Business Environment

Dr. Mrutyunjay Dash

Meaning and Definition:
 Environment literally means the surroundings, external objects, influences, or
circumstances under which someone or something exists. In the words of
Davis” the aggregate of all conditions, events and influences that surround
and affect it”.
 Business policy of an organisation is influenced by two set of factors.
 External and internal
 The internal factors are known as controllable factors for example a committed labour
force.
 The organisation has control over these factors.
 It can modify or alter such factors to suit the environment.
External factors are known as uncontrollable: such
factors are largely beyond the control of the individual
enterprise for example the ecological environment
represents the external environment.
While the internal environment reveals an
organisation’s strengths and weakness, the external
environment reflects the opportunities available to the
organisation and the threat it faces.
Important Internal Factors:
 Organisational resources
 Research and development
 Technological capabilities
 Financial capabilities
 Marketing capabilities
 Operations capabilities

However the term “business environment” generally refers to the

external environment and includes factors outside the firm which can
lead to opportunities for or threats to the firm. Although there are
many external factors, the most important factors are economic,
governmental, legal, technological, geographic, and social.
Major pollutants of internal environment:
 Conflict bt. Managers & workers
 Inter-departmental conflicts and mistrust
 Unhealthy competition bt. employees
 Office politics and discrimination at workplace
 Corruption
 Nepotism and misuse of office position
 Disloyalty and espionage for outsiders.
 Every company’s policy is in many ways affected by its
environment, because the accomplishment of its objective
depends largely on the degree of interaction of the
enterprise with its environment. The environment imposes
several constraints on the enterprise has considerable
impact and influence on the scope and direction of its
activities.

 Business environment enables the corporate policy

maker in the following important ways.

 Perform the critical function of making the needs

of the society and the capacity of the goods and
services to satisfy the needs of the people.
 Adapt the organisation itself to the dynamic
conditions of the society.
 Match the organisational policies and resources
with the social needs.
 Contribute to the social responsibility of business.
 Executives are able to adjust to the prevailing
conditions and thus influence the environment in
order to make it congenial for business.
Environmental factors:
 Many factors can be included in the environmental factors: social,
economic, cultural, geographical, technological, political, legal and
ecological factors, in addition to govt. policies, labour factors,
competitive market conditions and so on.
 Some of the most important factors:
 Social Factors: Every business organisation has a social responsibility.
It operates within the norms of the society and strives to satisfy the
needs and wants of the society.
 There are many social factors which affect the policy and strategy of
corporate management. Culture, values, tastes and preferences,social
integration happen to be a part of the agenda of every business
organisation. Davis and Blomstrom” a business is a social institution
performing a social mission and having a broad influence on the way people
live and work together.”
Economic Factors:
The economic factors that influence a business environment are
per capita income, national income, infrastructure development,
capital formation, resource mobilisation, exploitation of natural
resources.
Growth and Distribution environment:
GDP:
Personal consumption expenditure
Gross pvt. Domestic investment
Govt. expenditure on consumption and investment
Net exports [X-M]
Economic System:
Decision on three basic questions:
 What products should be produced and in what quantities?
 How should the products be produced?

 For whom should the products be produced?

Market Economy:
It is an economic system in which the basic economic decisions
are left to the market mechanisms for solutions.
Decisions by firms: product, targeting customers, pricing and profits.
Command Economy:
Productive assets owned & operated by govt.
Govt: Important decisions about production and distribution
Owning and operating enterprises.
Mixed Economy:
Important roles by public and private sector
Role of govt. both developmental and regulatory
Allocation of GDP:
Labour: wages and salaries
Capital owners: Interest
Land owners: Rent
Entrepreneurs: Profits
Govt: Taxes
A country with a high level of national income signifies good market potential
in aggregate terms. [Facilitates International trade and investment]
Major factors affecting growth:
Availability & quality of raw materials
Quantum and quality of capital stock
Entrepreneurship
Innovation and human skills
Availability of quality infrastructure
Social development & standard of Governance and
administration
Cultural Factors:
Managers and policy makers in a global business cannot disregard
cultural variables like social and religious practices, education,
knowledge, rural community norms and beliefs.
India:
Social stratification plays a vital role in rural societies while cultural
differences are unthinkable for any international manager or even an
urban Indian manager.
Geographic Factors:
In a global business environment, geographic location, seasonal
variations, climatic conditions, and so on considerably affect the tastes
and preferences of customers and prospects as well as the labour force.
The industrial location policies of the govt. are considerably influenced
by the pace of development in various geographic locations.
Technological Factors:
The technological factors consist of those factors which relate to
knowledge applied and the materials and machines used in the production
of goods and services that have an impact on the business of an
organisation.
Important Factors:
 Sources of technology like company sources, external sources and
foreign sources, cost of technology acquisition, collaboration in and
transfer of technology.
 Technological development, stages of development change and rate
of change of technology and research and development.
 Impact of technology on human beings, the man-machines system
and the environmental effects of technology.
 Communication and infrastructural technology and technology in
management.
 Rising Petrol Prices: Automobile Industry
Allopathic Drugs: Procter &Gamble Ltd. Along with Richardson
Hindustan Ltd. /Herbal solution to common chronic ailments.
Marketing Factors:
Marketing capability relate to the pricing, promotion and distribution of products
or services and all the allied aspects that have a bearing on an organisation’s
capacity and ability to implement its strategies.
Important Factors:
 Product related factors
Variety,
Differentiation
Mixed quality
Packaging, etc.
 Price-related factors like pricing policies, changes and consequent
repercussion
 Promotion related factors like sales promotion, advertising.
 Real life Illustrations:
 Weakness transferred to strength: Procter &
Gamble/1981-81/boycott from chemists’ association for higher
trade margins/reclassification of its products as aurvedic/now
products could be sold by the non-chemists also.
 Operations Factors:
These factors relate to the production of the products or services,use
of material resources and all allied aspects that have a bearing on an
organisation’s capacity and ability to implement its strategies.
Key Factors:
 Factors related to the production system like capacity,
location, layout, product or service design, work system,
degree of automation.
 Factors related to the operation and control system like
aggregate production planning, material supply,
Inventory, cost and quality control, etc.
 Factors related to the R & D system like personal facilities, product
development, patient right ,level of technology, technical collaboration and
support.
 Real life illustration:
 Cadila Laboratories, part of the Cadila group of companies /third largest
drugs company in India/It claims to have developed the knowhow for
fifteen drugs and has signed a protocol with the Soviet Institute of
Immunology for a joint scientific research forum.
 Personal Factors:
 These relate to the existence and use of human resources and skills and all
allied aspects that have a bearing on an organisation’s capacity.
Important Factors
Manpower planning, selection, development, compensation,
communication and appraisal.
 Factors like corporate image, quality of managers, staff and
workers, perception about and image of the organisation as
an employer, availability of developmental opportunities for
employees.
 Factors related to industrial relations like union-management
relationship, employee satisfaction and morale.
 Real life situation:
 The growth of Apollo Tyres got seriously affected due to
industrial relation problems.
Location : Kerala:a highly militant,
literate and unionised work force
Drastic change in its Personnel Selection Policy:
>28yrs
Finanacially needy, married and settled people
Three years agreement
 Political Environment:
 Political environment consists of factors related to the
management of public affairs and their impact on the business
of an organisation.
 Link between political environment and economic system
 Govt. specification on matters related to advertising,
marketing.
 India: cig: Statutory warning
 Milk:…for infant
 Business decisions based on political considerations:
 Real life Situation:
 Janata Govt. after 1977: followed a socialist approach/Coca Cola & IBM
were forced to leave. Comparison with the present Govt.
Political Environment
Political environment has a risk level to which corporate
managers adjust inv. decisions.
Types of Political Risk:
Confiscation: Forcible possession of ownership of a property
without compensation by the Govt. [Country Reports on Human Rights Practices-2
005
Released by the Bureau of Democracy, Human Rights, and Labor
March 8, 2006]

Expropriation: Forcible possession of ownership of a property

with some compensation by the Govt. [may not equal market
value of property]
Nationalisation: A compulsive process of transfer of ownership
and operation of a property from pvt. to pub. Hand. [Nat. of com.
Banks in 1969]
Domestication: A process of transferring of ownership and
operation of Foreign company partly or fully to nationals.
FERA: 40% sell of shares to Indian nationals.
General Instability Risk: Uncertainty of existence with regard to
the viability of the existing political system.
Transfer Risk: It arises from the possibility of any future act of
the govt. by which it restricts transactions or transfer of funds or
profits between the subsidiaries of a firm or from a subsidiary to
the parent company. [When location of operation is outside the
country]
Legal Environment
Legal System:
Decisions on investment and operations
A sense of security and safety
Codes & procedures for various types of business
Infringement law: Bribery
Product counterfeiting
Black marketers
Consumer deception
Tax evasion
Apart from the general legal system there exists specific pieces
of business legislation which together guide, control and regulate
Business activity.
Industrial development and regulation:
Licensing
Registration of industries
Location of industries
Takeovers of industries
Foreign exchange management:
Transactions in foreign currency, foreign exchange realisation,
foreign trade and investment transactions.
Consumer protection: Consumer rights, consumer disputes
complaints and grievance redressal.
Weights, measures and packaging: Covering standard units,
packaging norms and declaration and inspection.
Copyrights: Covering ownership and licenses of copyright,
infringement.
Labour policy: Employees’ insurance, payment of gratuity,
bonus, employees provident fund, compensation and disciplinary
matters.
Professionally managed companies adhere to legal conformity
while running their business operations to protect their goodwill
assets.
 Regulatory Environment:
 It relates to planning and regulation of economic activities by the
Govt. which have long standing impact on the business of an
organisation.

 Constitutional Framework
 Directive principles
 Fundamental rights
 Policies related to licensing monopolies
 Policies related to Foreign investment
 Policies related to imports and exports
 Policies related to public-sector and small-scale industries.
Demographic Environment:
Size & growth of population: Supply of human resources
Demand for it : salary & wage structure [India & China]
Attraction for MNCs: Cheap labour
Markets with high population growth: Incentives for firms
[LOW MARKETING COST]
Age & sex ratio: Product mix
 Improper
Discourages Pvt.
balance bt eco.
investment
Growth & pop.
growth

Adversely
affects size Poverty,
of market malnutrition,

Overall
det.
Quality
of life
 Michael Porter’s International
Competitiveness Model
The conditions based on
which companies created,
Firm Strategy, structure &
Rivalry Demand Condition:
organized and managed
Home demand for
industry’s products &
services

Factor Endowment Local Demand Condition

Factor Endowments:
Skilled labour, capital,
technology or
infrastructure Relating and Supporting Industries
Presence & absence of supplier and
related industries in a nation
 Michael Porter’s Five forces Model

Threat of Substitutes

Bargain Power of Supplier Bargain Power of Buyer

Threat of Competitor

Threat of New Entrants

Threat of Competitors: The rivalry among sellers in the industry.
Threat of New Entrants: The potential entry of new competitors
Threat of substitutes: Market attempts of companies in other
industries to win customers over to their own substitute products.
Bargaining power of Suppliers: The competitive pressure
stemming from the supplier-seller collaboration and resultant
bargaining.
Bargaining Power of Buyers: The competitive pressure stemming
Seller-buyer bargaining.
Rivalry:
Tactical Tools:
 Lower prices
 Snazzier features
 Expanded customer service
 Longer warranties
 Special promotional offers
 Introduction of new products

When does rivalry become stronger?

Growing demand for a product
Dissatisfaction over market share of one or more competitors
When does rivalry become weaker?
Satisfaction over market share of most competitors
Threat of new Entrants:
Life is not that easy instead a challenge on thrilling fronts:
Economies of scale
Factors independent of scale:
Patents, favourable access to raw materials, favourable location, lower
borrowing cost, govt. subsidies
Learning & Experience
Switching costs: [Physical, psychological and financial] resist to switch
over
Access to Distribution: Reluctance to deal with a product new to the
market.
Sol:
Product differentiation
Capital Inensive
Threat of Substitutes:
I.Availability of attractively priced substitutes

II.Quality, performance and other attributes

III.Easy switch over to substitutes.

Bargaiang power of suppliers:

Higher is the number of suppliers…………
High B. Power: Advanced technology, expertise in making innovation
Bargaining power of Buyers:
What happens when many sellers, few buyers Pdn. Capacity exceeds
demand ?
Andrew Grove ,CEO OF Intel/SIXTH FORCE
Force of Complementary
Strategic Group:
These are conceptually defined as clusters of competitors that
share similar strategies and therefore compete more directly with
one another than with other firms in the same industry.
Do they form formal group?
No, but only conceptual clusters
Core areas:
Extent of product diversity
Extent of geographic coverage
Number of market segment
Distribution channel
Extent of branding
Pricing
Critical Success Factors:

FIRMS CSFs

FMCG Distribution
Network
Pharmaceuticals R&D

Steel, Aluminium Cost

Food chain firms, Logistic

McDonalds &supply Chain
Management
Industry Life Cycle Analysis:
Embryonic Stage
Initial Stage: High Cost—High Price
PC-US/1976 & India-1980
Voltas & Puff Technology
Growth Stage:
Economies of Scale—Fall in prices, high growth and high profits
New entrants- stiff comp
1990: Telcom in India.
Message:? If venturing into Growth industry?
Industry Shakeout:
Saturation of Demand & COMPETITION AMONG FEW
Mature Industry: Saturated demand [restricted to replacement]
Growth is ZERO
Bottom line of operation is very thin
Is pdt. differentiation at this stage possible?
Sol:
Promotional Campaign & reduced price
Declining Industry:
Growth becomes negative [technological Substitution]
CDs-------?
Social changes: Greater health consciousness
Demographic: declining birth rate—Toys Industry
International competition : A threat
ENVIRONMENTAL ANALYSIS:
Verbal or wriiten
Corporate Intelligence:
“as a technique of adopting industry/research expertise to analyse the
information available on competition from public sources and to draw
conclusion based on this data.”
Collection, analysis and utilisation of business related data of competitors.
Companies: Microsoft, Motorola, P&G, HP,IBM.
Corporate Espionage:
Spying on business competitors
Product design
Research Projects
Marketing Plan
Trade Secret
Intellectual property
GM & Volkswagen
P&G and LEVERS Brothers[1943]
Environmental Evolution:
Type of change
Forces driving change
Type of future evolution
Systematic and discontinuous change
Gradual changes, changes in a phased manner, or those that are predictable:
systematic change
A change in the ratio of youth in population of India
Rise in the income of middle class
Unpredictable or sudden changes: Twin tower terror
Driving change:
Packaged food
Rising purchasing power of the middle class
More working women
More awareness among the youth via mass media
Environmental Analysis:
Scanning the environment to detect warning signals
Monitoring specific environmental trends
Forecasting the direction of future environmental change
Assessing current and future environmental changes for their
organisational implications
Scanning: It draws attention to possible changes and events well before their
occurrence.
Monitoring: Movement from imprecise & unbounded to specific and focused
Forecasting: Development of plausible projections of directions, scope, speed
and intensity of environment change, and to lay out the evolutionary path of
anticipatory change.
Assessment: Identifying and evaluating how & why