Hapter Usiness Nvironment: 1. What Is Business???

MYNOTES
ON
STRATEGIC MANAGEMENT
FOR
CA-INTERMEDIATE (IPC)
CHAPTER 1 BUSINESS ENVIRONMENT

1. WHAT IS BUSINESS???
The term business refers to all economic activities pursued mainly to
satisfy the material needs of society, with the purpose of earning profits.
Such activities include exchange of goods and services on a regular basis
and carry an element of risk and uncertainty. Manufacturing, trading
mining, banking, transport, insurance, etc., are all different types of
business.
2. Stability:
Every organisation aims at stable and consistent working. A business
must be able to fulfill its objectives without much tensions and
fluctuations in day-to-day operations.
3. Growth:
After earning sufficient profits, every business aims at increasing returns
in future to ensure growth of business with time. Growth can be seen in
terms of increase in profits and assets, turnover, manufacturing
capacity, market share, number of employees, business acquisitions,
and so on.
Nov 2012
4. Efficiency:
It is very important to achieve goals efficiently to ensure attractive
profits and other qualitative aspects related to the business. It is an
operational objective and measured in terms of inputoutput ratio,
consumption of resources, efforts made, etc.
Nov 2012
5.
Profitability:
: : A U T H O R E D BY C A KU N A L A G R AWA L
DISA(ICAI), B.COM] ::
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1.1
1. Survival:
It is not necessary for a business that is currently in the market to
remain there in the long run. The longevity of a business is not sure.
Therefore for a business to remain in the market it is necessary to
ensure its survival to protect the interests of those associated with it.
Survival depends upon many internal and external factors like
competition, technological changes, state of economy and type of
ownership.
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Every business functions with certain set objectives in mind. Every

business has a goal that it tries to achieve in order to remain in the
market and earn revenues. The objectives of any business are as follows:
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2. OBJECTIVES OF A BUSINESS

Profit making is the main, but not the only objective, of any business. It
is also the primary unit or yardstick of measurement of performance and
efficiency of a business. The performance of any business is judged
mainly by its profit margin and revenues. Although maximisation of profit
may not be aimed in the short run, every business aims at wealth
maximisation in the long run by earning good profits.
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3. ENVIRONMENTAL INFLUENCES
ON
BUSINESS
1) Business does not function in an isolated world.

2) Businesses function within a whole gambit of relevant environment
and have to negotiate their way through it.
3) The extent to which the business thrives depends on the manner in
which it interacts with its environment.
4) To be successful business has to not only recognise different
elements of the environment but also respect, adapt to or have to
manage and influence them.
5) The business must continuously monitor and adapt to the
environment if it is to survive and prosper.
6) A successful business has to identify, appraise, and respond to the
various opportunities and threats in its environment.
7) Business functions as a part of broader environment.
8) The inputs in the form of human, physical, financial and other
related resources are drawn from the environment.
9) The business converts these resources through various processes
into outputs of products and/or services.
10)
The latter are partly exchanged with the external client
groups, say customers. The exchange process brings in some
surplus (or profits, reputation, good public image and so on) to the
business, which could be stored and used for further development
and growth.
11)
The exchange with the environment brings in some surplus
and goodwill, etc., to the business, which is essential for survival
and growth.
4. PROBLEMS
IN UNDERSTANDING THE ENVIRONMENTAL INFLUENCES
1) The environment encapsulates many different influences;

Environment hides many different factors which influence business,
so listing all environmental influences may be possible, but it may
not be of much use because no overall picture emerges of really
important influences on the organization.
2) The second difficulty is that of uncertainty. Technological
change and the speed of global communications mean more and
faster change makes difficult for managers to understand future
external influences on an organization.
3) Managers are no different from other individuals in the way
they cope with complexity. Like a normal human being,
managers generally tend to simplify complexity by focusing on
aspects of the environment, which have been historically important.
One of the tasks of the strategic manager is to find ways to break
out of oversimplification or bias in the understanding of
environment, while still achieving a useful and usable level of
analysis.
ITSM no more a Theory Subject:: Learn & Understand ITSM in
PRACTICAL WAY
MYNOTES
ON
5. FRAMEWORK
FOR
TO UNDERSTAND THE ENVIRONMENTAL INFLUENCES
PM
Environmental Analysis refers to detailed evaluation of the external

environment, in terms of the opportunities and threats, and the internal
environment, in terms of the strengths and weaknesses, to ensure
survival, stability, growth and profitability of any organisation. A
systematic approach to understanding the environment is the SWOT
analysis.
Basic and Additional Goals

In general, environmental analysis has three basic goals, which are as
follows:
1) To provide an understanding of current and potential changes taking
place in the environment.
2) To provide inputs for strategic decision making.
3) To facilitate strategic thinking in organisations.
For example developments in the legal environment including introduction
of new direct tax code, limited liability partnership, GST, etc. have their
own bearing on the business.
BUSINESS ENVIRONMENT
Nov 2013
OF
Nov 2011
7. CHARACTERISTICS
1) Environment is complex - The environment is not made of any

one simple constituent but consists of a number of factors, events,
conditions and influences, arising from different sources. Hence,
environment is at the same time complex and somewhat easy to
understand in parts, but difficult in totality.
2) Environment is dynamic: the environment is constantly changing
in nature. Due to the many and varied influences operating, there is
[ACA,
1.3
6. ENVIRONMENTAL ANALYSIS
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Firstly, take an initial view of the nature of the organizations

environment in terms of how uncertain it is. This helps in deciding
what focus the rest of the analysis is to take.
The next step might be the auditing of environmental influences to
identify which of the many different environmental influences are
likely to affect the organization's development or performance. This
is done by considering the way in which political, economic, social
and technological influences have a bearing on organizations.
The final step is to focus more towards the immediate environment
of the organization - for example, the competitive arena in which the
organization operates. In competitive environment we will study five
forces analysis that aims to identify the key forces at work in the
immediate or competitive environment. It is also required to analyse
the organization's competitive position: that is, how it stands in
relation to those other organizations competing for the same
resources, or customers, as it-self.
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Framework help in identifying key issues, find ways of coping with

complexity and also assist in challenging managerial thinking.
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dynamism in the environment causing it to continuously change its

shape and character.
3) Environment is multi-faceted: Same element or influence of
environment affects different firms in different ways. This is
frequently seen when the same development, say liberalisation, is
welcomed as an opportunity by one company while another
company perceives it as a threat.
4) Environment has a far reaching impact: The environment has a
far reaching impact on organizations. The growth and profitability of
an organization depends critically on the environment in which it
exists. Any environment change has an impact on the organization
in several different ways.
8. COMPONENTS
OF
BUSINESS ENVIRONMENT
The environment in which an organization exists could be broadly

divided into two parts the external and the internal environment.
The external environment includes all the factors outside the
organization which provide opportunity or pose threats to the
organization.
The internal environment refers to all the factors within an
organization which impart strengths or cause weaknesses of a
strategic nature.
The four environmental influences could be described as follows:
o An opportunity is a favourable condition in the
organization's environment which enables it to consolidate
and strengthen its position.
o A threat is an unfavourable condition in the organization's
environment which creates a risk for, or causes damage to,
the organization. An example of a threat is the emergence of
strong new competitors who are likely to offer stiff competition
to the existing companies in an industry.
o A strength is an inherent capacity which an organization can
use to gain strategic advantage over its competitors. An
example of a strength is superior research and development
skills which can be used for new product development so that
the company gains competitive advantage.
o A weakness is an inherent limitation or constraint which
creates a strategic disadvantage. An example of a weakness is
over dependence on a single product line, which is potentially
risky for a company in times of crisis.
This systematic approach to understanding the environment is
known as SWOT analysis. Business firms undertake SWOT analysis
to understand the external and internal environment. SWOT, which
is the acronym for strengths, weaknesses, opportunities and threats.
This will be discussed in more detail in later chapters.

PRACTICAL WAY
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1.5
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Environment must
be scanned so as 9. RELATIONSHIP BETWEEN ORGANIZATION
AND ITS ENVIRONMENT
to
determine
development and The relationship between an organisation and its
forecasts of factors environment may be discussed in terms of
that will influence interactions between them in several areas,
organizational
which are as follows:
success.
Environmental
1) Exchange of Information
scanning can be
Organisations
scan
environmental
defined
as
the
information and use it for planning,
process by which
decision making and control.
organizations
Organisations transmit information to
monitor
their
several internal and external agencies
relevant
like govt., investors, trade unions and
environment
to
professional bodies.
identify
opportunities and
2) Exchange of Resources
threats
affecting
Inputs to a business, like materials, men,
their business for
money and machines, are drawn from
the
purpose
of
environment.
taking
strategic
Output in the form of goods and services
decisions.
is supplied to the environment.
Scanning
must
identify the threats
3) Exchange of Influence and Power
and opportunities
Environment transmits opportunities and
existing
in
the
threats.
environment.
Environment
has
a
considerable
The factors which
stronghold over an organisation by
need
to
be
virtue of its command over inputs.
considered
for
Government controls the organisation
environmental
through legitimate power; markets,
scanning
are
suppliers, etc., influence the planning
events,
trends,
and decision making of the organisation.
issues
and
An organisation also influences the
expectations.
environment through its command over
These factors are
internal resources and capacity to
explained below:
provide output.
a. Events are
important
and specific
10. THE MICRO AND MACRO ENVIRONMENT
occurrences
taking place
Micro-environment
Macro-environment
in
different
It refers to all the factors which It refers to all the factors which are
environment
are specific
to an organisation common for all organisations, provide
al
sectors.
and impart strengths or cause opportunities or pose threats to them
b. Trends
are
weaknesses
of a strategic
nature. and are relatively uncontrollable.
the
general
These affect the organisation on
tendencies
an immediate
basis but are
or
the
relatively controllable.
courses
of
action along
which
:: A
U T H events
O R E D BY C A KU N A L A G R AWA L [ A C A ,
take
place.
Trends
are
grouping of
similar
or
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May 2014
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FOR
May 2013
Environmental
M
YNOTES ON STRATEGIC MANAGEMENT
Scanning
May 2013
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11. ELEMENTS
OF
the The factors include the following:

a) Demographic environment
b) Economic environment
c) Political-legal cum Government
environment
d) Socio-cultural environment
e) Technological environment
f) Competitive environment
g) Global environment
MICRO ENVIRONMENT
May 2013
These
factors
include
following:
a) Market
b) Organisation
c) Intermediaries
d) Suppliers
e) Consumer/Customer
f) Competitors
Micro-environment is the specific or the task environment of a business

which affects its working or operations directly on a regular basis. While
the changes in the macro-environment affect business in the long run, the
effects of changes in the micro-environment are noticed immediately.
Hence, organisations must closely analyse and monitor all the elements of
the micro-environment on a regular basis. The elements of
microenvironment are as follows
1. Consumers/Customers: No organisation can survive without
customers and consumers. A customer is the one who buys a product or
service for the consumer who ultimately consumes or uses the product or
service of the organisation. Hence, the consumer occupies the central
position; therefore an organisation must closely monitor and analyse the
following:
a) Who are the customers/consumers?
b) What features or benefits are they looking for?
c) What are their income levels?
d) What are their tastes, preferences?
e) What are their buying patterns, etc?
2. Competitors: Competitors are the other business entities that
compete for resources as well as markets. A study of the competitive
scenario is essential for the marketer, particularly threats from
competition. Following are a few of major questions that may be
addressed for analysing competitions:
Who are the competitors?
What are their present strategy and business objective?
Who are the most aggressive and powerful competitors?
Competition may be direct or indirect. Direct competition is between
organizations, which are in same business activity. At the same time
competition can also be indirect. For example, competition between a
holiday resort and car manufacturing company for available discretionary
income of affluent customers is indirect competition.
3. Organisation: An organisation refers to a group of all individuals
working in different capacities and the practices and culture they follow. In
micro-environment analysis, nothing is as important as self-analysis,
which is done by the organisation itself. Understanding ones own
strengths and weaknesses in a particular business is of vital importance.
Organisations consist of specific groups of people who are likely to
influence an organization, which are as follows:
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a) OwnersProprietor, partners, shareholders, etc., who invest

resources and also make major decisions for the business.
b) Board of directorsElected by shareholders, the board is
responsible for day-to-day and general management of the
organisation to ensure that it is being run in a way that best serves
the shareholders interests.
4. Suppliers: The suppliers refer to the providers of inputs, like raw

materials, equipment and services, to an organisation. Large companies
have to deal with hundreds of suppliers to maintain their production.
Suppliers with their own bargaining power affect working and cost
structure of the industry. Hence it is important for an organisation to carry
out a study of the following:
a) Who are the suppliers?
b) What are their products, prices and terms and conditions?
c) Whether to Outsource production or get it done in-house
depending on this supplier environment, and so on.
5. Intermediaries: Intermediaries include agents and brokers who
facilitate the contact between buyers and sellers for a commission. They
may exert a considerable influence on the business organisations as, in
many cases, the consumers are not aware of the manufacturers and their
products. Hence, manufacturers use intermediaries to reach out to
consumers.
12. ELEMENTS
OF
MACRO ENVIRONMENT
Macro-environment is the general environment of a business which affects

its working on a broader basis in the long run. The organisations must
closely analyse and monitor all the elements of macro-environment. The
elements of macro-environment are as follows:
[ACA,
1.7
a) The existing and the potential demand b) Market growth rate

in market
c) Cost structure
d) Price sensitivity
e) Technological structure
f) Distribution system, etc
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3. Market: Market refers to the system of contact between an

organisation and its customers. The firm should study the trends and
development and the key success factors of the market, which are as
follows:
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c) EmployeesPeople who actually do the work in an organisation.

Employees are the major force within an organisation. It is important
for an organisation to have its employees embrace the same values
and goals as the organisation. However, they differ in beliefs,
education, attitudes, and capabilities. When the management and
employees work towards different goals, everyone suffers.
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1. Demographic Environment: The term demographic denotes

characteristics such as age, income, education, asset ownership, home
ownership, employment status, etc. of the population in an area, district,
country or world.
Data with respect to these factors are of interest to businessmen because
of their impact on the business. In particular, the following demographic
characteristics or elements of a population are of interest to a business:
(i) Population Size: It is very important to understand population size
and the changes in a population size like:
Changes in a nations birth rate and/or family size
Increases or declines in the total population
Effects of rapid population growth on natural resources or food
supplies
Such study is very helpful in framing suitable strategies for a business.
(ii) Geographic Distribution: Population shifts from one region of to
another like from non-metropolitan to metropolitan areas to search for
employment. It may have an impact on a companys strategic
competitiveness. Some important issues may be as follows:
Attractiveness of a companys location and respective
governmental support
Need to relocate the company if population shifts
Concept of working-from-home electronically, implying changes in
recruitment and management of the workforce.
(iii) Ethnic Mix: This reflects the changes in the social value system of a
population and has implications both for a companys potential customers
and for the workforce. Issues that should be addressed include the
following:
What changes in the ethnic mix would need a new product and
service design and delivery?
Will new products and services be demanded or can the existing
ones be modified?
Are the managers prepared to manage a more culturally diverse
workforce?
(iv) Income Distribution: Changes in income distribution are important
because changes in the levels of individual and group purchasing power
and discretionary income often result in changes in spending
(consumption) and savings patterns. Tracking, forecasting, and assessing
changes in income patterns may identify new opportunities for
companies.
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3. Political-legal Environment: Political-legal Environment is a

collection of factors, such as the general state of politics, the degree of
politicalisation of business and economic issues, the level of political
morality, the law and order situation, political stability, the political
ideology and practices of the ruling party, the purposefulness and
efficiency of governmental agencies, the extent and nature of
governmental intervention in the economy and the industry, Government
policies (fiscal, monetary, industrial, labour and export-import policies),
specific legal enactments and framework in which the enterprise has to
function and the degree of effectiveness with which they are
implemented, public attitude towards business in general and the
enterprise in particular, and so on.
There are three important elements in political-legal environment. These
elements are as follows:
i)
Government: A business is highly guided and controlled by
government policy. Hence the type of government running a
country is a powerful influence on any business; a strategist has
to consider the changes in the regulatory framework and their
impact on the business. Taxes and duties are other critical areas
that may be levied and that affect the business. For example,
introduction of FBT (Fringe Benefits Tax) has a major impact on
the business.
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2. Economic Environment: The economic environment refers to the

general economic situation in the region and the factors like resource
markets (money market, manpower market, raw material components,
services, supply markets, and so on) which influence the supply of inputs
to the enterprise, their costs, quality, availability and reliability. The
important point is to find out the effect of economic prospect and inflation
on the operations of the firms. Strategists must scan, monitor, forecast,
and assess a number of key economic factors mentioned in the table
below for both.

ii)
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iii)
1.10
4. Socio-cultural Environment: Socio-cultural environment is a

collection of social factors affecting a business and includes social
traditions, values and beliefs, level of literacy and education, the
ethical standards and state of society, the extent of social stratification,
conflict and cohesiveness, and so forth. Socio-cultural environment
consists of factors related to human relationships and the impact of
social attitudes and cultural values on the business of the organisation.
The beliefs, values and norms of a society determine how individuals
and organisations should be inter-related. The core beliefs of a
particular society tend to be rigid. It is difficult for businesses to change
these core values, which become a determinant of its functioning.
Some of the important factors and influences operating in this
environment are as follows:
a) Social concerns, such as the role of business in society,
environmental pollution, corruption, use of mass media, and
consumerism.
b) Social attitudes and values, such as expectations of society
from business, social customs, beliefs, rituals and practices,
changing lifestyle patterns, and materialism.
c) Family structure and the changes in it, attitude towards and
within the family, and family values.
d) Role of women in society, position of children and adolescents
in family and society.
e) Educational levels, awareness and consciousness of rights,
and work ethics of members of society.
PM
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Legal: Business organisations prefer to operate in a country

where there is a sound legal system. However, in any country,
businesses must have a good working knowledge of the major
laws protecting consumers, competitions and organisations.
Businesses must understand the relevant laws relating to
companies, competition, intellectual property, foreign exchange,
labour, and so on.
Political: Apart from Govt. and Legal factors there are several
other political pressures that influence and limit organisations.
Political uncertainty, political movements against certain
products, service and organisations, politicalisation of trade
unions, etc., put a lot of pressure on business organisations.
5. Technological Environment: It is a collection of technological factors

affecting a business. It includes scientific advancements and changes of
manufacturing, banking, communication, entertainment and all other
aspects of changing peoples life. The following factors are to be
considered for the technological environment:
a) Change in technology
b) Opportunities arising out of technological innovation
c) Risk and uncertainty of technological development
d) Role of R&D in a country and governments R&D budget
The key questions that can be asked in assessing the technological
environment are as follows:
a) What are the technologies used by the company?
b) What additional technologies will be required?
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d) How critical is each technology to each of these products and

businesses?
c) Which technological investments should be curtailed or
eliminated?
The interference between technology and business can be
represented as follows:
6. Competitive Environment: Competitive environment refers to a
collection of various firms with same, similar or substitute
products/services/customers/resources or any other common area.
Identify and concentrate on the competitors who are significantly affecting
the business. A better understanding of the nature and extent of
competition may be reached by answering the following questions:
in a Competitive Environment : Theoretically,

cooperation generates automatically in businesses owned by a same
family. However, Cooperation in a competitive environment can be
ensured through techniques like cartel formation, explicit contracting, etc.
Cooperation
Technique
Cartels
Explicit
contracts
Keiretsu
Description
Cartels is a term from economics, to define the groups
of firms in an oligopoly acting together. The
cooperation in organisations forming a cartel may be
in form of decisions regarding prices and plans.
Organisations may form open cartels known to the
general public or secret cartels not known to the
general public.
Explicit contracts are the second option for
cooperation between firms. Firms may identify some
common interest for cooperation between them and
write such arrangements that help all those who are
involved.
Keiretsu is a set of companies with interlocking
business relationships and share holdings. It is a type
of business group where member companies prefer to
do business with other keiretsu members, both when
buying and when selling. It refers to a group of
companies, usually in related Keiretsu is a set of
companies with interlocking business relationships
and share holdings and usually join for cooperation on
specific terms. Keiretsu members are peers and may
[ACA,
1.11
Cooperation
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b) What are their product and

services?
c) What are their market shares?
d)
What
are
their
financial
positions?
e) What gives them cost and price f) What are they likely to do next?
advantage?
g)
Who
are
the
potential
competitors?
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a) Who are the competitors?
1.12
Three Characterstics of a Global Company

To be specific, a global company has three characteristics which are as
follows:
1)
It is a conglomerate of multiple units (located in different parts
of the globe) but all linked by common ownership.
2)
Its multiple units draw on a common pool of resources, such
as money, credit, information, patents, trade names and
control systems.
3)
The units respond to some common strategy.
Strategic Approaches for Globalisation
PM
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7. Global Environment: Global environment refers to the environment in

all other countries over the world. Today, economies are open, which
means they can interact with economies of other countries. Hence,
globalisation has become a very important business strategy.
Globalisation refers to the process of spreading the business out of one
country to other parts of the world by removing political, geographical and
other barriers among countries. For example, companies like Nestle,
Cadbury, etc, have several manufacturing locations and markets around
the world.
A company which has a global presence is called a multinational company
(MNC) or a transnational company (TNC). An MNC, by operating in more
than one country, gains R&D, production, marketing and financial
advantages in its costs and good will which are not available to its purely
domestic competitors.
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Family
Ownership
own significant amounts of each others stock,

common purchasing, common distribution channels or
other functions in common and even have many
board members in common
Family
Ownership
generates
cooperation
automatically as members prefer to do businesses
with firms owned by the same family. The common
interests of the family largely influence the
managerial decisions and activities of the enterprise.
International economic dynamics accompanied by geographical changes

have changed the paradigm of global business. A firm / company which
wishes to go global will be guided by the following four types of strategies:
(i)
Multi-domestic strategy: A multi-domestic strategy focuses on
competition within each country in which the firm operates. The
organization attempts to extensively customize their products
and services according to the local conditions of different
countries.
(ii)
Global
strategy:
A
global
strategy
assumes
more
standardization of products across country boundaries. Under
this strategy, the company tries to focus on a low cost structure
by leveraging their expertise in providing certain products and
services and concentrating the production of these standard
products and services at a few favourable locations around the
world. Competitive strategy is centralized and controlled by the
home office.
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There are several reasons why companies go global. These reasons are as
follows:
a)
Rapid shrinking of time and distance across the globe due to faster
communication, speedier transportation, growing financial flows and
rapid technological changes
b)
Domestic markets are no longer enough to absorb whatever is
produced.
c)
Foreign markets have become large enough to justify foreign
investment.
d)
Reliable or cheaper resources available in other countries, e.g.,
cheap labour in India attract foreign investors.
e)
To reduce high transportation costs in case of exports to remote
countries.
f)
To improve sales volume to support high overheads or R&D
expenses like in electronics and technology products.
Manifestation of Globalisation
1) Configuring anywhere in the world - An MNC can locate its different
operations in different countries on the basis of raw material
availability, consumer markets and low-cost labour.
2) Interlinked and interdependent economies - Economies are
increasing international trade as each countrys prosperity is
interlinked with the rest of the world. No nation can any longer
succeed alone without international trade and assistance.
3) Lowering of trade and tariff barriers - The trade tariffs and custom
barriers are getting lowered, resulting in easy foreign trade and
cheaper and abundant supply of goods internationally.
4) Increasing trend towards privatization - Governments everywhere
are withdrawing from owning and running business enterprises.
[ACA,
1.13
Why do companies go global?
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Transnational strategy: Many large multinational firms,

particularly those with many diverse products, may use a multidomestic strategy with some product lines and a global strategy
with others. A transnational strategy seeks to combine aspects of
both multi-domestic and global strategies. Thus there is
emphasizes on both local responsiveness and global integration
and coordination.
When a firm adopts one or more of the above strategies, the firm
would have to take decisions on the manner in which it would
commence international operations.
The decision as to how to enter a foreign market can have a
significant impact on the results. Expansion into foreign markets
can be achieved through following options:
Exporting.
Licensing/ Franchising.
Joint Venture.
Foreign Direct Investment.
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Private entrepreneurs are given greater access and freedom to run
business units who are in no way committed to work in their own
country only.
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5) Market-side efficiency - Integration of global markets implies that

costs, quality, processing time, and terms of business become very
important. Customers can make a genuine choice of products and
services on the basis of maximum value for money.
6) Formation of regional blocks - The signing of cooperation treaties,
like SAARC, create new markets and manufacturing opportunities for
member countries and threaten to disrupt the plans and strategies
of non-members.
7) Mobility of skilled resources: Skilled labour was once considered to
be the decisive factor in plant location and even in determining
comparative advantage of a nation. Modern factories use highly
skilled labour which is freely mobile. Where labour is unskilled,
managements are spending vast sums of money to train workers
become skilled in their jobs.
13. PESTLE ANALYSIS

The term PESTLE is used to describe a framework for analysis of
macro environmental factors.
PESTLE analysis involves identifying the political, economic, sociocultural, technological, legal and environmental influences on an
organization and providing a way of scanning the environmental
influences that have affected or are likely to affect an organization
or its policy.
PESTLE analysis is an increasingly used and recognized term,
replacing the traditional framework for monitoring environment
known as PEST analysis.
The Key Factors

1) Political factors are how and to what extent a government
intervenes in the economy and the activities of corporate.
Furthermore, governments have great influence on the health,
education and infrastructure of a nation.
2) Economic factors have major impacts on how businesses operate
and take decisions. For example, interest rates affect a firm's cost of
capital and therefore to what extent a business grows and expands.
The money supply, inflation, credit flow, per capita income, growth
rates have a bearing on the business decisions.
3) Social factors affect the demand for a company's products and
how that company operates.
4) Technological factors can determine barriers to entry, minimum
efficient production level and influence outsourcing decisions.
Furthermore, technological shifts can affect costs, quality, and lead
to innovation.
PRACTICAL WAY
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5) Legal factors affect how a company operates, its costs, and the
demand for its products.
6) Environmental factors affect industries such as tourism, farming,
and insurance. Growing awareness to climate change is affecting
how companies operate and the products they offer--it is both
creating new markets and diminishing or destroying existing ones.
ENVIRONMENT
For any organisation to live and survive, it is important that it responds

positively to its environment and the changes in it. The strategic
responses of an organisation to its environment are as follows:
1.
Least resistance: Some businesses just manage to survive by way

of coping with their changing external environments. They are
simple goal-maintaining units. They are very passive in their
behaviour and are solely guided by the signals of the external
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Nov 2014
14. STRATEGIC RESPONSES
1.15
CA KUNAL AGRAWAL
These are the factors that require to be considered in the matrix. Then
transpose the final items that we have identified from your list to a
PESTLE matrix.
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1.16
CA KUNAL AGRAWAL
environment. They are not ambitious but are content with taking
simple paths of least resistance in their goal-seeking and resource
transforming behaviour.
2.
Proceed with Caution - It is a reactive type of response where

organisations take intelligent steps to adapt with the changing
external environment. These organisations monitor the changes in
that environment, analyse their impact on their own goals and
activities and translate their assessment in terms of specific
strategies for survival, stability and strength.
3.
Dynamic Response - It is a proactive type of response where

businesses regard the external environmental forces as partially
manageable and controllable by their actions. Not only do they
recognise and ward off threats, they convert threats into
opportunities. They are highly confident of their strengths and
conscious of their weaknesses.
Shaping external environment

Although it is not possible to shape the external environment, an
organisation can try to regulate environmental influences to its
advantage.
External environment in larger and more inclusive than the
individual organization; presumably the former commands more
resources and its interests and values are much broader than those
of the latter.
An innovative and autonomous organization generates its own
constraints. It is not above the rule of law and logic of the external
environment. Within certain limits, such an organization can shape
part of its relevant external environment on a reciprocal basis.
15. PORTERS FIVE FORCES MODEL - COMPETITIVE ANALYSIS

Porters five forces model of competitive analysis is a powerful and
popular tool for assessing the main competitive forces in any industry and
their strength and importance to an organisation. This model holds that
the state of competition in an industry is the sum of competitive pressures
operating in five areas of the overall market:
1) Competitive pressures associated with the market maneuvering and
jockeying for buyer patronage that goes on among rival sellers in
the industry.
2) Competitive pressures associated with the threat of new entrants
into the market.
3) Competitive pressures coming from the attempts of companies in
other industries to win buyers over to their own substitute products.
4) Competitive pressures stemming from supplier bargaining power
and supplier-seller collaboration.
5) Competitive pressures stemming from buyer bargaining power and
seller-buyer Collaboration.

PRACTICAL WAY
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The way one uses the five-force model to determine what competition is
like in a given industry is to build the picture of competition in three steps:
Step 1: Identify the specific competitive pressures associated
with each of the five forces.
Step 2: Evaluate how strong the pressures comprising each of the
five forces are (fierce, strong, moderate to normal, or weak).
Step 3: Determine whether the collective strength of the five
competitive forces is conducive to earning attractive profits.
b)
Threat of new entrants: New entrants are always a powerful

source of competition because they generally enter with new
products/offers/capacities /product range, etc. The bigger the new
entrant, the more severe the competitive effect. New entrants also
place a limit on prices and affect the profitability of existing players.
c)
Bargaining power of customers: There is always a threat to the

loyalty of a customer. Particularly in competitive markets,the
customer always has a dominating position. The bargaining power
of a customer increases when there are new entrants or substitutes
in market.
d)
Bargaining power of suppliers: If the suppliers are limited in

number or if they have other buyers then they can show their
bargaining power. They may demand better prices for raw
materials and other inputs of the industry and, therefore determine
industry attractiveness and profitability.
e)
Threats from substitutes: Substitute products offering a better

price and/or performance to the consumer can drastically change
the competition in an industry. For example, expensive cotton
clothes are mainly replaced by inexpensive and durable polyester
clothes. Substitutes usually limit the sales, prices and profits in an
industry.
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Rivalry among current players: There is always a tough fight in

any industry among current players. Rivalry among existing players
can affect the prices, quality, profitability etc. to a great extent. All
existing firms try to do their best in terms of products, prices, costs,
services to customers, production facilities, product development,
advertising, sales force, etc.
1.17
Nov 2009
a)
CA KUNAL AGRAWAL
Nov 2011
Now lets discuss the 5-factors in detail
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CA KUNAL AGRAWAL

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MYNOTES

CHAPTER 1 BUSINESS ENVIRONMENT

Every business functions with certain set objectives in mind. Every

CHAPTER 1 BUSINESS ENVIRONMENT

1) Business does not function in an isolated world.

IN UNDERSTANDING THE ENVIRONMENTAL INFLUENCES

1) The environment encapsulates many different influences;

TO UNDERSTAND THE ENVIRONMENTAL INFLUENCES

Environmental Analysis refers to detailed evaluation of the external

Basic and Additional Goals

1) Environment is complex - The environment is not made of any

Firstly, take an initial view of the nature of the organizations

Framework help in identifying key issues, find ways of coping with

CHAPTER 1 BUSINESS ENVIRONMENT

dynamism in the environment causing it to continuously change its

The environment in which an organization exists could be broadly

ITSM no more a Theory Subject:: Learn & Understand ITSM in

CHAPTER 1 BUSINESS ENVIRONMENT

the The factors include the following:

Micro-environment is the specific or the task environment of a business

a) OwnersProprietor, partners, shareholders, etc., who invest

4. Suppliers: The suppliers refer to the providers of inputs, like raw

Macro-environment is the general environment of a business which affects

a) The existing and the potential demand b) Market growth rate

3. Market: Market refers to the system of contact between an

c) EmployeesPeople who actually do the work in an organisation.

CHAPTER 1 BUSINESS ENVIRONMENT

1. Demographic Environment: The term demographic denotes

3. Political-legal Environment: Political-legal Environment is a

2. Economic Environment: The economic environment refers to the

CHAPTER 1 BUSINESS ENVIRONMENT

4. Socio-cultural Environment: Socio-cultural environment is a

Legal: Business organisations prefer to operate in a country

5. Technological Environment: It is a collection of technological factors

d) How critical is each technology to each of these products and

in a Competitive Environment : Theoretically,

b) What are their product and

a) Who are the competitors?

CHAPTER 1 BUSINESS ENVIRONMENT

Three Characterstics of a Global Company

Strategic Approaches for Globalisation

7. Global Environment: Global environment refers to the environment in

own significant amounts of each others stock,

International economic dynamics accompanied by geographical changes

Why do companies go global?

Transnational strategy: Many large multinational firms,

CHAPTER 1 BUSINESS ENVIRONMENT

5) Market-side efficiency - Integration of global markets implies that

13. PESTLE ANALYSIS

The Key Factors

For any organisation to live and survive, it is important that it responds

Least resistance: Some businesses just manage to survive by way

14. STRATEGIC RESPONSES

CHAPTER 1 BUSINESS ENVIRONMENT

Proceed with Caution - It is a reactive type of response where

Dynamic Response - It is a proactive type of response where

Shaping external environment

15. PORTERS FIVE FORCES MODEL - COMPETITIVE ANALYSIS

ITSM no more a Theory Subject:: Learn & Understand ITSM in

Threat of new entrants: New entrants are always a powerful

Bargaining power of customers: There is always a threat to the

Bargaining power of suppliers: If the suppliers are limited in

Threats from substitutes: Substitute products offering a better