BUSINESS ENVIRONMENT

Introduction to BusinessBusiness is the organized efforts of enterprises to supply consumers with goods and services. Businesses vary in size as measured by number of employees or by sales volume. All businesses share the same purpose to earn Profits. However, the purpose of business goes beyond earning profits. It is an important institution in society and the role of business is crucial.Be it for the supply of goods and servicesCreation of job opportunitiesOffer of better quality of lifeContributing to the economic growth of the country and putting it on the global map

Scope of BusinessBusiness included all activities connected with production, trade, banking, insurance, finance, agency, advertising, packaging and numerous other related activities. Businesses include all efforts to comply with legal restrictions and government requirements and discharging obligations to consumers, employees, owners and to other interest groups which have stakes in business directly or indirectly.

Environment

Environment refers to all external forces which have a bearing on the functioning of business. Environment are largely if not totally external, and beyond the control of individual industrial enterprises and their management. These are essentially the givers within which firms and their managements must operate in a specific country and they vary, from country to country.However, the term business environment refers to the External Factors. The external environment has two components ie business opportunities and threats to business.Similarly, the organizational environment has two components ie. strengths and weaknesses of the organization. A SWOT analysis is thus the first step in strategy formulation Business DecisionInternal EnvironmentExternal EnvironmentFactors influencing Business Decision

Business DecisionInternal EnvironmentMission / ObjectivesManagement StructureInternal Power RelationshipPhysical Assets & facilities

Company imageHuman resourcesFinancial CapabilitiesTechnological CapabilitiesMarketing CapabilitiesFinanciersSuppliersCustomersCompetitorsPublicMktg IntermediariesMicro EnvironmentEconomicTechnologicalGlobalDemographicSocio-CulturalPoliticalMacro EnvironmentBUSINESS ENVIRONMENT

INTRODUCTIONBusiness decisions are influenced by two sets of factorsInternal factors (The Internal Environment External Factors( The External Environment)

Business Environment presents two challenges to the enterpriseThe challenge to combat the environmental threatsExploit the business opportunities

TYPES OF ENVIRONMENTINTERNAL ENVIRONMENTEXTERNAL ENVIRONMENT

INTERNAL ENVIRONMENTImportant internal factors are1) Value SystemThe value system of founders and those at the helm of affairs has important bearing on the choice of business, the mission and objectives of the organization, business policies and practices.

2) Mission and ObjectivesThe business domain of the company , priorities , direction of development, business philosophy, business policy etc. are guided by the mission and objectives of the company.

INTERNAL ENVIRONMENT3) Management Structure and NatureThe organizational structure, the composition of the Board of Directors, extent of professionalization of management etc. are important factors influencing business decisions.

4) Internal Power RelationshipFactors like the amount of support the top management enjoys from lower levels and workers, share holders and Board of Directors have important influence on the decisions and their implementation.The relationship between the members of Board of Directors is also a critical factor.

INTERNAL ENVIRONMENT5) Human ResourcesThe characteristics of the human resources like skill, quality, morale, commitment, attitudes etc. could contribute to the strength and weakness of the organization.The involvement, initiative etc. of the people at different levels may vary from organization to organization.6) Company Image and Brand EquityThe image of the company matters while raising finance, forming joint ventures or other alliances, soliciting market intermediaries, entering purchase or sale contracts , launching new products etc.

INTERNAL ENVIRONMENTOTHER FACTORSPhysical Assets and FacilitiesR&D and Technological CapabilitiesMarketing ResourcesFinancial Factors

EXTERNAL ENVIRONMENTTwo TypesMicro EnvironmentConsists of actors in the companys immediate environment, that affects the performance of the company.Macro EnvironmentConsists of larger societal forces that affect all the actors in companys micro environment.

MICROENVIRONMENTAlso known as task environment and operating environmentIncludeThe suppliersMarketing intermediariesCompetitorsCustomersPublicsMore intimately linked with the company than macro factorsThe micro forces need not necessarily affect all the firms in a particular industry in the same way.Some of the micro factors are particular to a firm

suppliersThose who supply the inputs to the company.Source/Sources should be ReliableUncertainty regarding the supply or other supply constraints compel companies to maintain high inventories causing cost increases.Very risky to depend on a single supplierThe purchasing department should market itself to suppliers, to obtain favourable treatment during the periods of shortages.

customersMajor task of business is to create and sustain customersDifferent categories of consumersIndividualsHouseholdsIndustries and other commercial establishmentsGovernment and other institutionsDepending on single customer is too riskyChoice of customer should be done by consideringRelative profitabilitydependabilitystability of demandgrowth prospectus extent of competition

competitorsA firms competitors include not only the other firms which market the same or similar product but also all those who compete for the income of the consumersDesire competitionGeneric competitionProduct form competitionBrand competition

Marketing intermediariesFirms that aid the company in promoting, selling and distributing its goods to final buyers.Include the middlemen and merchants who help the company find customers or close sales with themPhysical distribution firms which assist the company in stocking and moving goods from their origin to their destinationsMarketing service agencies which assist the company in targeting and promoting its products to the right marketsFinancial intermediaries which finance marketing activities and insure business risksVital links between the company and the final consumers.

PublicsAny group that has an actual or potential interest in or impact on an organizations ability to achieve its interests

E.g. Media publics, citizens action publics, local publicsMedia attack on any company can influence the government decisions affecting the company.Environmental pollution is an issue often taken up by number of local publicsPublics are not always threat to the business.Fruitful cooperation between a company and the local publics may be established for the mutual benefit.

MACRO ENVIRONMENTConsists of larger societal forces that affect all the actors in companys micro environment-namely the demographic, economic, natural, technological, political and cultural forcesAlso known as Societal EnvironmentThe Societal Environment includes general forces that do not directly touch on short-run activities of the organization but that can, and often do, influence its long-run decisions.

Economic EnvironmentImportant factors are:Economic conditionsEconomic policiesEconomic systemsEconomic conditionThe economic conditions of a country for example, the nature of the economy, the stage of development of the economy, economic resources, the level of income, the distribution of income and assets, etc.- are among the very important determinants of business strategies.In a developing country, the low income may be the reason for the very low demand for the product.

Economic EnvironmentEconomic policiesSome types or categories of business are favourably affected by government policy, some adversely affected, while it is neutral to some others.E.g. a restrictive import policy may greatly help the import competing industries, while a liberalisation of the import policy may create difficulties for such industries

Economic SystemThe scope of the private business depends on the economic system.The freedom of the private enterprise is the greatest in the free market economy.

Political & Government EnvironmentHas close relationship with the economic system and economic policy.In many countries regulations to protect consumer interests have become stronger.Some governments specify certain standards for the products to be marketed in the country; some even prohibit the marketing of certain products.Promotional activities are subject to various types of controls.E.g.: In India, Advertisement of alcoholic product is prohibited and the packages must carry injurious to health warnings

Socio-cultural environmentMajor factors are: the buying and consumption habits of people, their language beliefs and values, customs and traditions, tastes and preferences, EducationStrategy should be appropriate in the socio-cultural environment.Eg: nestle brews a very large variety of instant coffee to satisfy different national tastes

ColourBlue: feminine and warm in Holland ; but masculine and cold in SwedenGreen: favourite in Muslim world; but represents illness in MalaysiaRed: popular in communist countries; but represents disaster in AfricaWhite: death and mourning in China and Korea; but it expresses happiness in some countries.

Demographic environmentFactors:Size, growth rate, age composition, sex composition of population, family size, educational levels, economic stratification of the population, language, caste, religion, etc.E.g. Decline in birth rates in USA have affected the demand for baby products. So Johnson &Johnson repositioned their products like baby shampoo and baby oil, to the adult segment, particularly to females.

Physical & technological environmentBusiness prospects demands availability of certain physical facilitiesE.g. demand for electrical appliances is affected by the extent of electrification and the reliability of power supply.Demand for LPG stoves depend on rate of growth of gas connections Differing technological environment of different markets may call for product modificationsE.g. Many appliances are designed for 110 V in USA. They should be converted for 240v in IndiaTechnological developments may increase or decrease the demand for some existing productsE.g. voltage stabilizers help increase in sale of electrical appliances in markets characterised by frequent voltage fluctuationsIntroduction of TVs, Refrigerators, etc. with in-built stabilizers adversely affects the demand for voltage stabilizers.

International EnvironmentParticularly important for the industries directly depending on imports or exports and import-competing industriesRecession, economic boom, liberalizationMajor international developments have their spread effects on domestic business.E.g. Oil price hikes increased the cost of production and the prices of certain products such as fertilizers , synthetic fibres. So usually, the demand for natural fibres and manures increased.

SWOT Analysis

SWOT stands for Strengths, Weaknesses, Opportunities and Threats.Identification of the threats and opportunities in the external environment and strengths and weaknesses in the internal environment of the firms are the cornerstone of business policy formulation. It is the SWOT analysis which determines the course of action to ensure the growth / survival of the firm.

Strengths

Strengthsinternal to the unit; are a units resources and capabilities that can be used as a basis for developing a competitive advantage; strength should be realistic and not modest.

Your list of strengths should be able to answer:What are the units advantages?What does the unit do well?What relevant resources do you have access to?What do other people see as your strengths?What would you want to boast about to someone who knows nothing about this organization and its work?

Examples: good reputation among customers, resources, assets, people, : experience, knowledge, data, capabilitiesThink in terms of: capabilities; competitive advantages; resources, assets, people(experience, knowledge); marketing; quality; location; accreditationsqualifications, certifications; processes/systems

Weaknesses

Weaknessesinternal force that could serve as a barrier to maintain or achieve a competitive advantage; a limitation, fault or defect of the unit . It should be truthful so that they may be overcome as quickly as possible.

Your list of weaknesses should be able to answer:What can be improved?What is done poorly?What should be avoided?What are you doing as an organization that you feel could be done more effectively/efficiently?What is this organization NOT doing that you feel it should be doing?If you could change one thing that would help this department function more effectively, what would you change?

Examples: gaps in capabilities, financial, deadlines, morale, lack of competitive.

OpportunitiesOpportunitiesany favorable situation present now or in thefuture in the external environment.Examples: unfulfilled customer need, arrival of new technologies, loosening of regulations, global influences, economic boom, demographic shift.Where are the good opportunities facing you?What are the interesting trends you are aware of?Think of: market developments; competitor; vulnerabilities; industry/ lifestyle trends;; geographical; partnerships

ThreatsExternal force that could inhibit the maintenance or attainment of acompetitive advantage; any unfavorable situation in the external environment that is potentially damaging now or in the future.Examples: shifts in consumer tastes, new regulations, political or legislative effects, environmental effects, new technology, loss of key staff, economic downturn, demographic shifts, competitor intent; market demands; sustaining internal capability; insurmountable weaknesses; financial backing.Your list of threats should be able to answer:What obstacles do you face?What is your competition doing?Are the required specifications for your job/services changing?Is changing technology threatening your position?Do you have financial problems?

POSITIVE/ HELPFULto achieving the goal NEGATIVE/ HARMFULto achieving the goal INTERNAL Originfacts/ factors of the organization StrengthsThings that are good now, maintain them, build on them and use as leverage WeaknessesThings that are bad now, remedy, change or stop them. EXTERNAL Originfacts/ factors of the environment in which the organization operates OpportunitiesThings that are good for the future, prioritize them, capture them, build on them and optimizeThreatsThings that are bad for the future, put in plans to manage them or counter them

Competitive Structure of IndustriesThe competitive structure of industries is a very important business environment. Identification of forces affecting the competitive dynamics of an industry is very useful in formulation of strategies. As per Michael Porter well known model of structural analysis of industries, the state of competitions depends on:

Porters analysis determines the competitive intensity of the industry and the attractiveness of the market. A highly competitive industry is one approaching Perfect Competition whereby businesses are only able to earn normal profits.Rivalry among firmsBuyersSubstitutesNew EntrantsSuppliersThreat of new entrantsThreat of substitutesBargaining powerBargaining power

Rivalry Among Existing Firms: Firms in an industry are mutually dependent competitive motives of a firm usually affects others and may be retaliated. Factors influencing the intensity of rivalry are:Number of firms and their Relative market shareState of Growth of Industry: In stagnant, declining and slow growth industries, a firm is able to increase its sales by increasing the market share.Fixed or storage costs: In case of high fixed costs, strategy of firms is to increase sales which in turn would improve on capacity utilization.Indivisibility of capacity augmentation : Where there are economies of scale, capacity increases would be in large blocks necessitating, efforts to increase sales to achieve capacity utilization norms.Product standardization

Threat of EntryNew entrants are newcomers to an existing industry. They typically bring new capacity. A desire to gain market share and substantial resources. Therefore they are threats to an established corporation. The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors . An entry barrier is an obstruction that makes it difficult for a company to enter an industry.

Threat of Entry

Potential competition tends to be high if the industry is profitable or critical and entry barriers are low. Some of the common entry barriers are:Government Policy: Government can limit entry into industry through licensing requirements by restricting access to raw materials.Product Differentiation: Characterized by brand image, customer loyalty etc. may deter new firms from entering the market.Capital Requirements : High capital intensive nature of the industry is an entry barrier to small firms .Economies of Scale : Scale economies in production and sales of microprocessors, gave Intel a significant cost advantage over any new arrival.Switching Costs : Once a software program such as excel or word becomes established in Office, office managers are reluctant to switch to a new program because of high training costs.

Threat of Substitutes

An industry which has close substitutes available is highly competitive in nature. Existence of close substitutes increases the propensity of consumers to switch to alternatives in response to price increases. Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in industry can profitably charge.

Bargaining power of Buyers

Buyers affect an industry through their ability to force down prices , bargain for higher quality or more services and play competitors against each other.

A buyer or distributor is powerful if some of the following factors is true :A buyer purchases a large proportion of sellers product or service (eg : oil filters purchased by a major automaker)A buyer has the potential to integrate backward by producing the product itself (eg: a newspaper chain could make its own paper)Alternate suppliers are plentiful because the product is standard or undifferentiated.Changing suppliers cost title. (eg: office supplies are sold by many vendors)The purchased product is unimportant to the final quality or a price of a buyers products (eg: electric wire bought for use in lamps)

Bargaining power of Suppliers Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and services. A buyer or distributor is powerful if some of the following factors is true :Supplier industry is dominated by a few companies but it sells too many(eg: petroleum industry)Service is unique or it has built up switching costs (eg: word processing software)Substitutes are not readily available (eg: electricity)Suppliers are able to integrate forward and compete directly with their present customers (eg: a microprocessor producer like Intel could make the complete PC)A purchasing industry buys only a small portion of the suppliers groups goods (eg: sales of lawn mower tires are less important to the tire industry than are sales of auto tires)

Environment Scanning And MonitoringThe process by which strategists monitor the economic, governmental/legal, market/competitive,technological, geographic and social settings to determine opportunities and threats to their firms

Stages of Environmental Analysis:The analysis consists of four steps:Scanning : It is process of analyzing environment for the identification of factors which impact or have implications for business.Monitoring : It involves more in-depth analysis of environmental trends identified at the scanning stage . Purpose of monitoring is to assemble sufficient data to discern whether certain patterns are emerging.Forecasting : Anticipating future is essential for identifying future threats and opportunities and formulating strategic plans.Assessment : It involves drawing up implications/possible impacts

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