Nature of Business Environment

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Nature of Business Environment


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Introduction to Businessl Business is the organized efforts of enterprises to supply consumers with goods

and services. Businesses vary in size as measured by number of employeesor by sales volume.

l All businesses share the same purpose to earn Profits . However, thepurpose of business goes beyond earning profits.

l It is an important institution in society and the role of business is crucial. Be it for the supply of goods and services Creation of job opportunities Offer of better quality of life Contributing to the economic growth of the country and putting it on the

global map

Scope of Business Business included all activities connected with production, trade,

banking, insurance, finance, agency, advertising, packagingand numerous other related activities. Businesses include allefforts to comply with legal restrictions and governmentrequirements and discharging obligations to consumers,employees, owners and to other interest groups which havestakes in business directly or indirectly.

Society cannot do without business and vice versa.


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Characteristics of Todays Business

Business

Information

Competition

Change - TransitionOpportunities

Diversification

Globalisation

Technology

Business during the 21 st Century There is a trend towards mini organizations alongwith large corporations. Existence of flexible, flat and team based structures Business is knowledge based. Processes have become complex. Brain power is in

great demand. Information technology will take care of all data management and networked

computers handle information. Organisations have become flat. Dispersed ownership, open minded and a transparent environment is encouraged

1. Three types of diversification maybe distinguished : Concentric, horizontal andconglomerate diversification. Concentric diversification refers to the process of adding

new, but related products or services. Eg : HLL which as Liril, Pears, Rexona, Lux andLifebuoy. Horizontal diversification is adding of new, unrelated products or services for


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BusinessDecision

Internal Environment

Mission / ObjectivesManagement StructureInternal Power RelationshipPhysical Assets & facilities

Company imageHuman resourcesFinancial CapabilitiesTechnological CapabilitiesMarketing Capabilities

FinanciersSuppliersCustomersCompetitorsPublicMktg Intermediaries

Micro Environment

Economic

TechnologicalGlobalDemographicSocio-CulturalPolitical

Macro Environment

BUSINESS ENVIRONMENT


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Internal Environment

l Any business has certain vision, mission and objectives and astrategy to achieve them. Formulation of strategy is definedas establishing a proper firm-environment fit . Indeed theobjectives should be based on an assessment of the externalenvironment and the organizational factors (internalenvironment).

l Visionl Missionl Objectivesl Management Structurel Human Resourcesl Financial Factorsl Company Image and Brand Equity


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l The macro environment consists of factors which are beyond the control of the business.There is a symbiotic relationship between business and the environmental factors,environmental factors are dynamic and a particular business firm, by itself, may not be in aposition to change its environment . Macro Environment includes :

l Political Environment

l Economic Environmentl Technological Environmentl Socio-cultural Environmentl Global Environment.

Macro Environment

Micro Environment

The Micro environment consists of different types of stakeholders -

customers, employees, suppliers, marketing intermediaries, competitors. It isalso known as the Task Environment and Operating Environment and has adirect bearing on the operations of the firm. Changes in the microenvironment will directly affect and impinge on the firm's activities.


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Political Environment

Political Environment refers to the influence exerted by the threepolitical institutions ie. legislature, executive and judiciary inshaping, directing, developing and controlling businessactivities.

ll The constitution of a countryl Political Organisationl Political Stabilityl Image of the country and its leadersl Foreign Policyl Laws governing businessl Flexibility and adaptability of lawsl The Judicial Systeml


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Economic Environment

Economic Environment refers to all forces which have an economicimpact on Business. The economic environment consists of the demand dynamics, supply

situation, pricing factors, degree of competitiveness, and impact of profitability. It includes the fiscal policy, monetary policy and thetaxation policy, the FDI norms, the investment criterion andfinancing decisions. Economic environment includes:

l Growth strategyl Industryl Agriculturel Infrastructurel Money and Capital Marketsl Per capita and national incomel Populationl New Economic Policyl.


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Global Environment : The global environment refers to those factors which are relevant to

business, such as the WTO principles and agreements; other international conventions/ treaties / agreements / sentiments in other

countries etc. For eg hike in crude oil prices has a global impact etc.l World is becoming one marketl Improving qualityl Competition from MNCsl Capital and technology transfersl Deciding which markets to enter and what products to manufacturel Adjusting the management processl

Socio-Cultural Environment:l Culture creates peoplel Culture and globalizationl Culture determines peoples attitude to business and work.l Caste systeml Spirit of collectivisml Educationl Ethics in businessl Social responsibilityl Social audit

l Corporate governance


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External Environmental AnalysisEnvironmental Analysis has three goals:

Provides an understanding of current and potential changes taking place Environmental Analysis should provide input for strategic decision making. Facilitate and lead to strategic decisions within an organization.

Environmental Analysis and diagnosis give strategists time to anticipateopportunities and to plan to take optional responses to these opportunities. Italso helps strategists to develop an early warning system to prevent threatsor to develop strategies which can turn a threat to a firms advantage. Firmswhich systematically analyse and diagnose the environment are moreeffective than those which do not.

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Process of Environmental Analysis:The analysis consists of four steps:

Scanning : Detect early signals of possible environmental change and detectenvironmental change already underway.

Monitoring : Purpose of monitoring is to assemble sufficient data to discernwhether certain trends are emerging, identification of the trends andidentification of areas for further scanning.

Forecasting : It is concerned with developing projections of the direction, scopeand intensity of environmental change.

Assessment : To determine implications for the organisations current andpotential strategy.


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Environmental Analysis and Strategic Management

Defining Business Mission and Objectives

SWOT AnalysisEnvironmental Analysis + Self Appraisal

Strategic Alternatives and Choice of Strategy

Implementation of Strategy

Evaluation and Control of Strategy


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Competitive Structure of Industries

The competitive structure of industries is a very important businessenvironment. Identification of forces affecting the competitivedynamics 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 industryand the attractiveness of the market. A highly competitive industry isone approaching Perfect Competition whereby businesses are onlyable to earn normal profits.

Rivalry among firms Buyers

Substitutes

New Entrants

Suppliers

Threat of new entrants

Threat of substitutes

Bargaining powerBargaining power


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Rivalry among Existing firms:

Product standardization, after sales service: In caseof firms which have standardized products; it isprice, distribution and after sales service whichbecome the distinguishing factors.

l Strategic stake: Rivalry becomes more intensive if

the firms have high stakes in achieving successthere.l Exit Barrier: If exit barriers are high, firms would keep

competing in the same industry even though itmight not be very attractive.

l Diverse Competition: Competitors with diversestrategies make the industry highly competitive.l Switching costs: One time costs that the buyer faces

on switching from one suppliers product to that of another ie cost of new ancillary equipment etc.

l Expected Retaliationl


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Threat of Entry:l

Potential competition tends to be high if the industry isprofitable or critical and entry barriers are low. Some of the commonentry barriers are:

l Government Policyl Cost Disadvantages: Cost advantages enjoyed by established firms

may discourage entry of new firms such as learning curve, favorablelocation etc.

l Product Differentiation: Characterized by brand image, customer loyaltyetc. may deter new firms from entering the market.

l Monopoly Elementsl Capital Requirements : High capital intensive nature of the industry is

an entry barrier to small firmsl

Threat of substitutesl 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.

l Perceived level of product differentiation in the minds of the consumer is also a highly influential factor.


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Bargaining power of Buyers :Buyers can in turn also be potential competitors as they may integrate

backwards or bargain for lower costs, better quality of the productetc.

l The volume of purchase relative to the total sale of the seller l The importance of the product to the buyer in terms of the total costl Extent of standardization or differentiation of the productl Switching costsl Extent of buyers informationll

Bargaining power of sellers:Important determinants of supplier power are the following:

l Extent of concentration and domination in the supplier industryl Importance of the product to the buyer l Importance of the buyer to the supplier l Extent of substitutability of the productl Switching costsl Extent of standardization of the product

l Potential for forward integration by suppliers


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SWOT AnalysisSWOT stands for Strengths, Weaknesses,Opportunities and Threats

Identification of the threats andopportunities in the external environmentand strengths and weaknesses in the internalenvironment of the firms are the cornerstoneof business policy formulation.It is the SWOT analysis which determinesthe course of action to ensure the growth /survival of the firm.


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Strengths Strengthsinternal to the unit; are a units resources and capabilities that canbe 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 aboutthis organization and its work? Examples: good reputation among customers, resources, assets, people, :experience, knowledge, data, capabilities Think in terms of: capabilities; competitive advantages; resources, assets,people (experience, knowledge); marketing; quality; location; accreditations qualifications, certifications; processes/systems


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Weaknesses Weaknessesinternal force that could serve as a barrier tomaintain or achieve a competitive advantage; a limitation, faultor defect of the unit; It should be truthful so that they may be overcome as quicklyas 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 bedoing? If you could change one thing that would help this departmentfunction more effectively, what would you change?

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


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Opportunities Opportunitiesany favorable situation present now or inthefuture in the external environment.

Examples: unfulfilled customer need, arrival of newtechnologies, 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


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Threats External force that could inhibit the maintenance or attainmentof acompetitive advantage; any unfavorable situation in the externalenvironment that is potentially damaging now or in the future.

Examples: shifts in consumer tastes, new regulations, political orlegislative effects, environmental effects, new technology, loss of key staff, economic downturn, demographic shifts, competitorintent; 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? Could any of your weaknesses seriously threaten your unit?


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AN ORGANIZATIONS ENVIRONMENT


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AN ORGANIZATIONS ENVIRONMENT

Industry SectorCompetitors ,

Industry size andCharacteristics, Related

Industries

Raw MaterialsSector

Suppliers,Manufacturers,Real Estate

HumanResourcesSector

Labor Market, EmploymentAgencies, Universities, TrainingSchools, Employees in Other

Companies, UnionizationFinancial Resources Sector

Stock Markets, Banks,Savings and Loans,Private Investors

MarketSector

Customers, Clients,Potential Users of Products and Services

TechnologySector

Techniques of Production, Science,Research Centers,Automation, NewMaterials

Economic

Conditions Sector

Recession, UnemploymentRate, Inflation rate, Rate of

Investment, Economics,Growth

Government Sector

City, State, Federal Laws andRegulations, Taxes, Services,Court System, PoliticalProcesses

Socio-Cultural sector

Age, Values, Beliefs, Education,Religion, Work Ethic, Urban vs.Rural, Birth Rate

ORGANIZATION

DOMAIN

Task Environment

MacroEnvironment

Documents

Nature of Business Environment