Nature of Business Environment

Introduction to Business

Business is the organized efforts of enterprises to supply consumers

with goods and services. Businesses vary in size as measured by
number of employees or by sales volume. Most business units in our
country are small units independently owned and managed and
employing fewer than twenty employees each.
All businesses share the same purpose to earn Profits. However,
the purpose of business goes beyond earning profits.
It is an important institution in society and the role of business is crucial.

Be it for the supply of goods and 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

Society cannot do without business and vice versa.

Scope of Business

Business included all activities connected with production,

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

Characteristics of Todays Business

Change
Government
Interference

Vast Canvass

Business
Competition

Diversification

Information
Science

Globalisation

Business during the 21st Century

There is a trend towards mini organizations alongwith large
corporations.
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.

Environment

Environment refers to all external forces which have a bearing

on the functioning of business. Environment are largely if not
totally external, and beyond the control of individual industrial
enterprises and their management. These are essentially the
givers within which firms and their managements must
operate in a specific country and they vary, from country to
country.

However, the term business environment refers to

the External Factors. The external environment has
two components ie business opportunities and threats
to business.
Simmilarly, the organisational environment has two
components
ie. influencing
strengthsBusiness
and weaknesses
of the
Factors
Decision
organisation. A SWOT analysis is thus the first step in
strategy formulation

Internal Environment

Business Decision

External Environment

BUSINESS ENVIRONMENT
Macro Environment
Micro Environment

Internal Environment
Financiers
Suppliers
Customers
Competitors
Public
Mktg Intermediaries

Mission / Objectives
Management Structure
Internal Power Relationship
Physical Assets & facilities

Business
Decision
Company image
Human resources
Financial Capabilities
Technological Capabilities
Marketing Capabilities

Legal
Economic
Technological
Global
Socio-Cultural
Political

Internal Environment

Any business has certain vision, mission and objectives

and a strategy to achieve them. Formulation of strategy
is defined as establishing a proper firm-environment fit.
Indeed the objectives should be based on an
assessment of the external environment and the
organizational factors (internal environment).
Vision
Mission
Objectives
Management Structure
Human Resources
Financial Factors
Company Image and Brand Equity

Objectives of a Business Organisation

Profit
Growth
Power
Employee Satisfaction and Development
Quality Products and Services
Market Leadership
Challenging
Joy of Creation
Service to Society
Good Corporate Citizenship

Micro Environment
The Micro environment consists of different types of stakeholders customers, employees, suppliers, marketing intermediaries, competitors. It
is also known as the Task Environment and Operating Environment and has
a direct bearing on the operations of the firm. Changes in the micro
environment will directly affect and impinge on the firm's activities.

Macro Environment

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 a position to change its
environment. Macro Environment includes:

Political Environment
Economic Environment
Technological Environment
Socio-cultural Environment
Global Environment.

Technological Environment

Technology is the systematic application of scientific or other

organized knowledge to practical tasks. Technological
environment hold new technological innovation, new products,
the state of technology, the utilization of technology for
maximum inputs and outputs, the obsolescence of technology
and the dynamic changes that frequently occur in
technologies which enable firms to get a competitive
advantage
Technology reaches people through business
Helps in increased productivity
Business needs to spend on R & D and keep up with the
technological advances around them
Technology leads to introduction of new products and older
products becoming outdated and redundant.
Technological advances leads to high expectations of
consumers in terms of quality
Leads to system complexity
Demand for capital

Political Environment
Political Environment refers to the influence exerted by the three
political institutions ie. legislature, executive and judiciary in
shaping, directing, developing and controlling business
activities.

The constitution of a country

Political Organisation
Political Stability
Image of the country and its leaders
Foreign Policy
Defence and military policy
Laws governing business
Flexibility and adaptability of laws
The Judicial System

Economic Environment
Economic Environment refers to all forces which have an
economic impact 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 the taxation
policy, the FDI norms, the investment criterion and financing
decisions. Economic environment includes:

Growth strategy

Industry

Agriculture

Infrastructure

Money and Capital Markets

Per capita and national income

Population

New Economic Policy

.

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 the acceptance of product patents affects the
Indian pharmaceutical companies. Etc.

World is becoming one market

Improving quality

Competition form MNCs

Capital and technology transfers

Deciding which markets to enter and what products to manufacture

Adjusting the management process

Socio-Cultural Environment:

Culture creates people

Culture and globalization
Culture determines peoples attitude to business and work.
Caste system
Spirit of collectivism
Education
Family and marriage
Authority
Ethics in business
Social responsibility
Social audit
Corporate governance

External Environmental Analysis

Environmental 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 anticipate
opportunities and to plan to take optional responses to these
opportunities. It also helps strategists to develop an early warning system
to prevent threats or to develop strategies which can turn a threat to a
firms advantage. Firms which systematically analyse and diagnose the
environment are more effective than those which do not.

Process of Environmental Analysis:

The analysis consists of four steps:

Scanning : Detect early signals of possible environmental change and

detect environmental change already underway.

Monitoring : Purpose of monitoring is to assemble sufficient data to

discern whether certain trends are emerging, identification of the trends
and identification of areas for further scanning.

Forecasting : It is concerned with developing projections of the direction,

scope and intensity of environmental change.

Assessment : To determine implications for the organisations current and

potential strategy.

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

Rivalry among firms

Bargaining power of buyers

Bargaining power of suppliers

Threat of substitutes
Substitutes

Buyers

Rivalry among Existing firms:

Firms in an industry are mutually dependent competitive
motives of a firm usually affects others and may be
retaliated. Factors influencing the intensity of rivalry
are:

Number of firms and their Relative market share

State of Growth of Industry
Fixed or storage costs
Indivisibility of capacity augmentation : Where there are economies of
scale, capacity increases would be in large blocks necessitating, efforts
to increase sales to achieve capacity utilization norms.
Product standardization and after sales service
Strategic stake
Exit Barrier
Diverse Competition
Switching costs
Expected Retaliation

Threat of Entry:

Potential competition tends to be high if the industry is profitable

or critical, entry barriers are low. Some of the common entry
barriers are:

Government Policy

Economies of Scale: Can deter in two ways ie keep out small

players and discourages even potentially large players because
of the risk of large stakes.

Cost Disadvantages: Cost advantages enjoyed by established

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

Product Differentiation: Characterized by brand image,

customer loyalty etc. may deter new firms from entering the
market.

Monopoly Elements

Capital Requirements : High capital intensive nature of the

industry is an entry barrier to small firms

Bargaining power of Buyers:

The volume of purchase relative to the total sale of the seller

The importance of the product to the buyer in terms of the total
cost
Extent of standardization or differentiation of the product
Switching costs
Importance of the industrys product with respect to the quality
of the buyers product or services.
Extent of buyers information

Bargaining power of sellers:

Extent of concentration and domination in the supplier industry

Importance of the product to the buyer
Importance of the buyer to the supplier
Extent of substitutability of the product
Switching costs
Extent of standardization of the product
Potential for forward integration by suppliers

AN ORGANIZATIONS ENVIRONMENT
Industry Sector
Competitors,

Raw Materials
Sector

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

Government Sector

Task Environment

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

City, State, Federal Laws and

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