Environment of Business Part-1

CH-1
Business Environment

Chapter

Business Environment
1– 1

1
Copyright © 2007, Vivek Mittal

Business Environment

Vivek Mittal

Excel Books

manufacturing. excess demand. influences or circumstances under which someone or something exists. 1975). (New York: McGraw Hill. P43Environment refers to all external forces that have a bearing on the functioning of a business. The Challenge of Business. The environment of any organization is "the aggregate of all conditions." Business is all about reaping profits from the opportunities available in the environment. Although there are many factors. latent need or new. supplier. external objects. Copyright © 2007. K. technological.Davis. the most important of these sectors are socio-economic. better and economical sources of supply or Cont…. Opportunity can manifest themselves in the form of short supply.Environment of Business Part-1 CH-1 Business Environment Environment literally means the surroundings. Jauch and Gluecke define environment thus: "The environment includes factors outside the firm which can lead to opportunities or a threat to the firm. events and influences that surround and affect it" . competitor and the government. Vivek Mittal 1– 2 Business Environment Vivek Mittal Excel Books .

2. Environment is Complex It is Dynamic Environment is multi –faceted It has a far-reaching impact Its impact on different firms with in the same industry differs It may be an opportunity as well as a threat to expansion Changes in the environment can change the competitive scenario Sometimes developments are difficult to predict with any degree of Copyright © 2007. 5. 6. 3. 7. 8.Environment of Business Part-1 CH-1 Business Environment Characteristics of Environment 1. Vivek Mittal accuracy 1– 3 Business Environment Vivek Mittal Excel Books . 4.

4. Events: Important and specific occurrences that taking place in a certain sector. Trends: The general tendencies or courses of action along which these events take place.Environment of Business Part-1 CH-1 Business Environment Environmental Scanning The process by which organizations monitors their environment to identify opportunities and threats affecting their business. TATA McGraw Hill. (Azhar Kazmi. Vivek Mittal 1– 4 Business Environment Vivek Mittal Excel Books . Issues: The current concerns that arise in response to events and trends. 3. is known as environmental scanning. Expectations: The demands made by interested groups in the light of their concern for issues. 2. The following factors to be considered for environmental scanning: 1. p 118) Copyright © 2007.

Vivek Mittal 1– 5 Business Environment Vivek Mittal Excel Books . Some internal factors are: 1. Culture and Value System Mission and Objectives Management Structure and Nature Human Resource Cont….Environment of Business Part-1 CH-1 Business Environment Type of Environment The environment can be divided into three broad categories: 1. Copyright © 2007. Internal Environment Internal environment refers to that of the organization and is controllable. 2. 4. 3.

Environment of Business Part-1 CH-1 2. Demographic Socio Culture Business Environment Political/ Legal Business Technological Dimensions in General Environment Economic Global Cont…. economic and global. Macro Environment The Macro/General environment consists of factors external to the industry that may have a significant impact on the firm's strategies. Vivek Mittal 1– 6 Business Environment Vivek Mittal Excel Books . Here we will look at six broad dimensions: demographic. socio-cultural. technological. political/legal. Copyright © 2007.

6. one should not only concentrate on how this factor will influence business but also on how this will influence other components of the environment and what will be the impact of these changes in the business. 2.Environment of Business Part-1 CH-1 Business Environment This shows that a single political change in 1991 has changed all the components of the macro environment. Copyright © 2007. 3. 4. Vivek Mittal Excel Books . Only then can one design long term strategies. 5. 1. 7. 1– 7 Political Environment Regulatory and Legal Environment Demographic Socio Culture Global Environment Economic Environment National Competitive Advantage Business Environment Vivek Mittal Cont…. So while studying macro environment.

Copyright © 2007. Vivek Mittal 1– 8 Business Environment Vivek Mittal Excel Books .Environment of Business Part-1 CH-1 Business Environment Michael Porter's International Competitiveness Model Firm Strategy. Structure & Rivalry Factor Endowment Local Demand Condition Relating and Supporting Industries Cont….

Cont….Environment of Business Part-1 CH-1 Business Environment In a study of national competitive advantage. organized and managed and the nature of domestic rivalry. a. c. Factor Endowments: A nation's position in the factors of production such as skilled labor. Vivek Mittal 1– 9 Business Environment Vivek Mittal Excel Books . d. structure and rivalry: The conditions in the nation that govern how companies are created. Firm strategy. Copyright © 2007. technology or the infrastructure necessary to compete in a given industry. capital. Relating and Supporting Industry: The presence and absence in a nation of supplier industries and related industries that are internationally competitive. Demand Condition: The nature of home demand for the industry's products and services. Michael Porter identified four attributes of a national or country-specific environment that have an important impact on the global competitiveness of companies located within that nation. b.

Threat of Competitors: The rivalry among sellers in the industry. All the business decisions-what business. c. Threat of New Entrants: The potential entry of new competitors. Bargaining Power of Suppliers: The competitive pressure stemming from the supplier-seller collaboration and resultant bargaining. This arena may be an industry. Copyright © 2007. seller-buyer collaboration and bargaining. b. etc. Threat of Substitutes: Market attempts of companies in other industries to win customers over to their own substitute products. e. product portfolio. distribution channel. Micro Environment Business Environment Micro environment or the competitive environment refers to the environment which an organization faces in its specific arena. depends on the competitive position of the firm. promotion strategy. pricing.. or it may be what is referred to as a strategic group. d. The Five Forces of Competition a. Bargaining Power of Buyers: The competitive pressure stemming from Cont…. Vivek Mittal Business Environment Vivek Mittal Excel Books 1– 10 .Environment of Business Part-1 CH-1 3.

Environment of Business Part-1 CH-1 Business Environment Michael Porter's Five Forces Model Threat of Substitutes Bargain Power of Supplier Threat of Competitor Bargain Power of Buyer Threat of New Entrants Cont…. Vivek Mittal 1– 11 Business Environment Vivek Mittal Excel Books . Copyright © 2007.

Almost every business has to take the help of these intermediaries. They also give expert opinion and consultancy to the corporate. FIs plays a critical role. Vivek Mittal Cont…. Financial Institutions(FIs) For any business. Some times they play a decisive role. promotion.Environment of Business Part-1 CH-1 Marketing Intermediaries These are firms and persons that help in distribution. characteristics. Every corporate is dependent on FIswhether it is banks or consultancies or NBFCs-for its financial needs. A strategic group is to identify a more defined set of organizations so that each grouping represents those with similar strategic Copyright © 2007. Strategic Group Strategic groups are conceptually defined as clusters of competitors that share similar strategies and therefore compete more directly with one another than with other firms in the same industry. 1– 12 Business Environment Business Environment Vivek Mittal Excel Books . FIs not only make available the finance but also create an environment for investment. and provides services like consultancy. selling.

sometimes changes in segment A can be the result of changes in segment B and on the other hand. Vivek Mittal 1– 13 Business Environment Vivek Mittal Excel Books . Copyright © 2007. Cont…. To understand and forecast future trends it essential to understand the driving force behind them. Driving Force Behind every change in environment there is some driving force and these driving forces lead to a sequential change in environment. to influence B one has to influence A.Environment of Business Part-1 CH-1 Business Environment Critical Success Factors (CSFs) Many industries have small but extremely important set of factors that are essential for successfully gaining and maintaining a competitive advantage. Critical success factors are those areas in which good results will help ensure an organization's success against competition and where poor results usually lead to declining performance. In fact.

Vivek Mittal 1– 14 Business Environment Vivek Mittal Excel Books .Environment of Business Part-1 CH-1 Industry Life Cycle Analysis Industry Life Cycle model identifies five sequential stages in the evolution of an industry that lead to five distinct industry environments: embryonic. mature and decline. growth. shakeout. Stages in Industry Life Cycle Business Environment Copyright © 2007. The manager's task is to analyse which stage the industry is in.

Environment of Business Part-1 CH-1 Business Environment Environmental Analysis Collection of Information Analysis is done by means of a search of verbal and written information. So it is essential for a strategist to rate the environmental factors on the basis of criticality and then invest time and resources in environmental analysis. forecasting and formal studies and information system. Identifying High Priority Environmental Sector Vivek Mittal Copyright © 2007. The Nine-cell Matrix is one method of deciding priorities regarding environmental issues. spying. Vivek Mittal 1– 15 Business Environment Excel Books . cumbersome and a costly affair to keep a regular eye on every aspect of these changes. Deciding Priorities Various changes take place in the environment and it is difficult. Impact on Business High Medium Low Probability of Actions High Critical High Priority To be Watched Medium High Priority High Priority Low Priority Low Low Priority Low Priority Low Priority Cont….

   Environmental Evolution: There are three components that are useful to describe changes in the environmental segments: Type of Change Forces driving change Type of future evolution. ii.Environment of Business Part-1 CH-1 Business Environment Environmental Analysis can be divided into two: i. Copyright © 2007. Process of Environmental Analysis: The process of environmental analysis can be divided into four parts:     Scanning the environment to detect warning signals Monitoring specific environmental trends Forecasting the direction of future environmental changes and Assessing current and future environmental changes for their organizational implications. Cont…. Vivek Mittal 1– 16 Business Environment Vivek Mittal Excel Books .

purchase of raw material. h. c. acquisition of finance. e. g. Following are some techniques of environmental forecasting: a. b. Vivek Mittal Excel Books . All managerial decisions are future oriented. recruitment of human resource. distribution and advertising strategy.. decision regarding product portfolio. f. etc. 1– 17 Business Environment Scenario Planning Issue Analysis Expert Opinion Delphi Method Market Experiments Survey Time Series Analysis Trend Projections Business Environment Vivek Mittal Copyright © 2007. all require forecasting of the external environment. Decisions like planning and scheduling production. d. pricing.Environment of Business Part-1 CH-1 Forecasting Information about the future is essential for planning.

Environment of Business Part-1 CH-1 Business Environment Benefits of Environmental Analysis 1. Environmental analysis keeps the manager informed and alert. 8. 6. Environmental analysis helps in suitable modification of strategies. Without proper environmental analysis. the right decision can't be made. Business is all about making the right decision at the right time. 5. Environmental analysis helps in predicting the future. 4. Environmental analysis gives an idea of organization's environment. Environmental analysis gives details about threats in the environment. 2. 3. Vivek Mittal 1– 18 Business Environment Vivek Mittal Excel Books . Environmental analysis gives a brief about competitors. Copyright © 2007. Environmental analysis tells us about opportunities to reap profits. as and when required. 7.

3.e. 2. scanned and monitored on a continuous basis and forecast and is assessed for the relevant factor.. all of a sudden the toy market of India was captured by Chinese products. Today it is extremely difficult to predict the external environment.Environment of Business Part-1 CH-1 Business Environment Limitations of Environmental Analysis 1. whether it is a systematic approach. Vivek Mittal Business Environment Vivek Mittal Excel Books 1– 19 . Business environment is global and any development in any part of the world can influence the business. which is very difficult to scan and assess. Copyright © 2007. Even a small political move can have a drastic impact. i. The Effectiveness of environmental analysis depends upon how it is practiced. A sudden disintegration of USSR had very adverse impact on many exporters in India. Under a systematic approach. information for environmental scanning is collected. A sudden attack of Al Qaeda on the Twin Towers in the US resulted in the hike of global petroleum prices. After signing the WTO. ad hoc or processed. Today the environment is turbulent and dynamic and it is difficult to forecast or predict the environment.

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