bev-module 1- factors effecting business environment

Amity School of Business

MODULE – 1Overview of business

environment

Ravi Bhasin.

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What is business?• Organised efforts of enterprises for the supply of goods and services in a

society and making profit in the process.• An economic act, carried out by an organization to achieve some targets.

Importance of business1. An important institution in the society. Business and society are dependent on

each other2. Supplies goods and services 3. Creates employment4. Contributes to the economic growth of a country

Characteristics of today’s business1. Change: modern business is dynamic, new technologies, new products2. Vastness: Mass production, mass marketing – fetching economies of scale to

the manufacturers and the resultant benefits getting passed on to the buyers.


3. Diversification: is a form of growth strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. It also tends to spread the dependency of the business on fewer products. Tata group, a premier business house, is into iron & steel, fertilizers, chemicals, automobiles, telecom, tea, shipping, hotels, information technology, printing, & consultancy. Similar is the story of other business groups as well.

There are three types of diversification: concentric, horizontal, and conglomerate.

Concentric diversification refers to the process of adding new, but related products or services. Hindustan Unilever Ltd. is the best example of concentric diversification. In one line it has several brands. e.g. in soaps, it has Lux, Liril, Lifebouy, Pears, Rexona, Hamam, Breeze, Dove.


Offering new and unrelated products or services to current customers is called horizontal diversification. In a competitive environment, this form of diversification is desirable if the present customers are have a good image of the company’s products and if the new products have good quality, well promoted and priced. In other words, this strategy tends to increase the firm’s dependence on certain market segments. e.g. in consumer non-durables, Hindustan Unilever is offering products like soaps, shampoos, washing powder, hair oils, moisturizing cream, ketchup, jams, tea, atta, salt, and ice creams to the same set of customers. Haldiram’s offerings like traditional Indian sweets, namkeens, and syrups (thandai), alongside following a dual selling approach, i.e. company-owned food outlets, and distributor-retailer system of reaching to the consumers.


Conglomerate diversification refers to adding new and unrelated products or services that have no technological or commercial synergies with current products, but which may appeal to new groups of customers. Like the Anil Dhirubhai Ambani group’s presence in varied areas like power generation and distribution, telecom services, cinema production, DTH services, financial products like mutual funds, and life insurance etc.

Main reasons of adopting such a strategy is to tap profitability existing in different industries, risk diversification, and better reputation / brand building as the company gets bigger.

4. Globalisation: going international is yet another feature of modern businesses. Production facilities are being set-up in different countries and products being sold world wide. Gradually, businesses are exposed to global competition and risks. Technological innovations, crumbling trade barriers, global flow of capital and technology, information explosion, changing life styles, intensity of market competition, are all strengthening globalisation of businesses.


5. Science: an important force affecting business. Products / services being demanded and offered, means of manufacturing and selling are fast changing. This is primarily because of continuous development in science and technology. 6. Information: Yet another characteristic of contemporary business is the significance of information, which is key to success of every business. Sources of information such as, internet, television, print media etc. play a important role in business decision making. Further, with the scientific advancement, the system of getting and giving information, processing and storing data, preparation of effective records and reports has also changed tremendously. 7. Government interference: makes laws, rules & regulations, polices, levy taxes etc., thereby affecting business.8. Competition: eliminate inefficiencies, cut down costs, improve productivity, and offer competitively in market in order stay fit.


Business environment

• That which envelops the business firm;

• consists of all those factors that have a bearing on the business.

• something external, beyond the control of an organization.

Points to note:

1. There exists a symbiotic relationship between business and its environment; i.e, the business is influenced by its environment and in turn, to a certain degree (and along with other firms) it influences the environment.

2. The business environment always keeps changing (evolving).

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3. Therefore, the survival & success of a business firm depends upon

– its innate strength – resources at its command, physical resources, human resources, skill and organisation;

– its adaptability to the environment;

– The extent to which the environment is favourable to the development of the organisation;

Two set of factors affecting business: -

a) The internal factors (present inside the firm); and

b) The external factors (present outside the firm).

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Factors forming the Internal Environment: 1. Promoters / shareholders values

2. Mission & objectives

3. Management structure & nature

4. Internal human relationships

5. Physical assets and facilities

6. Financial factors / capabilities: financial policies, financial position, capital structure etc.).

7. Human resources: skill, quality, morale, comittment, attitude etc.

8. Company image / brand equity : winning the customer, launching new products, raising finance, forming joint ventures, soliciting / maintaining business associates.

9. Technological Capabilities: company’s ability to innovate, use/ offer the latest & efficient technology for its advantage. 9


Internal factors

• Generally regarded as controllable factors because the firm has control over these factors; the firm can alter or modify them to suit the changing external environment.

• Form the Strengths and Weaknesses of the business firm.

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External environment

• Consists of institutions, organizations and forces operating outside the company.

• The external environment throws Opportunities and Threats on to the business.

• The success of a business depends upon its successfully grabbing (utilizing) the opportunities and countering the threats by effectively leveraging its strengths and overcoming its weaknesses.

• In other words, the survival and success of a business firm depend on its ability to use resources at its command (internal strength) and its adaptability to the external environment.

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External Environment – has two layers

1. Micro (Task / operating) environment: consists of actors in the company’s immediate environment, those having a direct bearing on the performance of the company. It includes customers, suppliers, competitors, marketing intermediaries, publics etc.

2. Macro (General /Remote) environment: refers to larger societal forces (economic and non-economic) those affect all the actors in the company’s immediate environment, including the company – namely, demographic, economic, political, technological, cultural and legal. They influence business activity in general.

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Factors effecting external environment of business

Micro external environment• Customers• Suppliers• Competitors• marketing intermediaries• Financiers• publics

Macro external environment• Domestic Macroeconomic

environment• International factors• Cultural factors• Political factors• Technological factors• Legal factors• Ecological factors• Demographic factors


Domestic Macroeconomic environment• Type of economic system (market, command or mixed economy)• GDP composition, growth, and distribution• Saving rates, rate of interest, money supply, credit availability• Capital stock, rate of capital formation• Consumption demand, investment demand• Rate of inflation• Level of employment• Exports, imports, exchange rates, balance of payments• Economic policies of the govt.- planning / monetary / fiscal /

industrial / EXIM / Labour policies• Trade cycles

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Determinants of International environment

• State of world economy• Role of multilateral economic institutions (IMF,

World Bank, UN, ILO etc.)• International economic laws and treaties• Political system and conditions in countries• International market structure and competition• Barriers to international trade and investment

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Social / Cultural environment• Culture is a set of socially accepted and shared set of beliefs, norms,

values and customs.

• Business has to regard cultural variables like social and religious practices, community norms & beliefs, education, family & marriage.

• Differs among various population sub-groups causing differences in perception of society & customers towards various products/services.

• E.g. in many societies non-vegetarian food, alcoholic drinks, beauty parlours, fashion shows are despised whereas in others these are part of normal life.

• Culture plays an important role in determining: the type of goods the business is going to produce, work culture, employee productivity, business negotiations, customer / public relations, social responsibility of business, business ethics, human resource mgmt, scientific spirit.

Amity School of BusinessPolitical factors• Political environment refers to the influence exerted by the three

political institutions: legislature, executive and judiciary in shaping, directing, developing and controlling business activities.

• A stable and dynamic political environment is prerequisite for the growth of business.

• Type of political system and its attitude towards business also matters a lot. The philosophy and approach of political party in power substantially influences the business environment.

• Businesses have several risks associated with the political scenario:

Confiscation, Expropriation, Nationalization, Domestication, General Instability risk, Operation risk, Transfer risk.

The risk is higher in absolutist, command economies. And also in countries passing through economic, social or political crises.

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1. Consfication: when government forcibly possess ownership of a property without compensation.

2. Expropriation: forcible possession of ownership by the govt. followed by some compensation, which may not equal to market value of the property.

3. Nationalisation: Also a compulsive process of transfer of ownership and operations from private to public (govt.) hand. Compensation more rational. E.g. nationalisation of commercial banks in India in 1969.

4. Domestication: when a foreign company is made to transfer, fully or partly, ownership and control of its domestic affiliate to domestic nationals. In India under FERA (1973) the MNCs were forced to dilute 40 % of their equity in their Indian affiliates to Indian public / institutions.

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1. General Instability Risk: uncertainty with regard to the viability of the existing political system.

2. Operation risk: The risk arising from the possibility that the govt. might in future restrict the operations of the firm in marketing, finance, production, or in certain geographical locations.

3. 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 subsidiaries of a firm or from a subsidiary to the parent company. The risk is more prominent in cases where the subsidiary and its parent are located in different countries.

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Amity School of BusinessTechnological environment

• J.K. Galbraith defines technology as a systematic application of scientific or other knowledge to practical tasks.

• Technology includes the tools, & machines (hard technology) and ways of thinking (methods / soft technology) to perform certain tasks efficiently, solve problems and promote societal progress.

• Technology has developed immensely during the past 150 years.• A few benefits of technology – conquer distances, communications,

space research, healthcare, generate / preserve / distribute energy, discover / invent newer and better products & services, development of computers, biotechnology, etc.

• Features of technology – (a) change and then more change; (b) widespread effects; (c) self-reinforcing, i.e. it acts as its own multiplier – e.g. invention of wheel led rather quickly to a number of more applications.

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• Technology is one of the important determinants of success of a firm.

• It reaches people through business in form of goods and services. Technological factors may increase or decrease the demand for some existing products in the market.

• It results into high expectations of consumers for better goods / services at affordable price drives businesses to continuously work on product and process innovations, which, in turn, is possible from investment in technology through R & D.

• System complexity & integration – technology has resulted in making systems across the spectrum of economic activity more complex and integrated. e.g failure of power supply affects other areas of the system – will cause taps dry, affect traffic signals, suspend elevators between floors, dark streets and so on.


Impact of technology on businesses • Increased productivity (both quality and quantity)

• Allocation of resources on Research and Development (R&D)

• Jobs tend to become more intellectual (upgraded)

• Resistance to change (among employees / managers / owners)

• Problems of technostructure

• Multi-professional Managers

• Increased Regulation

• Increased demand for Capital

• Rise and decline of products and organisations

• Business boundaries redefined


Legal factors affecting business environment

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Legal Environment of Business• Every aspect of business is regulated by law in India. Legal system of a

country has a profound impact on decisions concerning both investment and operations in business as it touches the very existence and legality of business firms. Hence legal environment plays a vital role in business.

The broad areas covered by business legislation include: - • industrial licensing, company formation, factory administration, industrial

disputes, payment of wages, trade unionism, monopoly control, forex regulation, shops and establishment, product counterfeiting, gray markets, taxes etc.

• Industrial development and regulation – licensing and registration of industries; prices and output regulation, mergers, acquisitions and takeovers, location of industries;

• Forex management• Consumer protection – covering consumer rights, consumer disputes,

complaints and grievance redressal system;


Essential commodities – their supplies, prices, and qualityWeights, measures and packaging – standard units, packaging norms, declarations and inspection.Patents & copyrights– application procedure, life of a patent, rights of patent / copyright owners, infringement of patents / copyrights, claim procedure and settlement;Labour – employment norms / rules, employee insurance, payment of wages / salaries, bonuses / gratuity / PF, disciplinary matters, disputes;

Changes in legal environment are caused by legislative changes / amendments / and introduction of new laws. Business firms are also affected by the speed with which justice is delivered. Professionally managed companies give importance to legal conformity in their business operations.


Ecological Environment

• Ecology deals with the study of the environment, biotic factors (plants, animals, micro organisms), abiotic factors (water, air, sunlight, soil) and their interactions with one another.

• Protection of the environment and preservation of ecological balance is the responsibility of every business organization.

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Demographic environment

• Demography includes population, population density, sex ratio, fertility and mortality rates, age composition, life expectancy and geographical distribution of population.

• Demographic factors are important basis for market segmentation and product positioning for marketers.

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bev-module 1- factors effecting business environment

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