Business

• A person's regular occupation, profession, or trade.

• A business is an organization where
people work together. In a business, people work to
make and sell products or services. A business can
earn a profit for the products and services it offers.

• The word business comes from the word busy, and

means doing things.
 Nature of business
• Economic activity
Business is an economic activity of production and
distribution of goods and services.

 It provides employment opportunities in different

sectors like banking, insurance, transport, industries,
trade etc.

 It is an economic activity corned with creation of

utilities for the satisfaction of human wants.
•Buying and Selling
The basic activity of any business is trading. The business
involves buying of raw material, plants and machinery,
stationary, property etc.

On the other hand, it sells the finished products to the

consumers, wholesaler, retailer etc.

Business makes available various goods and services to the

different sections of the society.
•Continuous process
Business is not a single time activity. It is a continuous process
of production and distribution of goods and services.

 A single transaction of trade cannot be termed as a business.

A business should be conducted regularly in order to grow
and gain regular returns.

•Profit Motive
Profit is an indicator of success and failure of business. It is
the difference between income and expenses of the business.

 The primary goal of a business is usually to obtain the highest

possible level of profit through the production and sale of
goods and services. It is a return on investment. Profit acts as
a driving force behind all business activities.
•Risk and Uncertainties
Risk is defined as the effect of uncertainty arising on the
objectives of the business.

Risk is associated with every business. Business is exposed to

two types of risk, Insurable and Non-insurable. Insurable risk is
predictable.

•Creative and Dynamic

Modern business is creative and dynamic in nature.

Business firm has to come out with creative ideas, approaches

and concepts for production and distribution of goods and
services.

It means to bring things in fresh, new and inventive way.

•Customer satisfaction
The phase of business has changed from traditional concept to
modern concept. Now a day, business adopts a consumer-
oriented approach. Customer satisfaction is the ultimate aim
of all economic activities.

Modern business believes in satisfying the customers by

providing quality product at a reasonable price. It emphasize
not only on profit but also on customer satisfaction. 
•Social Activity
Business is a socio-economic activity. Both business and
society are interdependent. Modern business runs in the area
of social responsibility.

Business has some responsibility towards the society and in

turn it needs the support of various social groups like
investors, employees, customers, creditors etc. by making
goods available to various sections of the society, business
performs an important social function and meets social
needs.
•Government control
Business organisations are subject to government control.
They have to follow certain rules and regulations enacted by
the government.

 Government ensures that the business is conducted for social

good by keeping effective supervision and control by enacting
and amending laws and rules from time to time.

•Optimum utilisation of resources

Business facilitates optimum utilisation of countries material
and non-material resources and achieves economic progress.

The scarce resources are brought to its fullest use for

concentrating economic wealth and satisfying the needs and
wants of the consumers.
 Scope of business
• Industry
The word “Industry” refers to that part of business
activities which is apprehensive with the extraction,
production or fabrication of products.

The products which are raised, produced or processed by

an industry may either be used by the ultimate consumer
or by another concern for further production.

 If the goods produced by an industry are consumed by

the final customers, these are named as ‘consumer’s
goods’ e.g. clothes. 
Types of Industry
On the basis activity industry is further classified into various
types are as under:-

Extractive Industries
Extractive industries are those industries which extract,
raise or fabricate raw materials from above or beneath
surface of the earth. i.e. Mining, fisheries forestry,
agriculture.

Genetic Industries
Those industries which are engaged in reproducing and
multiplying certain species of animals and plants and
selling them in the market for profit are named as genetic
industries. i.e. Cattle breeding farms, poultry farms, plant
nurseries.
Constructive Industries
Constructive industries as the name signifies are engaged
in the construction of building, canals, bridges, dams,
roads etc.

Manufacturing Industries
Manufacturing industries are those which are concerned
of converting raw material or semi finished products into
finished products. E.g. Shoes Company, Textiles Mills.

Service Industries
Service industries are usually engaged in the
manufacturing of intangible goods which cannot be seen
or touched by naked eye. The service of professionals such
as doctors, lawyers is examples of service industries.
•Commerce
The second element that comes in the scope of business is
Commerce.

It is a very important component of business and is

concerned with the buying and selling of goods. It includes all
the activities which are connected to the transfer of goods
from the place of production to the ultimate consumers.

The whole ranges of commerce activities are classified are as

under:-

Trade
The process of buying and selling of goods is called Trade.
It is the exchange of goods and services among buyers and
sellers in which both the parties are benefited. Trade is
classified into two types.
Internal Trade
The process of buying and selling of goods within the edge of
a country is called internal trade.

1- Wholesale Trade. The process of purchase of goods in huge

quantity from producers and their resale to retailers is known
as wholesale trade. The retailer then further sells these goods
to the final consumers.
2- Retail Trade. The retailer sale the goods and services to the
ultimate consumers is known as Retail Trade.

External Trade
The purchase and sale of goods between two countries are
called external trade. It is also called foreign trade. There are
two types of external Trade.
i. Import Trade                       ii. Export Trade.
 Types of business organization
• Sole proprietor
A sole proprietorship is a business that is owned and operated
by a natural person (individual).

 This is the simplest form of business entity. The sole

proprietorship is not a legal entity. The business has no
existence separate from the owner who is called the proprietor.

Typical sole traders include the man-in-a-van type of

occupation such as a plumber or electrician. However, the term
can also apply to people who run small, web-based businesses
from home.
•Partnership
A partnership is the relationship existing between two or
more persons who join to carry on a trade or business.

Each person contributes money, property, labour or skill, and

expects to share in the profits and losses of the business. 

Partnerships are typically found in professional services such

as accountants, lawyers, doctors, dentists etc, where the
partners can share expertise and skills.

 They can also share the workload, organising work rotas to

allow for time off and holidays.

Partnerships comprise two or more people and any profits,

debts and decisions related to the business are shared.
•Company
A company is a legal entity made up of an association of
persons, be they natural, legal, or a mixture of both, for
carrying on a commercial or industrial enterprise.

Companies are owned by shareholders who each put an

amount of money into a central pool.

This pool of capital is then added to by borrowing and other

forms of finance. Directors run the company on behalf of
shareholders, who receive a share of the profits.

Each shareholder receives a portion – or share – of the

company that is equivalent to what they put in.

A company is seen as a legal entity that is entirely separate

from the shareholders.
•Franchise
A franchise in its’ simplest form is an agreement or license
entered into by two parties, the franchisor and the
franchisee. 

Franchises are licensing arrangements whereby an individual

or group can buy the right to trade and produce under a well-
known brand name in a given locality.

 A franchise involves you using another company’s successful

business model – and name – to establish your own business.

The franchisee benefits from working for themselves while

having the privilege and reputation associated with a much
larger group.
•Limited liability
Limited liability is a type of liability that does not exceed the
amount invested in a partnership or limited liability company.
The limited liability feature is one of the biggest advantages of
investing in publicly listed companies. 

Limited liabilities are intended to benefit professional

partnerships such as lawyers, doctors etc.

 They offer a form of business protection for company

shareholders and some limited partners.

For these individuals, the maximum sum they can lose from a
business venture that goes under, is the sum of money that
they invested in the company.
What is Environment?

Everything we depend on
 Business Environment

The sum total of all individuals, institutions

and other forces that are outside the control
of a business enterprise but the business still
depends upon them as they affect the overall
performance and sustainability of the
business.
•The forces which constitute the business environment are its
suppliers,
competitors,
consumer groups,
media,
government,
customers,
economic conditions
market conditions,
investors,
technologies,
trends,
and multiple other institutions working externally of a
business constitute its business environment.

•These forces influence the business even though they are

outside the business boundaries.
•For example, changes in taxes by the government can make the
customers buy less.

•Here the business would have to re-establish its prices to

survive the change.

• Even though the business had no involvement in initiating the

change it still had to adapt to it in order to survive or use the
opportunity to make profits
 Importance of Business Environment
Business Environment is the most important aspect of any
business.

 To be aware of the ongoing changes, not only helps the business

to adapt to these changes but also to use them as opportunities.

Business Environment presents threats as well as opportunities for

any business.

A good business manager not only identifies and evaluates the

environment but also reacts to these external forces. 
•Enables to Identify Business Opportunities
All changes are not negative. If understood and evaluated
them, they can be the reason for the success of a business.

It is very necessary to identify a change and use it as a tool to

solve the problems of the business or populous.

For example
Mr Phanindra Sama was troubled by the ticket booking
condition in India.
 He used to travel a long distance to his travel agent to
book his ticket but even after travelling this distance he
was not sure if his seat was confirmed.
He saw the opportunity to establish an app in the face of
the problem and co-founded the online ticket booking app
called ‘RedBus’.
•Helps in Tapping Useful Resources
Careful scanning of the Business Environment helps in tapping
the useful resources required for the business.

 It helps the firm to track these resources and convert them

into goods and services.

•Identification of Threats
Business may be subject to threats from competitors and
others.

Therefore environmental analysis helps to identify threats

from the environment identification of threats at an earlier
date is always beneficial to the firm as it helps to defuse the
same.
•Coping with Changes
The business must be aware of the ongoing changes in the
business environment, whether it be changes in the customer
requirements, emerging trends, new government policies,
technological changes.

 If the business is aware of these regular changes then it can

bring about a response to deal with those changes.

For example,
when the Android OS market was blooming and the
customers were preferring Android devices for its easy
interface and apps
Nokia failed to cope with the change by not implementing
Android OS on Nokia devices.
They failed to adapt and lost tremendous market value.
•Assistance in Planning
This is another aspect of the importance of business
environment.

 Planning purely means what is to be done in the future. 

When the Business Environment presents a problem or an

opportunity, it is up to the business to decide what plan
would it have to come up with in order to address the future
and solve the problem or utilise the opportunity.

After analysing the changes presented, the business can

incorporate plans to counteract the changes for a secure
future.
•Helps in Improving Performance
Enterprises that are thoroughly scanning their environment
not only deal with the changes presented but also flourish
with them.

Adapting to the external forces help the business to improve

the performance and survive in the market.

•Identification of Weakness
The analysis of the internal environment indicates not only
strengths but also the weakness of the firm.

 A firm may be strong in certain areas; where as it may be

weak in some other areas.

The firm should identify sue weakness so as to correct them

as early as possible.
•Identification of Strength
The analysis of the internal environment helps to identify
strength of the firm.

For instance, if the company has good personal policies in

respect of promotion, transfer, training, etc than it can
indicates strength of the firm in respect of personal policies.

This strength can be identified through the job satisfaction

and performance of the employees.

After identifying the strengths the firm must try to

consolidate its strengths by further improvement in its
existing plans & policies.
•Keeping Business Enterprise Alert
 Environment study is needed as it keeps the business unit
alert in its approach and activities.

In the absence of environmental changes, the business

activities will be dull and lifeless.

The problems & prospects of business can be understood

properly through the study of business environment.

This enables an enterprise to face the problems with

confidence and secure the maximum benefits of business
opportunities available.
•Keeping Business Flexible and Dynamic
Study of business environment is needed for keeping
business flexible and dynamic as per the changes in the
environmental forces.

 This will enable the development of business organization.

•Understanding Future Problems and Prospects

The study of business environment enables to understand
future problems and prospects of business in advance.

This enables business organizations to face the problems

boldly and also take the benefit of favorable situation.
•Making Business Socially Acceptable
Environment study enables businessmen to expand the
business and also make it acceptable to different social
groups.

Business organizations can make positive contribution for

maintaining ecological balance by studying social
environment.

•Ensures Survival and Growth

Business environment inform about suitable changes to be
affected in business policies.

 This helps the business organizations to grow & prosper.

 SWOT Analysis
• SWOT (strengths, weaknesses, opportunities, and threats) analysis is a
framework used to evaluate a company's competitive position and to
develop strategic planning.

• SWOT analysis assesses internal and external factors, as well as current

and future potential.

• A SWOT analysis is designed to facilitate a realistic, fact-based, data-

driven look at the strengths and weaknesses of an organization,
initiatives, or within its industry.

• The organization needs to keep the analysis accurate by avoiding pre-

conceived beliefs or gray areas and instead focusing on real-life
contexts. Companies should use it as a guide and not necessarily as a
prescription.
 How to Do a SWOT Analysis
• SWOT analysis is a technique for assessing the performance,
competition, risk, and potential of a business, as well as part of a
business such as a product line or division, an industry, or other entity.

• Using internal and external data, the technique can guide businesses

toward strategies more likely to be successful, and away from those in
which they have been, or are likely to be, less successful.

• Independent SWOT analysts, investors, or competitors can also guide

them on whether a company, product line, or industry might be strong
or weak and why.
•Strengths
Strengths describe what an organization excels at and
what separates it from the competition: a strong brand, loyal
customer base, a strong balance sheet, unique technology,
and so on.

 For example, a hedge fund may have developed a proprietary

trading strategy that returns market-beating results. It must
then decide how to use those results to attract new investors.
•Weaknesses
Weaknesses stop an organization from performing at its
optimum level.

They are areas where the business needs to improve to

remain competitive: a weak brand, higher-than-average
turnover, high levels of debt, an inadequate supply chain, or
lack of capital.

•Opportunities
Opportunities refer to favorable external factors that could
give an organization a competitive advantage.

 For example, if a country cuts tariffs, a car manufacturer

can export its cars into a new market, increasing sales
and market share.
•Threats
Threats refer to factors that have the potential to harm an
organization.

For example, a drought is a threat to a wheat-producing

company, as it may destroy or reduce the crop yield.

 Other common threats include things like rising costs for

materials, increasing competition, tight labor supply. and so
on.
Micro environment -Factors Determining the
Internal Environment of a Business

• Factor 1# Value System

The value system of an organisation means the ethical beliefs that
guide the organisation in achieving its mission and objective.

 The value system of a business organisation also determines its

behaviour towards its employees, customers and society at large.

 The value system of the promoters of a business firm has an

important bearing on the choice of business and the adop­tion of
business policies and practices.
•Factor 2# Mission and Objectives
The objective of all firms is assumed to be maximization of
long-run profits. But mission is different from this narrow
objective of profit maximization.

 Mission is defined as the overall purpose or reason for its

existence which guides and influences its business decision
and economic activities.

For example, “to become a world-class company and to

achieve global dominance has been the mission of ‘Reliance
Industries of India’. Similarly “to become a research based
international pharma company” has been stated as mission of
Ranbaxy Laboratories of India
•Factor 3# Organisation Structure
Organisation structure means such things as composition of board
of directors, the number of independent directors, the extent of
professional management and share -holding pattern.

The nature of organisational structure has a significant influence

over decision making process in an organisation.

 An efficient working of a business organisation requires that its

organisation structure should be conducive to quick decision
making. Delays in decision making can cost a good deal to a
business firm.

The board of directors is the highest decision making body in a

business organisation. It takes general policy decisions regarding
direction of growth of business of the firm and supervises its
overall functioning
•Factor 4# Corporate Culture and Style of Functioning
of Top Management
Corporate culture and style of functioning of top managers is
important factor for determining the internal environment of a
company.

 Corporate culture is generally considered as either closed and

threatening or open and participatory.

In a closed and threatening type of corporate culture the

business decisions are taken by top-level managers, while middle
level and work-level managers have no say in business decision
making.

There is lack of trust and confidence in subordinate officials of

the company and secrecy pervades throughout in the
organisation.
•Factor 5# Quality of Human Resources
Quality of employees (i.e. human resources) of a firm is an
important factor of internal environment of a firm.

The success of a business organisation depends to a great

extent on the skills, capabilities, attitudes and commitment of
its employees.

 Employees differ with regard to these characteristics.

It is difficult for the top management to deal directly with all
the employees of the business firm. Therefore, for efficient
management of human resources, employees are divided into
different groups.
•Factor 6# Labour Unions
Labour unions are other factor determining internal
environment of a firm.

 Unions collectively bargain with top managers regarding

wages, working conditions of different categories of
employees.

Smooth working of a business organisation requires that

there should be good relations between management and
labour union.
Factor 7# Physical Resources and Technological
Capabilities
Physical resources such as plant and equipment, and
technological capabilities of a firm determine its competitive
strength which is an important factor determining its
efficiency and unit cost of production.

R and D capabilities of a company determine its ability to

introduce innovations which enhance productivity of workers.

The growth of Bill Gates Microsoft Company and Murthy’s

Infosys Technologies is mostly due to the quality of human
resources and intellectual capital than to any superior physical
resources.
Micro environment -Factors Determining the
External Environment of a Business

•  Competitors
The competitive environment consists of certain basic things which
every firm has to take note of. No company, howsoever large it may be,
enjoys monopoly.

 In the original business world a company encounters various forms of

competition. The most common competition which a company’s
product now faces is from differentiated products of other companies.

For example, in the Colour Television Market, Philips TV faces

competition from other companies like Videocon, Onida, BPL and
others. This type of competition is called brand competition. It is found
in all durable product markets.
•Customers
“There is only one valid definition of business purpose, that is
to create a customer.”

The business enterprises aim to earn profit through serving

the customer demand. Today marketing of a firm begins and
also ends with the customers.

Now a days, a business firm to be successful, must find

customers for its products. This is the reason the customers
thus constitute the most important element in the micro
environment of business.

Products sales depend mainly on the degree of consumer

satisfaction.
•Suppliers
Regarding the suppliers, the organisation can think of availing
the required material or labour according to its manufacturing
programme.

It can adopt such a purchase policy which gives bargaining

power to the organisation.

The relationship between suppliers and the firm epitomises a

power equation between them. This equation is based on the
industry conditions and the extent to which each of them is
dependent on the other.
•Public
Literally word ‘public’ refers to people in general.

A public is any group that has an actual or potential interest

in or impact on a company’s ability to achieve its objectives.

 The environmentalists, consumer protection groups, media

persons and local people are some of the well-known
examples of publics.

The company has a duty to satisfy the people at large along

with competitors and the consumers.

It is an exercise which has a larger impact on the well-being

of the company for tomorrow s stay and growth. Create
goodwill among public, help to get a favourable response for
a company.
•Marketing Intermediaries
Market intermediaries are either individuals or business
houses who come to the aid of the company in promoting,
selling and distributing the goods to the ultimate consumers.

 They are Middlemen (wholesalers, retailers and agents),

distributing agencies, market service agencies and financial
institutions.

Most of the companies find, it is too difficult to reach the

consumers.

 In such a cases the agents and distribution firms help to reach

the product to the consumer.
•Workers and Their Union
As per the production function theory, the labour gets more
importance. He is also one of the pillars of the company.

The organised labours is highly secured their position

compare to unorganised workers So, the workers now prefer
to join labour unions which invariably resort to collective
bargaining and thereby makes them less vulnerable to
employer’s exploitation.

On the other hand, Trade Unions are a major component of a

modern business.

 Trade Union of workers is an organisation formed by workers

to protect their interests, improve their working conditions
etc.
 Macro components of business
environment
• Demographic Environment
The demographic environment is made up of the
people who constitute the market.

It is characterised as the factual investigation and

segregation of the population according to
their size, density, location, age, gender, race, and
occupation.
• Economical 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.

The economic environment factors have immediate and direct

impact on the businessman so businessmen must scan the
economic environment and take timely actions to deal with
these environments.

Economic environment may put constraints and may offer

opportunities to the businessman. After the new economic
policy of 1991, lots of opportunities are offered to
businessmen.
•Some Aspects of Economic Environment:
1. Role of Private and Public sector

2. Rate of growth of GDP, GNP, and Per Capita Income

3. Rate of Saving and Investment

4. Balance of Trade

5. Balance of Payment

6. Transport and Communication System

7. Money Supply in the Economy

•Social Environment:
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.

The businessman cannot overlook the components of social

environment as these components may not have immediate
impact on the business but in the long run the social
environment has great impact on the business.
For example, when the Pepsi Cola Company used the slogan of
“Come Alive” in their advertisement then the people of a
particular region misinterpreted the word “Come Alive” as they
assumed it means Coming out of Graves.

So, they condemned the use of the product and there was no
demand of Pepsi Cola in that region. So, the company had to
change its advertisement slogan as it cannot survive in market by
ignoring the sentiments of the people.
•Some Aspects of Social Environment:
1. Quality of life

2. Importance or place of women in workforce

3. Birth and Death rates

4. Attitude of customers towards innovation, life style etc.

5. Education and literacy rates

6. Consumption habits

7. Population

8. Tradition, customs and habits of people

•Political Environment
Political environment constitutes all the factors related to
government affairs such as type of government in power,
attitude of government towards different groups of societies,
policy changes implemented by different governments etc.

 The political environment has immediate and great impact on

the business transactions so businessman must scan this
environment very carefully.

The businessman has to make changes in his organisation

according to the changing factor of political environment.

 For example, in 1977 when Janata Government came in power

they made the policy of sending back all the foreign companies.
As a result the Coca Cola Company had to close its business and
leave the country.
•Some Aspects of Political Environment:
1. Present political system

2. Constitution of the country

3. Profile of political leaders

4. Government intervention in business

5. Foreign policy of government

6. Values and ideology of political parties

• Legal Environment
Legal environment constitutes the laws and various
legislations passed in the parliament.

The businessman cannot overlook the legislations because he

has to perform his business transactions within the
framework of legal environment.

The common legislation passed which has affected the

business transactions are Trade Mark Act, Essential
Commodity Act, Weights and Measures Act, etc.

Most of the time legal environments put constraints on the

businessman but sometimes they provide opportunities also. 
•Some Aspects of Legal Environment:
1. Various laws and legislative acts.

2. Legal policies related to licensing.

3. Legal policies related to foreign trade.

4. Statutory warnings essential to be printed on label.

5. Foreign Exchange Regulation and Management Act.

6. Laws to keep a check on Advertisements.

•Technological Environment
Technological environment refers to changes taking place in
the method of production, use of new equipment and
machineries to improve, the quality of product.

The businessman must closely monitor the technological

changes taking place in his industry because he will have to
implement these changes to remain in the competitive
market.

Technological changes always bring quality improvement

and more benefits for customers.
•The recent technological changes of Indian market are:
1. Digital watches have killed the prospects and the business
of traditional watches.

2. Color T.V. technology has closed the business of black and

white T.V.

3. Artificial fabric has taken the market of traditional cotton

and silk fabrics.

4. Photo copier and Xerox machines have led to the closure of

carbon paper business.

5. Shift from steam locomotives its diesel and electric engine.

6. From typewriter to World Processors.

•Some Aspects of Technological Environment:
1. Various Innovations and Inventions.

2. Scientific Improvements.

3. Developments in IT sector

4. Import and Export of Technology.

5. Technological Advances in Computers.

 Michael porter's five forces analysis
• Porter's Five Forces is a model that identifies and analyzes five
competitive forces that shape every industry and helps determine an
industry's weaknesses and strengths.

• Five Forces analysis is frequently used to identify an industry's structure

to determine corporate strategy.

• Porter's model can be applied to any segment of the economy to

understand the level of competition within the industry and enhance a
company's long-term profitability.

• The Five Forces model is named after Harvard Business School professor,
Michael E. Porter.
Porter's five 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 first of the five forces refers to the number of competitors
and their ability to undercut 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.

Suppliers and buyers seek out a company's competition if they

are able to offer a better deal or lower prices.

Conversely, when competitive rivalry is low, a company has

greater power to charge higher prices and set the terms of
deals 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 an
established company's position could be significantly
weakened.

An industry with strong barriers to entry is ideal for existing

companies within that industry since the company would be
able to charge higher prices and negotiate better terms.
•Power of Suppliers
The next factor in the five forces model addresses how
easily suppliers can drive up the cost of inputs.

It is affected by the number of suppliers of key inputs of a

good or service, how unique these inputs are, and how much
it would cost a company to switch to another supplier.

 The fewer suppliers to an industry, the more a company

would depend on a supplier. As a result, the supplier has
more power and can drive up input costs and push for other
advantages in trade.

On the other hand, when there are many suppliers or low
switching costs between rival suppliers, a company can keep
its input costs lower and enhance its profits.
•Power of Customers
The ability that customers have to drive prices lower or their
level of power is one of the five forces.

It is affected by how many buyers or customers a company

has, how significant each customer is, and how much it would
cost a company to find new customers or markets for its
output.

 A smaller and more powerful client base means that each

customer has more power to negotiate for lower prices and
better deals.

 A company that has many, smaller, independent customers

will have an easier time charging higher prices to increase
profitability.
•Threat of Substitutes
The last of the five forces focuses on substitutes. Substitute
goods or services that can be used in place of a company's
products or services pose a threat.

Companies that produce goods or services for which there are

no close substitutes will have more power to increase prices
and lock in favorable terms.

When close substitutes are available, customers will have the

option to forgo buying a company's product, and a company's
power can be weakened.
 Competitive strategies
• Competitive Strategy is defined as the long term plan of a
particular company in order to gain competitive advantage over
its competitors in the industry.

• It is aimed at creating defensive position in an industry and

generating a superior ROI (Return on Investment).

• Such type of strategies play a very important role when industry

is very competitive and consumers are provided with almost
similar products. One can take example of mobile phone market.

• Before devising a competitive strategy, one needs to evaluate all

strengths, weaknesses, opportunities, threats in the industry and
then go ahead which would give one a competitive advantage.
Types of competitive strategies by Porter
1. Cost Leadership
Here, the objective of the firm is to become the lowest cost
producer in the industry and is achieved by producing in large
scale which enables the firm to attain economies of scale.

High capacity utilization, good bargaining power, high

technology implementation are some of factors necessary to
achieve cost leadership. e.g Micromax phones

Micromax smart phones and mobile phones are giving good

quality products at an affordable price which contain all the
features which a premium phone like Apple or Samsung offers
2. Differentiation leadership
Under this strategy, firm maintains unique features of its
products in the market thus creating a differentiating factor.

 With this differentiation leadership, firms target to achieve

market leadership. And firms charge a premium price for the
products (due to high value added features).

Superior brand and quality, major distribution channels,

consistent promotional support etc. are the attributes of such
products.E.g. BMW, Apple

BMW offers cars which are different from other car brands.
BMW cars are more technologically advanced, have better
features and have got personalized services
3. Cost focus
Under this strategy, firm concentrates on specific market
segments and keeps its products low priced in those
segments.

 Such strategy helps firm to satisfy sufficient consumers and

gain popularity. E.g. Sonata watches

Sonata watches are focused towards giving wrist watches at a

low cost as compared to competitors like Rolex, Titan, Omega
etc
4. Differentiation focus
Under this strategy, firm aims to differentiate itself from one
or two competitors, again in specific segments only.

This type of differentiation is made to meet demands of

border customers who refrain from purchasing competitors’
products only due to missing of small features. It is a clear
niche marketing strategy. E.g. Titan watches.

Titan watches concentrates on premium segment which

includes jewels in its watches.