Business Environment

Introduction to Business

Business is the organized efforts of enterprises to supply consumers with goods and services for a profit. All businesses share the same purpose to earn Profits. However, the purpose of business goes beyond earning profits.

Objectives of a business

Economic Objectives
a) Earning of adequate profit. b) Creation of customers

c) Innovation
d) Generation of employment e) Control of inflation f) Economic development g) Market leadership h) Growth

Social Objectives
a) Supply of goods and services. b) Customer satisfaction. c) Fair treatment of employees. d) Good working environment

e) Social responsibility.
f) Pollution control.

National Objectives

a) Implement of government laws.

b) Payment of taxes.

Characteristics of Business
Change - Transition Competition Opportunities

Technology

Business Diversification

Information

Globalization

Characteristics of Business environment : Business environment is constantly changing process. Business environment is different for different business units. It has both long term and short term impact. Unlimited influence of external environment factors. It is very uncertain. Inter-related components. It includes both internal and external environment.

Environment
Environment means surrounding Business environment means the factors and activities those surround the business and affect or influence the business.

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

Factors influencing Business Decision

Internal Environment

External Environment

BUSINESS ENVIRONMENT Macro Environment Micro Environment

Internal Environment
Bankers and financial institution Suppliers Customers Competitors Public Mkt. Intermediaries Share holders Creditors
Mission / Objectives Management Structure Production Capabilities Finance Capabilities Marketing Capabilities HR Capabilities R&D Capabilities Technological Capabilities Company image Physical Assets & facilities Economic Political legal Technological Global Socio-Cultural natural

Business Decision

Internal Environment
Vision Mission Objectives Management Structure Production Capabilities Marketing Capabilities

Human Resources Financial Factors Company Image and Brand Equity R&D Capabilities Physical Assets & facilities

Micro Environment(external)
1) Suppliers Supply raw materials and other components (Inputs) Importance Reliable supply continuous supply for smooth functioning

2)

CUSTOMERS

Different categories of customers

i. Industrial customers ii. Wholesale customers

iii. Retail customers

iv. Government customers

v. Foreign customers

3)

Market intermediaries

i. Middlemen. ii. Physical distribution Firms: (warehouses and transport firms) iii. Marketing service agencies (Advertising agencies market research firms, media firms, consulting firms) iv. Financial intermediaries

 4. Competitors:

The Threat of entry of new firms The Power of Buyers The Power of Suppliers The Power of Substitutes The Intensity of Rivalry among existing firms

5.Public 6.Share holders 7.Creditors 8.Bankers and financial institution

Macro Environment(external)

Economic environment
i. Economic policies

a) b) c) d) e) f)
ii.

Budget Industrial policy Trade policy Agricultural policy Fiscal Policy Monetary Policy
Mixed

Economic system- Capitalistic, Socilalitic,

Economic conditions Growth strategy Industry Agriculture Infrastructure Money and Capital Markets Per capita and national income FDI norms Inflation rate Growth in spending power people in a pensionable age Recession or Boom GDP, Business Cycle, Unemployment, Inflation, Balance of Payment, Exchange rate Policy, Interest Rate.

legal environment
Legislature Labour Laws like Factories Act,, Industrial Disputes Act, Minimum Wages Act, Payment of Wages Act, etc MRTP Act, Law of Contracts, Companies act, FERA, Import & Export Control act, Tax Laws

Judiciary - District, High Courts, Supreme Court,

The constitution of a country Foreign Policy Laws governing business Flexibility and adaptability of laws The Judicial System Taxation Policy Trade regulations

legal environment
Unemployment law Health and safety Product safety Advertising regulations Product labeling labor laws

Political
Political parties Political Stability Image of the country and its leaders Political Belief of Government Political Strength of the Country Relation with other countries Defense and Military Policies

Socio cultural environment

the buying and consumption habits of people, their language beliefs and values, customs and traditions, tastes and preferences, Education age distribution. education levels. income level. diet & nutrition. population growth life expectancies Religion

Colour

Blue: feminine and warm in Holland ; but masculine and cold in Sweden Green: favourite in Muslim world; but represents illness in Malaysia Red: popular in communist countries; but represents disaster in Africa White: death and mourning in China and Korea; but it expresses happiness in some countries. Also it is the colour of bridal dress.

Socio cultural environment

Attitude of people towards work and health. Role of family. Marriage. Religion. Education Ethical issues Social responsibility of business

Society cannot do without business and vice versa.

Natural environment
i. Natural resources.

ii. Weather and climatic conditions. iii. Locational aspects. iv. Nearness to port facilities.

Technological environment
Internet E-commerce

Social Media
Nature of technology Scope for innovation Technology Helps in increased productivity Technology leads to introduction of new products and older products becoming outdated

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. World is becoming one market Improving quality Competition from MNCs Capital and technology transfers Deciding which markets to enter and what products to manufacture Adjusting the management process

SIGNIFICANCE OF BUSINESS ENVIRONMENT

Ensures Optimum Utilization of Resources Facilitates operations of the organisation Forms the basis of long term policies, plans, strategies of organisation Helps organisation in identifying & understanding its competitors Helps the firm to expand & grow Identification of Strength Identification of Weakness: Identification of Opportunities Identification of Threats

 Exploitation of Business Opportunities Keeping Business Enterprise Alert Keeping Business Flexible and Dynamic Understanding Future Problems and Prospects Making Business Socially Acceptable Ensures Survival and Growth Maintaining adaptability to changes Image Building Continuous learning

TYPES OF BUSINESS ENVIRONMENT RISK

Legal risk: arising from legal challenges or changes in laws

Regulatory risk: arising from regulatory design & its changes

Political risk: arising from political changes Social risk: originating from social attitudes, perceptions Natural risk: associated with natural calamities

Uses of environment studies

1) 2) 3) 4) 5) Awareness Policy decisions Demand forecasting Competitors strategies. To innovate

Limitations of environmental analysis

a) b) c) Unexpected events Future is not a guarantee Too much of information.

Business Sectors
Primary Sector Agriculture, Secondary sector -

Mining
Electricity Generation and

Manufacturing Industries

Manufacturing activities Construction

Tertiary Sector Services industries

Trade , Commerce, Insurance, Banking, Transport

Process of Environmental Analysis:

The analysis consists of four steps: Scanning Monitoring Forecasting Assessment

Environmental Analysis and Strategic Management

Defining Business Mission and Objectives

SWOT Analysis Environmental Analysis + Self Appraisal

Strategic Alternatives and Choice of Strategy

Implementation of Strategy

Evaluation and Control of Strategy

Competitive Structure of Industries The 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:
New Entrants Threat of new entrants Suppliers Bargaining power Rivalry among firms

Bargaining power Buyers

Threat of substitutes Substitutes

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, capabilities Think in terms of: capabilities; competitive advantages; resources, assets, people (experience, knowledge); marketing; quality; location; accreditations qualifications, 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

Opportunities Opportunitiesany favorable situation present now or in the future 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

Threats External force that could inhibit the maintenance or attainment of a competitive 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? Could any of your weaknesses seriously threaten your unit?

SWOT Analysis of Indian Economy

Weaknesses Strengths
Huge pool of labor force High percentage of cultivable land Diversified nature of the economy Availability of skilled manpower Extensive higher education system High growth rate of economy Rapid growth of IT / ITes Sector Abundance of natural resources High percentage of workforce involved in agriculture Approx a quarter of population below the poverty line High unemployment rate Inequality in prevailing socio economic conditions, rural urban divide Low productivity Huge population leading to scarcity of resources Low level of mechanization Red tapism, Bureaucracy Low literacy rates

Opportunities

Threats
High fiscal deficit Threat of government intervention in some states Growing import bill Population explosion, rate of growth of population Agriculture excessively dependent on monsoon

Scope for entry of private firms in various sectors of business Inflow of FDI Huge foreign exchange prospects in IT / ITeS Investment in R & D Area of infrastructure Huge domestic market : Opportunity for MNCs Huge agricultural resources

AN ORGANIZATIONS ENVIRONMENT
Industry Sector Competitors,
Raw Materials Sector

Task Environment

Industry size and Suppliers, Characteristics, Related Manufacturers, Industries Real Estate Socio-Cultural sector

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

Human Resources Sector Labor Market, Employment Agencies, Universities, Training Schools, Employees in Other Companies, Unionization Financial Resources Sector

Government Sector

Stock Markets, Banks, City, State, Federal Laws and ORGANIZATION Regulations, Taxes, Services, Savings and Loans, Market Court System, Political Sector Private Investors Economic Processes Conditions Sector Technology Sector Customers, Clients, Potential Users of Techniques of Recession, Unemployment Rate, Inflation rate, Rate of Production, Science, Products and Services Investment, Economics, Macro Research Centers, Growth Environment Automation, New Materials