BUSINESS ENVIRONMENT

ANALYSIS
INTRODUCTION- BUSINESS AND ITS
ENVIRONMENT

Module- 1

Prof. Dr. Ir. Sukaria Sinulingga, M.Eng

PROGRAM MAGISTER
MANAJEMEN
UNIVERSITAS SUMATERA UTARA
26/09/23 1
A. Objective (s)
To provide students with the deep understanding on business
environment and changes, its impacts on business performance,
factors triggering the environmental changes and challenges,
anticipated policy to maximize advantages impacts and of the
changes and challenges.

B. Method of Assessment
▪ Class attendance : 20 %
▪ Class participation : 15 %
▪ Assignments : 15 %
▪ Mid exam : 25 %
▪ Final exam : 25 %
------------------------------------
Total 100 % 2
C. References:

1. Baron, D. P., Business and Its Environment, Stanford University,

Prentice Hall, Upper Sadle River, New Jersy, .
2. Bennet, L., Managing the Business Environment, Inter-national
Thomson Business Press, Suffolk,
3. Brooks, I, and Weatherstone,. J. The Business Environ-ment,
Challenges and Change, Faculty of Management and Business,
Nene College of Higher Education, Prentice Hall Europe, London,
4. Griffin, R.W and Pustay, M.W, International Business, Texas A
&M University, Prentice Hall,
5. Obolensky, N., Business Re-engineering,Kogan Page Ltd, 120
Pentonville Rd. London,.

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I. BUSINESS
1.1 Why businesses important to a country

▪ Supply goods and service for society

(To satisfy consumption)
▪ Provides jobs for labour forces
(Production, distribution, retailing)
▪ Transfer of technology to society
Business
▪ Buy production input
(Raw material, parts, components)
▪ Pay taxes to the government

▪ To exploit natural resources

(Economic growth and social welfare)
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 1.2 Business, Government and Global Market
▪ Global market is the market that characterized by
global competition :
♦ Rivalry for worldwide leadership
♦ Overall competitive advantages is based on its
entire worldwide operation
Global
Market
Goods
Goods /servicess
/servicess ▪ Government indirectly manages
Payments Payments business through law, regulation and
rule, providing infrastructures leading to
Facilities
stimulate the business organization to
Business Governe- increase their competitiveness in global
ment market
Taxes

▪ Businesses is an economic entities produce

goods and service produced partly and sold in
global market and contribute to government 5
income
1.3 Dismissing of Business in Global Market

1. General Motor Corp USA (1908-2009)

• Failed to adapt to the changes of customers’ need and did not
adopt the new technology
2. Kodak (1889-2012)
• Under estimated and ignored the growing demand of digital
camera
3. Polaroid (1937-2001)
• Unable to anticipate digital camera would have on its film
business
4. Compaq PC (1982-2002)
• Failed to compete price war against Dell and others PC’s
companies
5. Nokia / Blackberry
• Thought the mobile phone was only for message, call and
game, failed to anticipate that the phone will be the tool of computing 6
1.4 What is Business ?

° Business may be defined as an economic institution engaged in

production and / or distribution of goods and services in order to earn
profits and acquire wealth

° Business is an organization or enterprising entity engage in:

• Commercial, such as trading, banking
• Industrial such as manufacturing, construction / real estate
• Professional activities such construction engineering
consulting

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Commercial

Engineering consulting

Industrial

8
° A business can for:
• A profit entity such as a publicly corporation
• A non - profit organization engaged in business activities such
as agricultural operation

° For a business, profit is often regarded as overall measure of

performance (it is financial yard stick for measuring business
efficiency and evaluating managerial competence)

9
1.5 Types of Business Activities

° Businesses explore and exploit natural resouces

° Businesses converse the available resource into valuable
products and services (quantity, quality, time, price) needed by
people /customers
° Businesses distribute products and services make them
available to consume

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1.6 Objectives of Business

The main purposes of business is to create customers

or markets which in turn cater to society

° Profitability
° Capital growth
° Productivity / Efficiency
° Technology dynamism
° Stability
° Self reliance
° Survival

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II. BUSINESS ENVIRONMENT
2.1 Definition
° Business environment is the aggregate of all the forces, factors
and institutions which are external to and beyond the control of
an individual business enterprise but which exercise a
significant influence on the functioning and growth of individual
enterprise
Forces, factors,
Institutions

Business
Business
Environment
(Macro / Micro)

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2.2 Why Business Environment ?

a. Any organization, business and institution is operating under

its specific environment. As consequence, they need to
understand and analyze thoroughly those factors in order to achieve
the overall goal of the organization

b. Analysis should provide an understanding on current and

potential changes taken place, besides long term future prospective

c. Future is uncertain and not all future events can be

anticipated

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2.3 Business Environment Analysis

a. Business Environmental Analysis (BEA) is one of the

first step in strategic management before the executives make
decision on the business objectives and programs for
achieving the objectives.

b. Environmental analysis should facilitate and foster strategic

thinking in organization by bringing fresh view points and ideas
in context of business operations

c. Analysis should provide an understanding on current and

potential changes taken place, besides long term future
prospective

d. Environmental analysis provides input in form of information

which is useful for strategic decision making 14
2.4 Benefits of Using BEA
° BEA helps business to detect potential forces that may affect or
provide both opportunities and threats. It helps management to
prepare for the change of the environment

° Some benefits of using and environment analysis :

• Enables the company to identify the opportunities and
threats and setting the first mover advantages
• Help the company to identify the threats’ early warning
signals
• Helping in tapping and assembling resources
• Helping in adjusting and adapting the company with the
rapid change
• Assisting in planning and policy making
• Improving in performance

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2.5 Internal and External Factors
° Basically, there are two main factors in BEA
• Internal factors
Refers to all the inlying forces and condition (tangibles
and intangibles) present within the company which can affect the
company’s working

• External factors
Refers to a set of all exogenous forces that have the potential to
affect the organization’s profitability and functionality

Internal Business External

Factors Operation Factors

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2.6 Types of Business Environments
° For the purposes of analysis types of business
environments may be divided into Macro, Micro and
Internal factors

Macro Legal, Economy, Politic, Ecology,

Social, Technology, Competition

Stakeholers, Customers, Competitors-

Micro
Suppliers, Intrmediaries

Internal Environment
° Employees
° Cash flows External Envi
° Capital assets
° Materials
° Structure

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 Environment
° Customers ° Supplier ° Competitor
° Regulation ° Economy ° Politic, °
Technology

°Transformation
°Input System
°Inputs
° Capital °Output
° Capital ° Alteration
° Material
° Material ° Transportation ° Facilitate goods
° Equipment
° Equipment ° Storage ° Services
° Labour
° Labour ° Inspect
° Knowledge
° Information
° Information
° Energy
° Time

Monitoring and
Control

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2.7 Characteristic of Business Environments

Characteristic Description
1. Complex ° Different elements of BE are closely inter-related
and inter-dependent
° It is complex in the sense that it is very difficult to
know the exacts of influence of a particular factor
on the entity
° The changes of one element affects the other
element
2. Dynamic ° Dynamic means keep on changing from to time
to time
° The volatility prevail in the BE due to constant
change in the nature, shape, character and
pervasiveness of varied influencing factors

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 Characteristic Description
3. Relatively ° BE is a relative concept as it different from county to
country, even from region to region
° Capitalist economies like USA and UK have a different
kind of environment than communist economies. The
nature of economic system in a country affects the
environment of business
4. Uncertainty ° BE is largely uncertain because it is very difficult to
forecast the future environment
° When the element is volatile i.e change very fast,
uncertainty will increase
5. Multi-faceted ° The term implies having many parts or sides
° Due to complexity, dynamism and uncertainty of BE
there is constant change in its shape, character and
scope of business organization
° The perception of the observers is very important as a
new change or development may bring fresh
opportunities to one business but may be threat to
another 20
 Characteristic organization
6. Far reaching ° The term implies having important and widely
impact applicable effect or implication
° Each business organization operates in its unique
environment and it influences and being
influenced by such environment
° The BE has a very great influence not only on
the growth but also on the survival of the
organization. If you do not change as per the
change occurred the business may come to an
end

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2.8 Problems in Understanding the
Environment Influences

° The environment encapsulate different influences and

diversity which make strategic decision making difficult
° Uncertainty due to technological and global changes
make it difficult to understand future external influences
an organization

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3.2 Competitive Advantage

° The term competitive advantage refers to the ability gained

through attribute and resources to perform better at higher level
than others in the same industry or market (Porter, 1980)

° In business a competitive advantage is the attribute that allows

an organization to outperform its competitor

° A competitive advantage may include access to natural

resources such as :
• A high grade ores (in mining related business)
• A low cost power source
• Highly skilled labours
• Geographic location
• High entry barriers
• Access to new technology
• Access to proprietary information
• Etc 23
° Michael Porter (a professor at Harvard School of Business) in
his book wrote two ways which an organization can achieve
competitive advantages.

• Cost advantages
When a business provides the same product / services as
its competitor albeit at lesser cost

• Differentiation advantages
When a business provides better product or service as its
competitors

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3.3 Generic Competitive Strategies
Three forms of generic strategies that business can tackle
competition
Strategy Description
1. Cost ° It is a business ability to produce a product or
Leadership service that will be at lower cost than competitor
Strategy for the same level of product quality

2. Differentiate ° A differentiate advantage is gained when a

Strategy business’s product / service different from its
competitors

3. Focus Strategy ° Focus strategy ideally tries to get business to

aim at a few target market
° This strategy is often used to smaller business
since they may not have the appropriate resource
or ability to target every one 25