Business & Environment Interface

Interaction of Business & its Surroundings

I. Micro environment of business.

1) Suppliers

Supply raw materials and other components

(Inputs)

Importance
Reliable supply continuous supply for smooth functioning
Contd 1

Business & Environment Interface Micro environment of business.

2) CUSTOMERS

Different categories of customers

i. Industrial customers

ii. Wholesale customers

iii. Retail customers

iv. Government customers

v. Foreign customers
Contd 2

Business & Environment Interface Micro environment of business.

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

Contd 3

Business & Environment Interface Micro environment of business.

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

Contd 4

Business & Environment Interface Micro environment of business.

Competitors:
1. The Threat of entry of new firm

1. Economies of scale
2. Capital Requirement 3. Access to Channel 4. Absolute cost advantage 5. Expected Retaliation 5. Government Policy 7. Differentiation

Economies of Scale Unit cost Inverse to units produced Measured by Minimum Efficient Scale Or Market share MES volume is necessary to compete at minimum cost.

Strategy : Just in time & Lean

manufacturing to counter economies of scale Capital requirement Internet / Knowledge based services less costly

Business & Environment Interface Micro environment of business.

Competitors:
1. The Threat of entry of new firm

1. Economies of scale
2. Capital Requirement 3. Access to Channel 4. Absolute cost advantage 5. Expected Retaliation 5. Government Policy 7. Differentiation Access to Channel Self help groups / Social networks New channels of distribution

Absolute cost advantage Learning curve effect Cost advantage Expected Retaliation GSM Players like Airtel ,Spice retaliated entry of CMDA player Reliance Communication to operate in GSM field Government Policy Import of sugar, Edible oils, Steel , Liberation of Insurance & other sectors Differentiation Existing company Strong brand image, wide range of products to cover all segments

Business & Environment Interface Micro environment of business.

Competitors:
2. The Power of Buyers:
1. Concentration of buyers 2. Alternative source of supply 3. Component cost as a percentage of total cost 4. Possibility of backward integration

Concentration of buyers Small no. of buyer + High Volume purchase High buyer power Alternative source of supply More supply source high buyer power Honda, Suzuki, Component cost as a % of total cost High proportion of component/material cost to finished goods leads to looking for alternatives. Possibility of backward integration Buyers own supply chain more buyer power Co-opratives , Self help groups,
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Business & Environment Interface Micro environment of business.

Concentration of Sellers Competitors: Small no. of Sellers High seller power Like Monopoly & Oligopoly 3. The Power of Sellers: Switching Costs 1. Concentration of Sellers High switching cost to other seller source - Seller power increase 2. Switching costs High-Tec & Specialised goods - SAP 3. Brand power Brand Power 4. Possibility of forward integration High brand power High power 5. Dependence on customers Ariel , Surf Excel - Supermarkets have Dependence on customers to sell it Not depending on High volume small Possibility of forward integration no.of buyers more seller power Sellers own distribution operation More power
8

Business & Environment Interface Micro environment of business.

Competitors:
4. Threat of Substitution: Non-essential goods where there is the ultimate substitute of doing without That: 1. Relative Price & Performance of substitutes 2. Switching Costs 3.Buyers willingness to substitute

Relative performance & Price of Substitutes Substitutes with same cost High threat Email replaced Post Offices Switching costs The Cheaper switching cost - High threat Pet foods , Fast foods , Malls Buyers Willingness to substitute Low-cost articles & infrequent purchase of articles little effort made to go for substitutes Match box Lighter

Business & Environment Interface Micro environment of business.

High fixed costs Competitors: High Fixed cost High break even point 5. Competitive Rivalry: In depression times Price war to 1. Industry Growth maintain turnover 2.High Fixed costs 1990 UK & USA accused each of dumping Steel on Export market 3. Volatile Demand Volatile Demand 4.Product Differentiation 5. Extra Capacity in large increments May lead to intermittent Over-capacity Steel war -1990 6. Balance of firms Product Differentiation 7. High exit barriers Homogeneous products More intense Industry Growth: the rivalry - Steel Rapid Growth Competition need Extra capacity in large increments not be intense Maturity Phase- Intense competition Creates short term over capacity . Honda Nissan plant in UK
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Business & Environment Interface Micro environment of business.

Competitors:
5. Competitive Rivalry:

1. Industry Growth 2.High Fixed costs 3. Volatile Demand 4.Product Differentiation 5. Extra Capacity in large increments 6. Balance of firms 7. High exit barriers

Balance of firms If the no. of firms is large / similar size the rivalry will be intensive. Clear market leader can bring discipline High exit barriers High exit barriers Excess capacity to persist and rivalry to be intense

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Business & Environment Interface Macro environment of business.

1. Demography:
Quantitative aspects of population. Qualitative aspects of population.
1. Population Growth 2. Drivers of Population Changes 3. Ethnicity of Population 4. Implications of Demographic Changes Population Growth: Year 1000 Estimated 300 million Year 1750 Actual 728 million Year 1900 Actual 1500 million Year 1960 Actual 3 billion Year 2000 Actual 6 billion

Drivers of Population Changes Birth Rate No. of births per 1000 population Fertility Rate- Av. No. of birth per women Death Rate - No. of deaths per 1000 Migration Country to Country movement Implication Consumer, Labour , Employment participation

12

Business & Environment Interface Macro environment of business.

2. Economic environment
i.
ii.

Economic conditionsEconomic policies

GDP, Business Cycle, Unemployment, Inflation, Balance of Payment, Fiscal Policy, Monetary Policy, Exchange rate Policy, Interest Rate.

a) Budget
b) Industrial policy c) Trade policy

d) Agricultural policy
iii. Economic system- Capitalistic, Socilalitic, Mixed
Contd 13

Business & Environment Interface Macro environment of business. 3.Political environment

i. Legislature - Labour Laws like Factories Act, EPF Act, ESI

Act, Industrial Disputes Act, Minimum Wages Act, Payment of Wages Act, etc

MRTP Act, Law of Contracts, Companies act, IDRA Act, FERA, Import & Export Control act, Tax Laws

i. Executive- Administrators

ii. Judiciary - District, High Courts, Supreme Court, Tribunals

Contd 14

Business & Environment Interface Macro environment of business. 4. Socio cultural environment i. Attitude of people towards work and health.

ii. Role of family.

iii. Marriage.

iv. Religion.
v. Education vi. Ethical issues vii. Social responsibility of business
Contd 15

Business & Environment Interface Macro environment of business.

5. Natural environment

i.

Natural resources.

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

Contd 16

Business & Environment Interface Macro environment of business.

6. Technological environment

i.

Nature of technology

ii. Scope for innovation

Contd 17