23606461 nature of business environment

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Nature of Business Environment

2009

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Introduction to BusinessBusiness 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.All businesses share the same purpose to earn Profits . However, the purpose of businessgoes 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 servicesCreation of job opportunitiesOffer of better quality of life

Contributing to the economic growth of the country and putting it on the global map

Scope of BusinessBusiness included all activities connected with production, trade, banking,insurance, finance, agency, advertising, packaging and numerous other relatedactivities. Businesses include all efforts to comply with legal restrictions andgovernment requirements and discharging obligations to consumers, employees,owners and to other interest groups which have stakes in business directly or indirectly.

Society cannot do without business and vice versa.

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Characteristics of Todays Business

Business

Information

Competition

Change - TransitionOpportunities

Diversification

Globalisation

Technology

Business during the 21 st Century There is a trend towards mini organizations along with large corporations. Existence of flexible, flat and team based structures Business is knowledge based. Processes have become complex. Brain power is in

great demand. Information technology will take care of all data management and networkedcomputers handle information.

Organizations have become flat. Dispersed ownership, open minded and a transparent environment is encouraged

1. Three types of diversification maybe distinguished : Concentric, horizontal andconglomerate diversification. Concentric diversification refers to the process of addingnew, but related products or services. Eg : HLL which as Liril, Pears, Rexona, Lux andLifebuoy. Horizontal diversification is adding of new, unrelated products or services for

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EnvironmentEnvironment refers to all external forces which have a bearing on thefunctioning 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 andtheir 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 twocomponents ie business opportunities and threats to business.Simmilarly, the organisational environment has two componentsie. strengths and weaknesses of the organisation. A SWOTanalysis is thus the first step in strategy formulation

Business DecisionInternal Environment External Environment

Factors influencing Business Decision

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BusinessDecision

Internal Environment

Mission / ObjectivesManagement StructureInternal Power RelationshipPhysical Assets & facilities

Company imageHuman resourcesFinancial CapabilitiesTechnological CapabilitiesMarketing Capabilities

FinanciersSuppliersCustomersCompetitorsPublicMktg Intermediaries

Micro Environment

Economic

TechnologicalGlobalDemographicSocio-CulturalPolitical

Macro Environment

BUSINESS ENVIRONMENT

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Internal Environment

Any business has certain vision, mission and objectives and astrategy to achieve them. Formulation of strategy is defined asestablishing a proper firm-environment fit . Indeed the objectivesshould be based on an assessment of the external environmentand the organizational factors (internal environment).VisionMissionObjectivesManagement StructureHuman ResourcesFinancial FactorsCompany Image and Brand Equity

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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 aposition to change its environment . Macro Environment includes :

Political Environment

Economic EnvironmentTechnological EnvironmentSocio-cultural EnvironmentGlobal Environment.

Macro Environment

Micro Environment

The Micro environment consists of different types of stakeholders -

customers, employees, suppliers, marketing intermediaries, competitors. It isalso known as the Task Environment and Operating Environment and has adirect bearing on the operations of the firm. Changes in the microenvironment will directly affect and impinge on the firm's activities.

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Technological Environment

Technological is the systematic application of scientific or other organized knowledge to practical tasks.Technological environment hold new technological innovation, newproducts, 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 enablefirms to get a competitive advantageTechnology reaches people through businessHelps in increased productivityBusiness needs to spend on R & D and keep up with the technologicaladvances around themTechnology leads to introduction of new products and older productsbecoming outdated and redundant.Technological advances leads to high expectations of consumers interms of qualityLeads to system complexityDemand for capital

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Political Environment

Political Environment refers to the influence exerted by the threepolitical institutions ie. legislature, executive and judiciary inshaping, directing, developing and controlling business activities.

The constitution of a country

Political OrganisationPolitical StabilityImage of the country and its leadersForeign PolicyLaws governing business

Flexibility and adaptability of lawsThe Judicial System

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Economic Environment

Economic Environment refers to all forces which have an economicimpact on Business.The economic environment consists of the demand dynamics, supplysituation, pricing factors, degree of competitiveness, and impact of profitability. It includes the fiscal policy, monetary policy and thetaxation policy, the FDI norms, the investment criterion and financingdecisions. Economic environment includes:

Growth strategyIndustry

AgricultureInfrastructureMoney and Capital Markets

Per capita and national incomePopulationNew Economic Policy

.

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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 marketImproving qualityCompetition from MNCsCapital and technology transfersDeciding which markets to enter and what products to manufacture

Adjusting the management process

Socio-Cultural Environment:Culture creates peopleCulture and globalization

Culture determines peoples attitude to business and work.Caste systemSpirit of collectivismEducationEthics in businessSocial responsibility

Social auditCorporate governance

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External Environmental AnalysisEnvironmental Analysis has three goals:

Provides an understanding of current and potential changes taking placeEnvironmental 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 anticipateopportunities and to plan to take optional responses to these opportunities. Italso helps strategists to develop an early warning system to prevent threats or todevelop strategies which can turn a threat to a firms advantage. Firms whichsystematically analyse and diagnose the environment are more effective thanthose which do not.

Process of Environmental Analysis:The analysis consists of four steps:

Scanning : Detect early signals of possible environmental change and detectenvironmental change already underway.Monitoring : Purpose of monitoring is to assemble sufficient data to discernwhether certain trends are emerging, identification of the trends andidentification of areas for further scanning.Forecasting : It is concerned with developing projections of the direction, scopeand intensity of environmental change.Assessment : To determine implications for the organisations current andpotential strategy.

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Environmental Analysis and Strategic Management

Defining Business Mission and Objectives

SWOT AnalysisEnvironmental Analysis + Self Appraisal

Strategic Alternatives and Choice of Strategy

Implementation of Strategy

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Competitive Structure of Industries

The competitive structure of industries is a very important businessenvironment. Identification of forces affecting the competitive dynamicsof 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:

Porters analysis determines the competitive intensity of the industry andthe attractiveness of the market. A highly competitive industry is oneapproaching Perfect Competition whereby businesses are only able toearn normal profits.

Rivalry among firms Buyers

Substitutes

New Entrants

Suppliers

Threat of new entrants

Threat of substitutes

Bargaining powerBargaining power

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Rivalry among Existing firms:

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

Number of firms and their Relative market shareState of Growth of Industry: In stagnant, declining and slow growth industries, afirm is able to increase its sales by increasing the market share.Fixed or storage costs: In case of high fixed costs, strategy of firms is to increasesales which in turn would improve on capacity utilization.Indivisibility of capacity augmentation : Where there are economies of scale,capacity increases would be in large blocks necessitating, efforts to increase salesto achieve capacity utilization norms.Product standardization, after sales service: In case of firms which havestandardized products; it is price, distribution and after sales service which becomethe distinguishing factors.Strategic stake: Rivalry becomes more intensive if the firms have high stakes inachieving success there.Exit Barrier: If exit barriers are high, firms would keep competing in the sameindustry even though it might not be very attractive.Diverse Competition: Competitors with diverse strategies make the industry highlycompetitive.Switching costs: One time costs that the buyer faces on switching from onesuppliers product to that of another ie cost of new ancillary equipment etc.Expected Retaliation

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Threat of Entry:

Potential competition tends to be high if the industry is profitable or critical and entry barriers are low. Some of the common entry barriersare:Government PolicyCost Disadvantages: Cost advantages enjoyed by established firmsmay discourage entry of new firms such as learning curve, favorablelocation etc.Product Differentiation: Characterized by brand image, customer loyaltyetc. may deter new firms from entering the market.Monopoly ElementsCapital Requirements : High capital intensive nature of the industry isan entry barrier to small firms

Threat of substitutes An industry which has close substitutes available is highly competitivein nature. Existence of close substitutes increases the propensity of consumers to switch to alternatives in response to price increases.Perceived level of product differentiation in the minds of the consumer is also a highly influential factor. 16


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Bargaining power of Buyers :Buyers can in turn also be potential competitors as they may integrate

backwards or bargain for lower costs, better quality of the product etc.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 costExtent of standardization or differentiation of the productSwitching costsExtent of buyers information

Bargaining power of sellers:Important determinants of supplier power are the following:

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 productSwitching costsExtent of standardization of the productPotential for forward integration by suppliers

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SWOT AnalysisSWOT stands for Strengths, Weaknesses,Opportunities and Threats

Identification of the threats andopportunities in the external environmentand strengths and weaknesses in the internalenvironment of the firms are the cornerstoneof business policy formulation.

It is the SWOT analysis which determinesthe course of action to ensure the growth /survival of the firm.

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StrengthsStrengthsinternal to the unit; are a units resources and capabilities that canbe 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 thisorganization and its work?

Examples: good reputation among customers, resources, assets, people, :experience, knowledge, data, capabilitiesThink in terms of: capabilities; competitive advantages; resources, assets,people(experience, knowledge); marketing; quality; location; accreditationsqualifications, certifications; processes/systems

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Weaknesses Weaknessesinternal force that could serve as a barrier tomaintain or achieve a competitive advantage; a limitation, faultor defect of the unit; It should be truthful so that they may be overcome as quicklyas 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 bedoing? If you could change one thing that would help this departmentfunction more effectively, what would you change?

Examples: gaps in capabilities, financial, deadlines, morale lack of competitive

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Opportunities Opportunitiesany favorable situation present now or inthefuture in the external environment.

Examples: unfulfilled customer need, arrival of newtechnologies, 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

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Threats External force that could inhibit the maintenance or attainmentof acompetitive advantage; any unfavorable situation in the externalenvironment that is potentially damaging now or in the future.

Examples: shifts in consumer tastes, new regulations, political orlegislative effects, environmental effects, new technology, loss of key staff, economic downturn, demographic shifts, competitorintent; 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?

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POSITIVE/HELPFUL

to achieving thegoal

NEGATIVE/HARMFUL

to achieving thegoal

INTERNAL Origin

facts/ factors of theorganization

StrengthsThings that are good

now, maintainthem, build onthem and use as

leverage

WeaknessesThings that are bad

now, remedy,change or stopthem.

EXTERNAL Originfacts/ factors of the

environment inwhich the

organizationoperates

OpportunitiesThings that are good

for the future,prioritize them,capture them,build on themand optimize

ThreatsThings that are bad

for the future, putin plans to

manage them orcounter them

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SWOT Analysis of Indian Economy


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SWOT Analysis of Indian Economy

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

Weaknesses 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 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

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

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AN ORGANIZATIONS ENVIRONMENT

Industry SectorCompetitors ,

Industry size andCharacteristics, Related

Industries

Raw MaterialsSector

Suppliers,Manufacturers,Real Estate

HumanResourcesSector

Labor Market, EmploymentAgencies, Universities, TrainingSchools, Employees in Other

Companies, UnionizationFinancial Resources Sector

Stock Markets, Banks,Savings and Loans,Private Investors

MarketSector

Customers, Clients,Potential Users of Products and Services

TechnologySector

Techniques of Production, Science,Research Centers,Automation, NewMaterials

Economic

Conditions Sector

Recession, UnemploymentRate, Inflation rate, Rate of

Investment, Economics,Growth

Government Sector

City, State, Federal Laws andRegulations, Taxes, Services,Court System, PoliticalProcesses

Socio-Cultural sector

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

ORGANIZATION

DOMAIN

Task Environment

MacroEnvironment

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23606461 nature of business environment

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