UNIT – 1

Business as a social system

 BUSINESS ENVIRONMENT

• Def– It refers to the totality of all the relevant forces

external, to and beyond the control of, an individual
business enterprise and its management.
• Business Environmental factors are the constraints
and are largely if not totally, external and beyond
the control of individual and their managements
• It can pose a threat or give an opportunity to the firm
 Importance of Business Environment
• Helps an organisation to develop its broad strategies
and long-term policies.
• It enables an organisation to analyse its competitors'
strategies
• Knowledge about the changing environment gives
the firm an adavntage.
• Adjustment for the executives is easy according to
the prevailing conditions
 Macro/ General/Remote-Environment
Political/Govt. Environment Legal Environment

Micro/Task/Operating Environment
Financiers

Suppliers Internal Environment

Promoters’/shareholders, values Customers Global

Mission /objectives Environment

ManagementBusiness
structure Human resources
Decision Tech capabilities
Demographic Financial
Environment capabilities

Public Internal power relationship Marketing competitors Economic

Physical assets and facilities capabilities Environment

Co. image/brand equity

Marketing intermediaries

Social/cultural Environment Technological/Natural Environment

Internal environment

• Internal environment includes internal

factors of the business which can be
controlled by business.
• It refers to the environment within the
organisation.
• It refers to the 5 Ms – man, material,
money, machinery and management
• The responsibility of studying changes in
the external environment lies on
managers, directors, top officials(who are
part of internal environment)
 Internal Environment

• Management structure- managers want

job satisfaction and chances of timely
promotions
• Shareholders- contribute to the capital of
the company with a view to earning
handsome dividends and capital
appreciation of their stocks.
• Relationships
• Physical assets – a firm’s plant and machinery,
production technology, R & D work and
logistics etc. in case of a manufacturing
company would help to achieve its efficiency
and competitiveness
• Technological resources- innovation based
technology is assuming greater importance in
recent times reducing the worth of tangible
assets and financial resources. This can be seen
in Millard Brown 2008 brand report which
showed that out of the top ten brands of the
world seven are technology based brands that
include
Google, GE, Microsoft, IBM, China Mobile,
Apple and Nokia. Only three non-technology
brands- Coco Cola, Mc Donald’s and Marlboro
found their place in the report
• Human resources – The most important of all the
factors constituting internal environment is the
human assets the company has acquired over time.
The attitude, skill sets and expertise, commitment
and morale of a firm’s workforce count enormously
for the success of the firm. Their need for
compensation and appropriate prerequisites should
be taken care of.
• For e.g. Infosys considers the experience and
expertise of human assets so much invaluable asset
that they include it in their balance sheet along with
their tangible and physical assets
• Financial resources
• Firm’s goals and objectives
• Value system
 External environment

• External environment refers to the

external aspects of the surroundings of
business enterprise which have influence
on the functioning of the business
• The external aspects of the surroundings
of business enterprise are beyond the
control of the business
• External environment includes factors
outside the firm which can provide
opportunities or pose threats to the
firms
• The success of a business enterprise
depends to a great extent on its
awareness about its surroundings,
environment, adaptability to changes in
the environment.
 Micro Environment
• The Micro Environment consists of the actors in the
company’s immediate that affect the performance of
the company. A business is influenced both
collectively and individually by these factors
• It consists of –
general public, customers, suppliers of input,
workers along with trade unions, market
intermediaries, competitors and the public whose
decisions and actions have direct impact and
functioning of a company
• The first three components influence
production of goods and services the latter
three affect the marketing and sales
operations of the firm
• Suppliers
• They refer to the people who supply raw
materials, components and parts, machinery
expert services, fuel, electricity etc. to help in
production of goods and services.
• Suppliers - responsible for smooth functioning
of the firm therefore reliability is very
important
• Vendor development is gaining importance
Public – Acc. to Philip Kotler-
Any group that has an actual or potential
interest in or has an impact on achieving
organisation’s objective
Public includes users and non-users of
the product.
 To interact meaningfully with different
categories of public, most companies today
have public relations department that follows
and studies the attitudes of their publics and
issues information and communications with
a view to create goodwill among them about
their company.
The head of the public relations
department(PR) is carefully chosen. A
PRO is compared to an ambassador who
is responsible for the positive image of
the organization
types- financial public, media public,
citizen-action
public, local public, general public, internal
public.
Customers - A company may have different
categories of business –individuals,
households, industries and other commercial
establishments, and government and other
institutions
Every management should ensure that its
consumers have good experience with a view
to promoting loyalty to their company. People
only want good experiences . That is the
reason Japanese give so much importance to
consumer delight
• Marketing intermediaries – these are the firms that
help the company to promote, sell, and distribute its
goods and services to the final buyers.
• They are – middlemen-wholesalers, retailers
physical distribution firms –warehouses,
transportation firms
Marketing service agencies – marketing
research firms, advertising
agencies, marketing consulting firms
Financial intermediaries - banks, credit
companies, insurance companies
• Workers and unions – A trade union
represents the collective voice and strength of
the workers. If trade unions become disruptive
they can cause lot of industrial unrest causing
loss of production, peace and harmony and
even livelihoods
 Competitors -

One of the characteristic of a market economy is competetion

The following three factors need to be analysed –
• Entry and exit of major competitors
• Substitutes and complements for current product/ services
• major strategic changes by current competitors
The competition among the products can be
Desire competition
Generic competition
Product form competition
Brand competition
 Michael porter’s Model
Potential Entrants

Rivalry among Buyers

Suppliers existing firms

Substitutes
• Five Forces Analysis assumes that there are
five important forces that determine
competitive power in a business situation.
These are:
• Supplier Power: Here it is assessed how easy
it is for suppliers to drive up prices. This is
driven by the number of suppliers of each key
input, the uniqueness of their product or
service, their strength and control over the
firm, the cost of switching from one to
another, and so on. The fewer the supplier
choices a firm has, and the more you need
suppliers' help, the more powerful the firm’s
suppliers are.
• Buyer Power: Here it is assesed how easy it is
for buyers to drive prices down. Again, this is
driven by the number of buyers, the
importance of each individual buyer for the
business, the cost to them of switching from
present product being supplied to products
and services to those of someone else, and so
on. If the buyers are few and powerful , then
they are often able to dictate terms to the
firm.
• Competitive Rivalry: What is important here is
the number and capability of the firm’s
competitors. If the firm has many competitors,
and they offer equally attractive products and
services, then the firm will most likely have
little power in the situation, because suppliers
and buyers will go elsewhere if they don't get
a good deal from you. On the other hand, if
no-one else can do what the firm does, then
the business has a tremendous advantage.
• Threat of Substitution: This is affected by the
ability of the firm’s customers to find a
different way of doing what you do – for
example, if the firm supplies a unique
software product that automates an
important process, people may substitute by
doing the process manually or by outsourcing
it. If substitution is easy and substitution is
viable, then this weakens the firm’s power.
• Threat of New Entry: Power is also affected by
the ability of people to enter the business of
the firm. If it costs little in time or money to
enter the market and compete effectively, if
there are few economies of scale in place, or if
the firm has little protection for its key
technologies, then new competitors can
quickly enter the market and weaken its
position. If the firm has strong and durable
barriers to entry, then it can preserve a
favorable position and take fair advantage of
it.
Macro Environment

• A firm does not operate in vacuum but in an

environment consisting of several forces and
factors that influence business activity and to
a large extent determines opportunities that
are available for it to promote its business.
There are both economic and non-economic
factors which affect business operation in
different ways
 Economic Environment
• Economic system
• Economic policies of the government and
their objectives
• Growth and organization of the financial
system
• Macroeconomic scenario
• The phase of business activity through
which the business activity is passing
through
• Economic system –It means the socio-
economic and political organization
within which the country’s economic
activities take place
Presently we have
• free enterprise economic system also
referred to as capitalism
• Socialism
• Mixed economic system of various kinds
• Immediately after independence, because of
need for rapid development, government had
large role in establishing public sector units.
This was due to influence of Neharuvian
socialism. Several stringent controls and laws
were established to regulate India’s nascent
industry.
• The government was more concerned with
equitable distribution of income and wealth
and neglected the requirements for
production.
Socio Cultural environment

• Social environment describes the people,

their attitudes, social behaviour and
impact of education, knowledge
explosion, and public opinion whereas
the cultural environment deals with
values, norms, and accepted behavioral
patterns.
• A person’s interaction with the society
that he/she lives shapes, refines and
alters his/her beliefs values and norms
which in turn defines his/her tastes and
preferences and even prompts to absorb
a world view of things.
• In a social group cultures and sub-
cultures intermingle and sometimes tend
to lose their uniqueness and individuality
• In India for e.g. there are six major
religions, more than 1600 languages
Demographic Environment

• The population of a country with its

characteristics like – size, growth rate,
age and sex composition, life expectancy,
work participation, employment status,
rural-urban divide, levels of education,
caste, ethnicity, language and religion
has a huge impact on business.
• This is because people are both
consumers and producers- two of the
most important constituents of business
environment.
 Technological Environment

• Developments in information,
manufacturing, transportation
technologies, as well as emergence of
the internet, have facilitated rapid and
early internationalization of countless,
firms.
• Modern technology is promoting a higher
level of international business activity than
ever before.
• For e.g. many companies in software,
gaming or entertainment, maintain a
presence only on web.
• Advances in transportation and
communication technologies have greatly
aided express delivery service providers
such as DHL, UPS, and FedEx to serve
• The most important driver of
globalization since 1980s have been
technological advances in
communications, information,
manufacturing, and transportation.
• Firms transmit all variety of data,
information and vital communication
that help the smooth running of their
operations worldwide.
• The companies also use information
technology to improve productivity of
their operations, which provides
competitive advantages.
• The huge improvements in productivity
and the industrial revolution would
render human labour, especially at the
shopfloor level,obsolete over time.
• New technologies could displace labour
faster than the pace at which society
could find new uses for labour, but it
could improve the standard of living.
• The most important activity underlying
technological advances is innovation.
• Societies and organizations innovate in various
ways, including new product designs, new
product processes, new approaches to
marketing and new ways of organizing and
training.
• Innovation mainly results from R & D