS

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?
COPMETITOR ANALYSIS

Future goals
Analysis of future goals would be helpful to identify the attitude and behavior of the
competitor and likely strategies.

Current strategy

Assumptions
1. The competitor's assumptions about itself.
2. The competitor's assumptions about the industry and the other companies in it.

Capabilities (SWOT)
 Tools for Analyzing the Environment

PEST Analysis

PESTEL Analysis

STEEPLE Analysis
S - Social
T - Technological
E - Economic
E - Environmental
P - Political
L - Legal
E - Ethical
TYPES OF FORECASTING

• Economic forecast
• social forecast
• political forecast
• technological forecast

STEPS IN ENVIRONMENTAL FORECASTING

• Identification of relevant environmental variables

• collection of information
• selection of forecasting techniques
• monitoring
TECHNIQUES OF ENVIRONMENTAL FORECASTING

• ECONOMETRIC TECHNIQUES
involves casual models to predict major economic indicators
Can be used when there is well established relationship between two or more variables

Eg. If demand is a function of consumer income, the impact of increase in consumer income
on demand can be predicted using the equation between these two variables
Multiple regression analysis and time series regression models

• TREND EXTRAPOLATION (time series)

Assumes that past is prologue to the future and extrapolate the historical data to the future
TECHNIQUES OF ENVIRONMENTAL FORECASTING

• SCENARIO DEVELOPMENT (development of alternative scenario)

A scenario is a detailed description of how certain events may occur in the future and their
consequences for the organisation

• Premising method (drawing premises based on certain assumptions)

• system diagram method ( based on the present system of organisation)
• critical site method (critical decisions)
• newspaper headline method (using hypothetical headline in newspaper)
• logical possibilities method ( alternative supplement to other models)
• Judgement Models (opinion of people with intimate knowledge of relevant factors)
TECHNIQUES OF ENVIRONMENTAL FORECASTING

•BRAINSTORMING
Creative method of generating ideas and forecasts.
Group of knowledgeable people are encouraged to generate ideas, discuss them and to make
forecast.

• DELPHI METHOD (uses panel of experts on subject)

Opinion are gathered from the experts using a semi structured questionnaire or / and
interview

• STRATEGIC ISSUES ANALYSIS (qualitative technique )

Systematic monitoring of social, regulatory and political changes that can affect
corporate performance and identify the impact on the company
BENEFITS / IMPORTANCE OF ENVIRONMENTAL ANALYSIS

• awareness of the environment – organization linkage

• helps an organization to identify the present / future threats and opportunities
• provides an insight on factors which influence the business
• helps to understand the transformation of the industry
• identification of risks
• prerequisite for formulation of right strategies
• helps making suitable modifications of strategies when needed
• keeps managers informed, alert and often dynamic

LIMITATION OF ENVIRONMENTAL FORECASTING

Limitations of forecasting arise from the limitation of the methods used and errors
affecting the reliability of the forecasts
 Internal Business External
Environment Decision Environment

METHODS OF ASSESSING ENVIRONMENT RISK

• Expert opinion
• Rating and ranking systems
• Economic methods
• Checklist
 CARRY OUT THE FOLLOWING ANALYSIS FOR YOUR FIRM / COMPANY

1. SWOT ANALYSIS
2. PESTEL ANALYSIS
3. FIVE FORCES MODEL ANALYSIS (reading: michael porter five forces analysis)

Pre lecture reading for next class:

envisioning India 2030 – FICCI (overview)