business · profound impact on the business. the type of product to be manufactured and marketed,...

BUSINESSENVIRONMENT

TEXT AND CASES

Dr. Francis CherunilamM.A., M.B.A., D.D.P., Ph.D.

64 Vidyanagar Cochin University P.O.,Cochin - 682 022.

E-mail: [email protected]

Formerly Professor and Chairman, Marketing Area, IIMK;Director, School of Management Studies,

Cochin University of Science & Technology;Director, Albertian Institute of Management, Cochin;

Director, Kochi Business School, Cochin;Director, Managalam School of Management Studies,

Ettumanoor and HOD & DeanViswajyothi School of Management Studies,

Vazhakulam.

ISO 9001:2015 CERTIFIED

© AuthorNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the author and thepublisher.

Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.Phone: 022-23860170, 23863863; Fax: 022-23877178E-mail: [email protected]; Website: www.himpub.com

Branch Offices :New Delhi : “Pooja Apartments”, 4-B, Murari Lal Street, Ansari Road, Darya Ganj, New

Delhi - 110 002. Phone: 011-23270392, 23278631; Fax: 011-23256286Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018.

Phone: 0712-2738731, 3296733; Telefax: 0712-2721216Bengaluru : Plot No. 91-33, 2nd Main Road, Seshadripuram, Behind Nataraja Theatre, Bengaluru - 560020.

Phone: 08041138821; Mobile: 09379847017, 09379847005Hyderabad : No. 3-4-184, Lingampally, Besides Raghavendra Swamy Matham, Kachiguda, Hyderabad - 500 027.

Phone: 040-27560041, 27550139Chennai : New No. 48/2, Old No. 28/2, Ground Floor, Sarangapani Street, T. Nagar, Chennai - 600 012.

Mobile: 09380460419Pune : First Floor, “Laksha” Apartment, No. 527, Mehunpura, Shaniwarpeth (Near Prabhat Theatre),

Pune - 411 030. Phone: 020-24496323, 24496333; Mobile: 09370579333Lucknow : House No. 731, Shekhupura Colony, Near B.D. Convent School, Aliganj, Lucknow - 226 022.

Phone: 0522-4012353; Mobile: 09307501549Ahmedabad : 114, “SHAIL”, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura, Ahmedabad - 380 009.

Phone: 079-26560126; Mobile: 09377088847Ernakulam : 39/176 (New No. 60/251) 1st Floor, Karikkamuri Road, Ernakulam, Kochi - 682011.

Phone: 0484-2378012, 2378016; Mobile: 09387122121Bhubaneswar : Plot No. 214/1342, Budheswari Colony, Behind Durga Mandap,

Bhubaneswar - 751 006. Phone: 0674-2575129; Mobile: 09338746007Kolkata : 108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank, Kolkata - 700 010.

Phone: 033-32449649; Mobile: 07439040301DTP by : SunandaPrinted at : Mudrashilpa Offset Printers, Bajaj Nagar, Nagpur. On behalf of HPH.

First Edition : 1985Eighth Edition : 1997Eleventh Revised Edition : 2000Reprint : 2001Twelfth Revised Edition : 2002Thirteenth Revised Edition : 2003Fourteenth Revised Edition : 2003Fifteenth Edition : 2004Sixteenth Revised Edition : 2005Seventeenth Revised Edition : 2006Reprint : 2007Eighteenth Revised Edition : 2008Nineteenth Revised Edition : 2009Reprint : 2010Twentieth Revised Edition : 2011Twenty-first Revised Edition : 2012Twenty-second Revised Edition : 2013Twenty-third Revised Edition : 2014Twenty-fourth Revised Edition : 2015Twenty-fifth Revised Edition : 2016Twenty-sixth Revised Edition : 2017Reprint : 2018Twenty-seventh Revised Edition : 2019

PREFACE TO THE TWENTY-SEVENTH EDITION

It is with great joy and gratitude that I present the 27th edition of the pioneering comprehensiveIndian book on Business Environment. It was indeed adventurous to attempt such a work ata fairly young age, more than three decades ago, when there was no model book to helpconceptualise the scope and structure, no internet to source information, word processing bycomputer was strange, printing technology was crude, courier service was absent and had toencounter a host of other handicaps of those days. The experience, however, was exciting andthe response of the academic community has been overwhelming. That this work filled animportant academic void is indicated by the fact that it was after its publication that universitiesand institutes started including Business Environment as a subject in the curricula of Managementand Commerce courses. This book is an expanded version of my first book Business andGovernment which was very well received by the academia. After the advent of the bookBusiness Environment, many universities and institutes replaced the course Business andGovernment with Business Environment.

Over the last three decades, the book was thoroughly modified and revised a number oftimes, zeroing in the changes in the business environment and needs of the academic community.Almost every year, there was either a new edition or reprint.

The present edition is characterised by a thorough revision and modification of the text.Information has been updated throughout the text. Some pieces of information which havebecome obsolete or less relevant have been deleted. Additional/new materials have beenincorporated in many places. Several chapters have been reworked.

Chapters which have been significantly modified are: 4 (Economic environment);7 (Demographic environment); 14 (Public, private, joint and cooperative sectors);15 (Privatisation and disinvestment); 16 (Micro, small and medium enterprises [MSME]sector); 22 (Monetary and fiscal policies); 35 (Planning in India); 36 (Industrialdevelopment strategy); 38 (GATT/WTO and global liberalisation); 39 (Internationalinvestments); 40 (Multinational corporations).

I have no words to thank the academic community for the unstinted support. I have beenable to bring out books after books and editions after editions of existing books because of theenormous encouragement of the Himalaya Publishing House Pvt. Ltd. And I bow down beforethe profuse blessings of the Almighty.

Cochin, Dr. Francis Cherunilam19th October 2018

PREFACE TO FIRST EDITION

The modern business is placed in a very complex and intricate environment. The constraints andopportunities provided by the nature of the economy and the economic system, political and legalframework, social system, geographical and ecological conditions, demographic factors, etc. haveprofound impact on the business. The type of product to be manufactured and marketed, the marketingstrategies to be employed, the way the business should be organised, the technology to be adoptedetc. are all influenced by the environmental factors. For formulating appropriate business strategies,one should, therefore, have proper understanding of the business environment.

This book is a humble attempt to sketch the various important aspects of the business-environmentinterface. A major part of the work is devoted to deal with the socio-economic and political and legalenvironment of the business in India.

I am very grateful to Prof. N. Somasekhara, Chairman, Department of Industrial Management,Indian Institute of Science, Bangalore, who was kind enough to write a Foreword to this book. Ishould also like to record my gratitude to all those who helped me, in one way or other, in my endeavour.I must particularly thank Mr. D.P. Pandey and the Himalaya Publishing House Pvt. Ltd. for theirconstant encouragement.

It may be pointed out here that as the business environment changes quite frequently, any workon this subject can be hardly up-to-date. In fact, when this book was in press, some modifications inGovernment policy have taken place. Some of these policy modifications are stated in the Postscriptgiven at the end of the book.

Constructive criticisms and suggestions will be most welcome.

Francis Cherunilam

CONTENTS

PART 1 : AN OVERVIEW OF BUSINESS ENVIRONMENT 1-140

1. A GLIMPSE OF BUSINESS ENVIRONMENT 3-27Types of environment; internal environment; external environment; micro environment; macro environment;competitive structure of industries; competitor analysis; environmental analysis and strategic management;summary.

2. NATURE, SCOPE AND OBJECTIVES OF BUSINESS 28-55Business system/process; classification of business; classification of industries; characteristics of business;goals of business; summary.

3. ENVIRONMENTAL ANALYSIS AND FORECASTING 56-68Techniques for environmental analysis; steps in/approaches to environmental analysis; types of environmentalforecasting; techniques for environmental forecasting; benefits/importance of environmental analysis; limitationsof environmental forecasting; summary.

4. ECONOMIC ENVIRONMENT 69-80Nature of the economy; structure of the economy; economic policies; economic conditions; summary.

5. POLITICAL AND GOVERNMENT ENVIRONMENT 81-102Functions of State; economic roles of government; government and legal environment; economic roles ofgovernment in India; the constitutional environment; summary.

6. NATURAL AND TECHNOLOGICAL ENVIRONMENT 103-125Natural environment; technological environment; innovation; technological leadership and followership;technology and competitive advantage; sources of technological dynamics; time lags in technologyintroduction/absorption; appropriate technology and technology adaptation; impact of technology onglobalisation; IT and marketing; transfer of technology; summary.

7. DEMOGRAPHIC ENVIRONMENT 126-140Population size; falling birth rate and changing age structure; global demographic trends; migration andethnic aspects; india’s demographic dynamics; summary.

PART 2 : BUSINESS AND SOCIETY 141-222

8. SOCIETAL ENVIRONMENT 143-167Business and society; objectives and importance of business; professionalisation; business ethics; businessand culture; religion; language; culture and organisational behaviour; other social/cultural factors; technologicaldevelopment and social change; summary.

9. SOCIAL RESPONSIBILITY OF BUSINESS 168-189Classical and contemporary views; social orientations of business; factors affecting social orientation;responsibilities to different sections; the Indian situation; arguments for and against social involvement;social audit; recent developments in India; Companies Act 2013 and CSR; summary.

10. CONSUMER RIGHTS, CONSUMERISM AND BUSINESS 190-207Consumer rights; exploitation of consumers; consumerism; consumer protection; UN guidelines for consumerprotection; consumer protection and consumerism in India; Consumer Protection Act; summary.

11. CORPORATE GOVERNANCE 208-222Meaning; reasons for the growing demand for corporate governance; importance of corporate governance;prerequisites; regulatory and voluntary actions; recommendations of Birla Committee; legal environment ofcorporate governance in India; summary.

PART 3 : INDUSTRIAL POLICIES AND REGULATIONS 223-384

12. INDUSTRIAL POLICY 225-231Industrial policy up to 1991; the new industrial policy; an evaluation of the new policy; summary;Annexure 12.1: Schedule to industrial policy resolution, 1956; summary.

13. IDRA AND INDUSTRIAL LICENSING 232-237Industries (Development & Regulation) Act; industrial licensing; the new policy; summary.

14. PUBLIC, PRIVATE, JOINT AND COOPERATIVE SECTORS 238-270Public sector; growth and performance of public sector; the new public sector policy; organisation of publicenterprises; government and parliamentary control over public enterprises; pricing policy in public enterprises;department of public enterprises; nationalisation; private sector; joint sector; the concept of national sector;cooperative sector; summary.

15. PRIVATISATION AND DISINVESTMENT 271-280Expansion of public sector and its defects; privatisation reaction; ways of privatisation; obstacles; conditionsfor success of privatisation; benefits of privatisation; arguments against privatisation; sins and pitfalls ofprivatisation; privatisation/disinvestment in India; summary.

16. MICRO, SMALL AND MEDIUM ENTERPRISES (MSME) SECTOR 281-298The VSI sector; definitions; SMEs in other countries; importance; development of VSI under the plans;promotional measures; institutional support structure; state industrial policies; khadi and village industries;ancillary industries; drawbacks and problems; summary.

17. INDUSTRIAL SICKNESS 299-305Definition; magnitude; causes of sickness; preventive and curative measures; Sick Industrial CompaniesAct; summary.

18. PRICE AND DISTRIBUTION CONTROLS 306-317Objectives of price and distribution controls; price policy in India; price controls; indirect controls; directcontrols; administered prices; dual pricing; subsidisation; Essential Commodities Act; other laws to controlproduction, distribution and prices; the public distribution system; summary.

19. INDIAN COMPANY LAW 318-356A brief history of company law in India; Companies Act 2013 — a synoptic note; objectives of the CompaniesAct: classification of companies; incorporation of company; memorandum of association; articles of association;prospectus and allotment of securities; share capital and debentures; management and administration;declaration and payment of dividend; board of directors; inspection, inquiry and investigation; revival andrehabilitation of sick companies; winding of companies; National Company Law Tribunal and AppellateTribunal; miscellaneous; summary

20. PATENTS AND TRADE MARKS 357-368Patents; trade marks; the Trade Marks Act, 1999; summary; Annexure 20.1: Falsifying and falsely representingtrade marks; Falsely representing trade marks as registered; registration of trade marks as associated trademarks.

21. COMPETITION POLICY AND LAW 369-384Competition policy and law – nature and scope; government policies and distortions to competition; interfaceof FDI and competition law; pre-requisites for a competition policy; contours of competition law; CompetitionAct, 2002; summary; Annexure 21.1: MRTP Act.

PART 4 : THE FINANCIAL SYSTEM 385-494

22. MONETARY AND FISCAL POLICIES 387-402Monetary policy; measures of money stock; monetary policy and money supply; instruments of monetarypolicy; fiscal policy; the Union budget; State budgets; finances of the Union and States; the FinanceCommission; importance of the budget; summary.

23. FINANCIAL MARKET STRUCTURE 403-412Credit market; foreign exchange market; debt market; derivatives market; bancassurance; summary.

24. MONEY AND CAPITAL MARKETS 413-425Meaning of money market; constituents of a money market; functions of money market; the Indian moneymarket; money market instruments and constituents; capital market—nature and constituents; importance ofcapital market; capital market in India; nature of the Indian capital market; development of the market;summary.

25. STOCK EXCHANGE AND ITS REGULATION 426-453Meaning; Importance and functions; dealings on stock exchange; speculation on the stock exchange,organisation of stock exchanges in India; OTCEI; National Stock Exchange of India; Stock Holding Corporationof India; regulation of stock exchange—Securities Contracts (Regulation) Act; SEBI; capital market reformsand developments; summary; Annexure 25.1: Derivatives; Annexure 25.2: BSE Sensex.

26. INDUSTRIAL FINANCE 454-468Short term finance; medium term finance; long-term finance; ownership securities; creditorship securities:new issues—marketing of securities; underwriting of securities; internal financing (ploughing back of profits)public deposits; commercial banks; summary; Annexure 26.1: Leasing.

27. INDUSTRIAL FINANCIAL INSTITUTIONS 469-494Types of institutions; types of assistance; industrial development Bank of India; Industrial Finance Corporationof India; Industrial Credit and Investment Corporation of India; Discount and Finance House of India; StateFinancial Corporations; State Industrial Development/Investment Corporations; investment Institutions;institutions for small industry; commercial banks; summary; Annexure 27.1: Merchant Banking; MutualFunds; Venture Capital.

PART 5 : LABOUR ENVIRONMENT 495-575

28. LABOUR LEGISLATION 497-509Principles of labour legislation; labour legislation in India—laws relating to weaker sections; laws relating tospecific industries; laws relating to specific matters; laws relating to trade unions and industrial relations.

29. LABOUR WELFARE AND SOCIAL SECURITY 510-520Welfare and amenities within the precincts of the establishment; welfare outside the establishment; socialsecurity; legislative enactments; workmen’s compensation; maternity benefits; employee’s state insurance;provident fund; lay-off and retrenchment compensation; family pension; gratuity scheme; summary.

30. INDUSTRIAL RELATIONS 521-537Industrial disputes; causes of industrial disputes; industrial disputes—preventive steps; employer-employeerelations; tripartite machinery; Code of Discipline and Industrial Truce Resolution; settlement of disputes—voluntary arbitration; machinery under the Industrial Disputes Act; grievance settlement authority; conciliationofficers; boards of conciliation; courts of inquiry; labour courts; tribunals; national tribunals; reference andawards; prohibition of strikes and lock-outs; other important provisions of the Act; Annexure: 30.1: Schedulesto the Industrial Disputes Act.; summary.

31. TRADE UNIONS 538-548Meaning; Functions of trade union; social responsibilities of trade unions; trade union movement in India—factors contributing to growth; some important developments; limitations and problems of trade unionism inIndia; regulation of trade unions—the Trade Unions Act; definition of trade union; registration of unions;rights and liabilities of registered unions; amendments to Trade Unions Act; summary.

32. WORKERS’ PARTICIPATION IN MANAGEMENT 549-559Meaning; objectives; problems and limitations; forms of participation; workers’ participation schemes inIndia; Works Committees/Joint Committees; Joint Management Councils; Shop/Department Councils andJoint Councils; summary.

33. EXIT POLICY 560-566Need for exit policy; Extent of overmanning; VRS and golden handshake, NRF; conclusion; summary.

34. QUALITY CIRCLES 567-575Origin and development; meaning and nature of QC; structure of quality circles; objectives/philosophy ofQCs; the process of QCs; conditions for success of QCs; reasons for failure of QCs; conclusion; summary;Annexure 34.1: Research findings on QCs.

PART 6 : ECONOMIC PLANNING AND DEVELOPMENT 577-605

35. PLANNING IN INDIA 579-586Importance of national economic planning to business; review of the plans; performance of five year plans;structure change in national planning.

36. INDUSTRIAL DEVELOPMENT STRATEGY 587-592Salient features of industrial planning and development; evaluation; summary.

37. PLANNING AND DEVELOPMENT OF AGRICULTURE 593-605Importance of agriculture; phases of development; expansion and development of inputs and services;agricultural marketing; agricultural price policy; commodity exchange; summary.

PART 7 : GLOBAL ENVIRONMENT 607-710

38. WTO AND GLOBAL LIBERALISATION 609-621Objectives; an evaluation of GATT; WTO; functions of WTO; WTO agreement; impact of WTO; evaluationof WTO; WTO and India; summary.

39. INTERNATIONAL INVESTMENTS 622-646Types of foreign investment; advantages and disadvantages of foreign investment; factors affectinginternational investment; trends in foreign investment; directionla trends (geographical distribution); FDIand developing countries; sectoral trends; trends in FDI by acquistitions; foreign investment in India;foreign investment by Indian companies; summary.

40. MULTINATIONAL CORPORATIONS 647-659Meaning and definitions; universe of MNCs; significance of MNCs; organisational models; perspectives;code of conduct; multinationals in India; summary.

41. GLOBALISATION 660-685Globalisation of world economy; globalisation of business; meaning and dimensions; features of currentglobalisation; globalisation stages; essential conditions for globalisation; foreign market entry strategies;pros and cons of globalisation; policy options; globalisation of Indian business; summary.

42. DEVELOPMENT AND REGULATION OF FOREIGN TRADE 686-702Regulation of foreign trade; Foreign Trade (Development and Regulation) Act; foreign trade policy; exportpromotion; organisational set up; production assistance; marketing assistance; EPZs, EOUs, TPs and SEZs;export houses and trading houses; an evaluation; summary.

43. FOREIGN EXCHANGE MANAGEMENT ACT 703-710Objectives; holding of foreign exchange etc.; current account transactions; capital account transactions;export of goods and services; realisation and repatriation of foreign exchange; contravention and penalties;Administration of the Act; FERA and FEMA — a comparison; summary; Annexure 43.1: Definitions.

PART 8 : CASES 711-749

1. McKinsey’s Agenda for India’s Economic Reforms 713-7172. South-East Asian Economic Crisis 718-7213. Remains of a Dream 722-7244. The Costs of Delay 725-7265. Natural Thrust 727-7286. The Swap 729-7307. A Question of Ethics 731-7328. Different for Gamble 733-7359. Ill-treatment 736-73710. Human Rights Protection 738-73911. Whose Basmati is It? 740-74112. The Sensex 742-74313. Globalisation of Pop Culture 744-74514. The Environmental Services Business 746-749

INDEX 751-755

LIST OF BOXES

1.1 Values, governance and excellence 61.2 The 21st century international system 124.1 India surges forward to 6th rank in GDP 725.1 Political environment and economic reforms 825.2 State and government : Some concepts 845.3 Functions and powers of parliament 945.4 The evolution of the role of the State in India 1006.1 The core of social system 1046.2 India’s innovative potential 1116.3 Global village 1166.4 Technology, globalisation and inequality 1187.1 Demographic decline vs. demographic dividend 1287.2 Highlights of world population change 1317.3 Highlights of India’s demographic dynamics 1387.4 The surging indian market 1398.1 Professionalisation of management of family

owned companies 1468.2 Cultural environment and technology 1519.1 Social expectations 1699.2 Business leaders on corporate social

responsibility 1719.3 Evolution of social responsibility at Tisco 174

10.1 Responsibilities of consumers 19210.2 Counterfeits and pass-offs 20011.1 The aim and purpose of corporate governance 20911.2 Public and private perspectives of corporate

governance 21011.3 National corporate governance award 21814.1 Imperatives of public sector 23916.1 Redefinition of MSMEs 28416.2 Small enterprises, big part 28421.1 Selected restrictive business practices

addressed by competitive law 371-37221.2 Why a new law? 37621.3 CCI – A watchdog with teeth 37821.4 Policy paradox 38424.1 Indian capital market in transition 42225.1 Objectives and role of stock exchange 42727.1 Venture Capital fund, IDBI 49428.1 Second national commission on labour 498-49928.2 ILO declaration on fundamental principles

and rights at work 499-50028.3 Postulates and evolution of labour policy

in India 501

28.4 Labour regulations and rigidities in thelabour market 506

30.1 National commission on labour on strikes 53131.1 Second National Commission Labour on

Trade Unions 54231.2 Second national commission labour on

trade unions 54732.1 Imperatives of workers’ participation

in management 55737.1 Thrust areas of development 59439.1 12 Commandments of foreign direct

investment 630-63139.2 A direction and motives/benefits of indian

acquisitions 643-64441.1 Drivers of globalisation 662

C.1.1 Reform proposals 717C.14.1 Companies and the environment: WIMBY

and NIMBY 748-749

LIST OF FIGURES

1.1 Factors influencing business decision 51.2 Business environment 111.3 Forces driving industry competition 131.4 Strategic management process 251.5 Components of business environment 262.1 Business system 292.2 Business process 392.3 Mission, objectives, goals and targets –

sequence of formulation and achievement 422.4 Hierarchy of objectives 483.1 Epitome of environmental forecasting 675.1 Functions of the State (Adopted from World

Bank, World Development Report, 1997) 865.2 The constitutional environment 985.3 Functions and economic roles of government 1026.1 Impulsive and propulsive 6 factors affecting

business 1046.2 Links between technology and human

development (adopted from undp,human development report, 2001) 104

6.3 Rates of product and process innovations 1086.4 Technology S-curve 1096.5 Innovative drivers 1139.1 Responsibilities of business 1729.2 Social orientations and involvement of business 1739.3 Claimants of social responsibility of business 178

10.1 Factors of consumer protection 20610.2 Consumer disputes redressal agencies under

Consumer Protection Act 20711.1 Corporate governance environment and

outcomes 21311.2 The external environment shaping corporate

governance in India 22013.1 Salient features of IDRA 23714.1 Parliamentary impact on the public sector 25618.1 Instruments of price and distribution controls 31619.1 Classification of companies 32624.1 Structure of Indian money market 41624.2 Structure of Indian capital market 42332.1 Forms of workers’ participation in management 55832.2 Schemes of workers’ participation in management

in India 55934.1 Structure of organisation of quality circle 56938.1 WTO and world trading system 61438.2 The WTO impact 61739.1 Types of foreign investment 62439.2 Host country determinants of FDI* 62939.3 FDI inflows, global and by group of economies,

2005-2017, (Billions of dollars) 63140.1 Characteristics of different organisational

models* 65141.1 Foreign market entry strategies 684

C.2.1 Factors that contributed to the thai crisis 720

LIST OF TABLES

2.1 Comparison between economic and socialobjectives 50

4.1 Classes of economies 704.2 Some economic comparisons 724.3 Share of service sector in GDP 754.4 Indian economic reforms and environmental

change 764.5 Important factors of economic environment 805.1 Impact of state 876.1 Retail Revolution 120

7.1 Percentage distribution of the worldpopulation by development group andmajor area, estimates and projections accordingto different variants, 1950-2100 133

7.2 Countries accounting for about 75 per cent ofthe world population ordered by populationsize, estimates and mediumvariant, 1950 and 2011 134-135

7.3 Countries accounting for about 75 per centof the world population ordered bypopulation size, estimates and mediumvariant, 2050 and 2100 135-136

9.1 The format of a business responsibility report 18712.1 Industrial policy changes 23014.1 Growth of public enterprises 24114.2 Classification criteria 244-24519.1 Private company and public company:

A comparison 32425.1 Comparison between stock exchange,

OTCEI and NSE 43426.1 Sources of finance 46526.2 Types of corporate securities 46627.1 Industrial development/financial institutions 48935.1 India’s growth performance during the plans

(Annual percentage growth – estimates) 58336.1 Pros and cons of the industrial development

strategy until 1991 59137.1 Characteristics of spot and futures contracts 60038.1 Difference between GATT and WTO 61338.2 Advantages and disadvantages of WTO 61939.1 Country-wise and sector-wise FDI inflows to

India, 2000 – March 2018 64140.1 Increasing clout of multinationals 65240.2 Top 10 Fortune 500 companies, 2017 65340.3 Top 10 countries with largest Fortune 500

companies, 2017 65340.4 Fortune 500 Indian companies, 2017 65442.1 Categories of export house 690

C.1.1 The reform route to faster GDP growth 714C.1.2 Reform measures required 715C.2.1 Current account deficit (per cent of GDP) 721C.2.2 External debt ratios (1996) 721

Part 1AN OVERVIEW OF

BUSINESS ENVIRONMENT

Business decisions in general and strategies in particular are moulded by thebusiness environment – those external factors like the economic, political/regulatory, social/demographic, technological and natural factors which makeup the opportunities for and threats to business and internal factors like theresources, capabilities and goodwill of the organisation, internal powerrelationships etc. which decide the strengths and weaknesses of the firm. Athorough understanding of the business environment, therefore, is a prerequisitefor making any strategic decision. Indeed, formulation of strategy is sometimes defined as establishing a proper firm-environment fit.

This Part starts with a general introduction to the broad nature of businessenvironment, and environmental analysis and forecasting. It also presents abroad picture of the Economic Environment, Political and GovernmentEnvironment, Natural and Technological Environment, and DemographicEnvironment.

A GLIMPSE OFBUSINESS ENVIRONMENT

1Structure

Meaning of Business Environment

Types of Environment

Competitive Structure of Industries

Environmental Analysis and Strategic Management

Summary

References

Business Environment4

No business enterprise functions in a vacuum. Business is an integral part of the ecology andsocial system and, therefore, its decisions and performance are influenced by a host of diversefactors. Important decisions related to business such as what business to do, which should be thecustomer segments to target at and what strategies be adopted, where to do the business, when todo the business, how to do the business, whether to continue a business, whether to expand abusiness and if yes where and how to expand it, and so on are influenced by a number of factorswhich constitute what is generally referred to as the business environment.

MEANING OF BUSINESS ENVIRONMENTBusiness Environment consists of all those factors that have a bearing on the business, such

as the strengths, weaknesses, internal power relationships and orientations of the organisation;government policies and regulations; nature of the economy and economic conditions; socio-cultural factors; demographic trends; natural factors; and, global trends and cross-border developments.Transformation of the Indian Two-wheeler Market given at the end of the chapter illustrates theimpact of business environment on the business.

BUSINESS ECOLOGY

The business ecology indeed is very similar to the human ecology (or any ecology for thatmatter). Just as the survival and success of any individual depend on his innate capability – suchas the physiological and psychological factors — to cope up with the environment and the extentto which the environment is conducive to the development of the individual, the survival andsuccess of a business firm depend on its innate strength — resources at its command, includingphysical resources, financial resources, human resources, the inter-linkages and synergy, skill andorganisation — and its adaptability to the environment and the extent to which the environment isfavourable to the development of the organisation. The survival and success of a firm, thus, dependon two sets of factors, viz., the internal factors (the internal environment) and external factors (theexternal environment).

The external environment has, broadly, two components, viz., business opportunities andthreats to business. Similarly, the organisational environment has two components: strengths andweaknesses of the organisation. Thus, strategy formulation is properly pitting the organisationalfactors (the internal environment) against the opportunities and threats in the external environment.In other words, business decisions are conditioned by two broad sets of factors, viz., the internalenvironment and the external environment.

BUSINESS-ENVIRONMENT INTERRELATIONSHIP

Any meaningful organisation has certain mission, objective(s) and goal(s) and a strategy toachieve them. Business environment has a bearing on the shaping of all these integral and interrelatedelements. It is, therefore, only very appropriate that formulation of strategy is sometimes defined asestablishing a proper firm-environment fit. Indeed, the mission/objectives/goals themselves shouldbe based on an assessment of the external environment and the organisational factors (i.e., theinternal environment). A SWOT analysis (analysis of the strengths and weaknesses of the organisationand opportunities and threats in the environment), therefore, is one of the first steps in the strategicmanagement process. Business dynamics, to a large extent, is a dependent factor — it depends on,inter alia, the environmental dynamics. Hence, the importance of environmental analysis.

Busin

ess

Envir

onm

ent r

efer

s to

all t

hose

inte

rnal

and

exte

rnal

facto

rs wh

ichim

pact

the

func

tionin

g/pe

rform

ance

of a

firm

and

/or i

ts de

cision

-mak

ing,

partic

ularly

stra

tegie

s. Al

thou

gh th

e sc

ope

of th

e te

rm b

usine

ss e

nviro

nmen

tinc

ludes

, in

a br

oad

sens

e, b

oth

inter

nal a

nd e

xtern

al fa

ctors

impa

cting

the

busin

ess (

i.e.,

inter

nal a

nd ex

tern

al en

viron

men

ts) in

its co

mm

on us

age i

t ofte

nre

fers

to th

e ex

tern

al fa

ctors.

5A Glimpse of Business Environment

TYPES OF ENVIRONMENTOn the basis of the extent of intimacy with the firm, the environmental factors may be

classified into different types or levels. As indicated above, there are, broadly, two types ofenvironment, the internal environment, i.e., factors internal to the firm and external environment,i.e., factors external to the firm which have relevance to it.

The internal factors are generally regarded as controllable factors because the company hascontrol over these factors; it can alter or modify such factors as its personnel, physical facilities,organisation and functional means, such as marketing mix, to suit the environment.

The external factors, on the other hand, are, by and large, beyond the control of a company.The external or environmental factors such as the economic factors, socio-cultural factors, governmentand legal factors, demographic factors, geo-physical factors etc., are, therefore, generally regardedas uncontrollable factors.

It may, however, be noted that a firm may not sometimes have complete control over all theinternal factors. Also, it is sometimes possible to change certain external factors.

Some of the external factors have a direct and intimate impact on the firm (like the suppliersand distributors of the firm). These factors are classified as micro environment, also known as taskenvironment and operating environment. There are other external factors which affect an industryvery generally (such as industrial policy, demographic factors etc.). They constitute what is calledmacro environment, general environment or remote environment.

Although business environment consists of both the internal and external environments, manypeople often confine the term to the external environment of business. In this book too, in thesubsequent chapters, the term refers mostly to external environment of business.

INTERNAL ENVIRONMENT

The important internal factors which have a bearing on the strategy and other decisions areoutlined below.

Value SystemThe value system of the founders and those at the helm of affairs has important bearing on

the choice of business, the mission and objectives of the organisation, business policies and practices.It is a widely acknowledged fact that the extent to which the value system is shared by all in theorganisation is an important factor contributing to success.

BusinessDecision

InternalEnvironment

ExternalEnvironment

Fig.

1.1

Fact

ors

Influ

enci

ng

Bus

ines

s D

ecis

ion

Busin

ess e

nviro

nmen

t may

be

cons

idere

d at

thre

e lev

els:

•In

tern

al en

viron

men

t•

Micr

o en

viron

men

t/tas

k env

ironm

ent/o

pera

ting

envir

onm

ent

•M

acro

env

ironm

ent/g

ener

al en

viron

men

t/rem

ote

envir

onm

ent


The value system of JRD Tata and the acceptance of it by others whose matter were responsiblefor the voluntary incorporation in the Articles of Association of TISCO, its social and moralresponsibilities to consumers, employees, shareholders, society and the people.

After the EID Parry Group was taken over by the Murugappa Group, one of the most profitablebusinesses (liquor) of the ailing Parry Group was sold off as the liquor business did not fit into thevalue system of the Murugappa Group.

The value system and ethical standards are also among the factors evaluated by many companiesin the selection of suppliers, distributors, collaborators etc.

BOX 1.1 : VALUES, GOVERNANCE AND EXCELLENCE

Infosys Technologies Limited is a publicly held company based in India that provides informationtechnology consulting and software services to Fortune 1000 companies and employs more than3,000 people worldwide. Infosys has based its growth on several key principles of corporate governance:best practices, financial markets, and human capital. Its core value: To achieve our objectives in anenvironment of fairness, honesty, transparency, and courtesy towards our customers, employees,vendors, and society at large.

All Infosys activities are continually benchmarked with global best practices. The Firm’s qualitycontrol and project management have helped it achieve total quality management accreditation.Feedback from process audits enable the reengineering of internal processes when required.International accounting practices are also followed. Infosys publishes all financial reports accordingto both US and Indian Generally Accepted Accounting Practices. Best practices at Infosys are capturedthrough a knowledge management systems that makes experience gained from various clientassignments freely available in an intranet repository.

The first Indian-registered direct listing on a US market, Infosys began trading on Nasdaq inMarch 1999. Infosys viewed the listing as a way to achieve a more liquid currency (through stockoptions) for attracting the best employees and future acquisitions. It anticipates that its presence onNasdaq will give potential customers greater comfort and confidence in the company.

Infosys views its employees as its key resource. With “wealth creation for employees” as one of itsstated objectives, Infosys provides innovative compensation and benefit packages. Infosys pioneeredthe concept of the employee stock ownership plan in India. Infosys also offers such benefits astraining, asset acquisition, loans, housing, and personal assistance services. This combination ofstock options and benefits allows Infosys to attract top talent to contribute to its growth.

Infosys won the first National Corporate Governance Award (1999), instituted by the Ministry ofFinance and sponsored by the UTI.

Source: Financial Times, reproduced in M.R. Iskander and N. Chamlou, CorporateGovernance: A Framework for Implementation.

Vision, Mission and ObjectivesThe business domain of the company, priorities, direction of development, business philosophy,

business policy etc., are guided by the vision, mission and objectives of the company. Ranbaxy’sthrust into the foreign markets and development were driven by its mission “to become a research-based international pharmaceutical company”. Arvind Mills’ mission – “To achieve global dominancein select businesses built around our core competencies through continuous product and technicalinnovation, customer orientation and focus on cost effectiveness”, – has driven its future developmentstrategy including the portfolio strategy, and indicated the thrusts required in the functional areasto help achieve the mission.

Management Structure and NatureThe organisational structure, the composition of the Board of Directors, extent of

professionalisation of management etc., are important factors influencing business decisions. Some

The

valu

e sy

stem

of t

he o

rgan

isatio

ninf

luenc

es it

s po

rtfoli

o st

rate

gy, H

RM,

mar

ketin

g str

ateg

y and

CSR

.

Visio

n, m

ission

and

obje

ctive

s se

t the

scop

e, di

recti

on, p

hilos

ophy

and p

ace o

fde

velop

men

t.


management structures and styles delay decision-making while some others facilitate quick decision-making.

The Board of Directors being the highest decision-making body which sets the direction forthe development of the organisation and which oversees the performance of the organisation, thequality of the Board is a very critical factor for the development and performance of company. Theprivate sector in India presents extreme cases in this respect. At one end, there are companies withhighly qualified and responsible Board and at the other end there are companies which do notpossess these qualities.

The shareholding pattern could have important managerial implications. There are very largecompanies where majority of the share is held by the promoters (like Wipro) and there are largefirms where the promoters’ position is very vulnerable (like the Tata Group of Companies).

Financial institutions had large shareholding in many Indian companies. The stand of nomineesof financial institutions could be very decisive in several critical instances.

Internal Power RelationshipFactors like the amount of support the top management enjoys from different levels of employees,

shareholders and Board of Directors have important influence on the decisions and theirimplementation.

The relationship between the members of Board of Directors and between the chief executiveand the Board are also a critical factors.

Human ResourcesThe characteristics of the human resources like skill, quality, morale, commitment, attitude

etc., could contribute to the strength and weakness of an organisation. Some organisations find itdifficult to carry out restructuring or modernisation because of resistance by employees whereasthey are smoothly done in some others.

The involvement, initiative etc., of people at different levels may vary from organisation toorganisation. The organisational culture and overall environment have bearing on them. John Towers,M.D., Rover Group, observes that a Japanese company of 30,000 employees is 30,000 processimprovers. In a Western company, it is 2,000 process improvers and 28,000 workers.1 And in anIndian company?

Company Image and Brand EquityThe image of the company matters while raising finance, forming joint ventures or other

alliances, soliciting marketing intermediaries, entering purchase or sale contracts, launching newproducts etc. Brand equity is also relevant in several of these cases.

Miscellaneous FactorsThere are a number of other internal factors which contribute to the business success/failures

or influence the decision-making. They include the following.

1. Physical Assets and Facilities like the production capacity, technology and efficiency of theproductive apparatus, distribution logistics etc., are among the factors which influence thecompetitiveness of a firm. For example, as quality is very important in the pharmaceuticalindustry, particularly for a global player, in the case of Core Healthcare not only there isno compromise on quality but also the company made the quality norms stricter thaninternational or other relevant standards and the quality mantra has been well imbibedthroughout the organisation.

Inter

nal fa

ctors

deter

mine

the p

oten

tial o

f a co

mpa

ny to

mee

tth

e en

viron

men

tal c

halle

nges

.


2. R&D and Technological Capabilities, among other things, determine a company’s abilityto innovate and compete.

3. Marketing Resources like the organisation for marketing, quality of the marketing men,brand equity and distribution network have direct bearing on marketing efficiency. Theyare important also for brand extension, new product introduction etc.

4. Financial Factors like financial policies, financial position and capital structure are alsoimportant internal environment affecting business performances, strategies and decisions.

EXTERNAL ENVIRONMENT

As stated earlier, the external business environment consists of a micro environment and amacro environment.

Micro Environment“The micro environment consists of the actors in the company’s immediate environment that

affect the performance of the company. These include the suppliers, marketing intermediaries,competitors, customers and the publics.”2 The macro environment consists larger societal forces thataffect all the actors in the company’s micro environment — namely, the demographic, economic,natural, technical, political and cultural forces.”3

It is quite obvious that the micro environmental factors are more intimately linked with thecompany than the macro factors. The micro forces need not necessarily affect all the firms in aparticular industry in the same way. Some of the micro factors may be particular to a firm. Forexample, a firm which depends on a supplier may have a supplier environment which is entirelydifferent from that of a firm whose supply source is different. When competing firms in an industryhave the same micro elements, the relative success of the firms depends, inter alia, on their relativeeffectiveness in dealing with these elements.

SuppliersAn important force in the micro environment of a company is the suppliers, i.e., those who

supply the inputs like raw materials and components to the company. The importance of reliablesource/sources of supply to the smooth functioning of the business is obvious. Uncertainty regardingthe supply or other supply constraints often compel companies to maintain high inventories causingcost increases. It had been pointed out that factories in India maintained indigenous stocks of 3-4months and imported stocks of 9 months as against an average of a few hours to two weeks inJapan.4 The liberalisation, however, has caused a significant change in the situation.

Because of the sensitivity of the supply, many companies give high importance to Vendordevelopment. Vertical integration, where feasible, helps solve the supply problem. For example,Nirma has always been a believer of the logic that captive production plants for raw materials isthe best way to production costs in check and it has gone for a mammoth backward integration.In many cases, however, outsourcing is more beneficial.

It is very risky to depend on a single supplier because a strike, lock out or any other productionproblem with that supplier may seriously affect the company. Similarly, a change in the attitude orbehaviour of the supplier may also affect the company. Hence, multiple sources of supply oftenhelp reduce such risks.

The supply management assumes more importance in a scarcity environment. “Companypurchasing agents are learning how to “wine and dine” suppliers to obtain favourable treatmentduring periods of shortages. In other words, the purchasing department might have to “market” itselfto suppliers.”5

Both

tang

ible a

nd in

tangib

le as

sets

and t

hestr

uctur

e and

natu

re of

man

agem

ent s

hape

the

orga

nisat

ional

stren

gth.

The

micr

o en

viron

men

t is

also

know

n as

the

Task

Envir

onm

ent a

nd O

pera

ting

Envir

onm

ent b

ecau

se th

em

icro

envir

onm

enta

l for

ces

have

a d

irect

bear

ing o

nth

e op

erat

ions o

f the

firm

.Su

pply

chai

n m

anag

emen

t is

critic

al to

the e

fficien

cy of

a firm

.


Recognising the critical importance of the supply factor, companies all around the worldare increasingly resorting to partnering/relationship marketing. (For details, see the author’sBusiness Marketing (Himalaya Publishing House). Partnering is becoming more and more internationaland this provides a challenging opportunity for Indian suppliers to become international players.

CustomersAs it is often exhorted, the major task of a business is to create and sustain customers. A

business exists only because of its customers. Monitoring the customer sensitivity is, therefore, aprerequisite for the business success.

A company may have different categories of consumers like individuals, households, industriesand other commercial establishments, and government and other institutions. For example, thecustomers of a tyre company may include individual automobile owners, automobile manufacturers,public sector transport undertakings and other transport operators.

Depending on a single customer is often too risky because it may place the company in apoor bargaining position, apart from the risks of losing business consequent to the windingup of business by the customer or due to the customers switching over to the competitors of thecompany.

With the growing globalisation, the customer environment is increasingly becoming global.Not only that the markets of other countries are becoming more open, the Indian market is becomingmore exposed to the global competition and the Indian customer is becoming more “global” in hisshopping.

CompetitorsA firm’s competitors include not only the other firms which market the same or similar

products but also all those who compete for the discretionary income of the consumers. Forexample, the competition for a company’s televisions may come not only from other T.V.manufacturers but also from two-wheelers, refrigerators, cooking ranges, stereo sets and so on andfrom firms offering savings and investment schemes like banks, Unit Trust of India, companiesaccepting public deposits or issuing shares or debentures etc. This competition among these productsmay be described as desire competition as the primary task here is to influence the basic desire ofthe consumer. Such desire competition is generally very high in countries characterised by limiteddisposable incomes and many unsatisfied desires (and, of course, with many alternatives for spending/investing the disposable income).

If the consumer decides to spend his discretionary income on recreation (or recreation-cum-education), he will still be confronted with a number of alternatives to choose from like T.V., stereo,two-in-one, three-in-one etc. The competition among such alternatives which satisfy a particularcategory of desire is called generic competition.

If the consumer decides to go in for a T.V., the next question is which form of the T.V. — blackand white or colour with remote control or without it etc. In other words, there is a product formcompetition. Finally, the consumer encounters the brand competition, i.e., the competition betweenthe different brands of the same product form.

An implication of these different demands is that a marketer should strive to create primaryand selective demand for his products.

Consequent to the liberalisation, the competitive environment in India has been undergoinga sea change. Many companies restructured their business portfolio and strategies. In many industrieswhere a seller’s market existed a buyer’s market has emerged.

In ch

oosin

g the

custo

mer

segm

ents,

a co

mpa

ny sh

ould

cons

ider s

uch

fact

ors

as th

e re

lativ

e pr

ofita

bility

,de

pend

abilit

y, sta

bility

of de

man

d, gr

owth

pros

pects

and

the

exte

nt of

com

petiti

on.

Com

petit

ion h

as d

iffer

ent

levels

and

dim

ensio

ns.

The

liber

alisa

tion

has

dram

atica

lly tr

ansf

orm

ed th

eco

mpe

titive

env

ironm

ent in

India

.


The competitive environment is detailed in the section Competitive Structure of Industries laterin this chapter.

Marketing IntermediariesThe immediate environment of a company may consist of a number of marketing intermediaries

which are “firms that aid the company in promoting, selling and distributing its goods to finalbuyers”.6

The marketing intermediaries include middlemen such as agents and merchants who “help thecompany find customers or close sales with them”,7 physical distribution firms which “assist thecompany in stocking and moving goods from their origin to their destination”8 such as warehousesand transportation firms; marketing service agencies which “assist the company in targeting andpromoting its products to the right markets”9 such as advertising agencies, marketing research firms,media firms and consulting firms; and financial intermediaries which finance marketing activitiesand insure business risks.

Marketing intermediaries are vital links between the company and the final consumers. Adislocation or disturbance of the link, or a wrong choice of the link, may cost the company veryheavily. Retail chemists and druggists in India once decided to boycott the products of a leadingcompany on some issue such as poor retail margin. This move for collective boycott was, however,objected to by the MRTP Commission; but for this the company would, perhaps, have been introuble. Hindustan Lever too faced major challenge when it faced a collective boycott in Kerala onthe issue of trade margin.

FinanciersAnother important micro environmental factor is the financiers of the company. Besides the

financing capabilities, their policies and strategies, attitudes (including attitude towards risk), abilityto provide non-financial assistance etc. are very important.

PublicsA company may encounter certain publics in its environment. “A public is any group that has

an actual or potential interest in or impact on an organisation’s ability to achieve its interests.”10

Media publics, citizens action publics and local publics are some examples.

Some companies are seriously affected by such publics. For example, one of the leadingcompanies in India was frequently under attack by the media public, particularly by a leading dailywhich was allegedly bent on bringing down the share prices of the company by tarnishing its image.Such exposures or campaigns by the media might even influence the government decisions affectingthe company. Many companies are also affected by local publics. Environmental pollution is anissue often taken up by a number of local publics. Actions by local publics on this issue have causedsome companies to suspend operations and/or take pollution abatement measures. Non-governmentorganisations (NGOs), particularly in developed countries, have been mounting up protests againstchild labour, sweat labour, cruelty against animals, environmental problems, deindustrialisationresulting from imports and so on. Exports of developing countries, particularly, are affected by suchdevelopments.

It is wrong to think that all publics are threats to business. Some of the actions of the publicsmay cause problems for companies. However, some publics are an opportunity for the business.Some businessmen, for example, regard consumerism as an opportunity for the business. The mediapublic may be used to disseminate useful information. Similarly, fruitful cooperation between acompany and the local publics may be established for the mutual benefit of the company and thelocal community.

Diffe

rent

mar

ketin

g int

erm

ediar

iesca

n be v

ery h

elpfu

l in fo

rmula

ting a

ndop

erat

iona

lisin

g th

e m

arke

ting

strate

gy.

Grow

th of

cons

umer

publi

cs (li

ke N

GOs)

is an

impo

rtant

dev

elopm

ent a

ffect

ingbu

sines

s.


Macro (General/Remote) Environment

Micro (Task/Operating) Environment

Internal Environment

Political/Govt. environment

Financiers

Promoters’/shareholders’ values

Mission/ObjectivesManagement structureInternal power relationshipPhysical assets and facilities

Company image/brand equityHuman resourcesFinancial capabilitiesTechnological capabilitiesMarketing capabilities

BusinessDecision

Suppliers Customers

Publics Competitors

Demographic

environment

Global

environment

Marketing intermediaries

Legal environment

Social/Cultural environment Technological/Natural environment

Fig.

1.2

Bu

sine

ss E

nvir

onm

ent

MACRO ENVIRONMENT

A company and the forces in its micro environment operate in a larger macro environment offorces that shape opportunities and pose threats to the company.

The macro forces are, generally, more uncontrollable than the micro forces. When the macroenvironment is uncontrollable, the success of a company depends on its adaptability to theenvironment. For example, if the cost of the imported components increases substantially becauseof the depreciation of the domestic currency, a solution may be their domestic manufacture.

Important macro environment factors include economic environment, political and regulatoryenvironment, social/cultural environment, demographic environment, technological environment,natural environment, and global environment. Several of these are dealt with in some detail insubsequent chapters.

Mac

ro E

nviro

nmen

t, als

o kn

own

asGe

nera

l Env

ironm

ent

and

Rem

ote

Envir

onme

nt, r

efer

s to

facto

rs w

hich

affe

ct bu

sines

s in

gene

ral.


Global EnvironmentThe global environment refers to those global factors which are relevant to business, such as

the WTO principles and agreements; other international conventions/treaties/agreements/declarations/protocols etc.; economic and business conditions/sentiments in other countries etc. Similarly, thereare certain developments, like a hike in the crude oil price, which have global impact.

BOX 1.2 : THE 21ST CENTURY INTERNATIONAL SYSTEM

The international system of the twenty-first century will be marked by a seeming contradiction:on the one hand, fragmentation; on the other, growing globalisation. On the level of the relationsamong states, the new order will be more like the European state system of the eighteenth andnineteenth centuries than the rigid patterns of the Cold War. It will contain at least six major powers– the United States, Europe, China, Japan, Russia, and probably India – as well as a multiplicity ofmedium-sized and smaller countries. At the same time, international relations have become trulyglobal for the first time. Communications are instantaneous; the world economy operates on allcontinents simultaneously. A whole set of issues has surfaced that can only be dealt with on aworldwide basis, such as nuclear proliferation, the environment, the population explosion, andeconomic interdependence.

Source: Henry Kissinger, Diplomacy (Touchstone, New York, 1994).

The WTO principles and regulations have far-reaching implications for Indian business.Acceptance of product patents, for example, seriously impacts the Indian pharmaceutical industry.The import and investment liberalisations mandated by WTO have substantially changed thecompetitive environment in India.

Economic conditions in other countries may affect the business. For example, if the economicconditions in a company’s export markets are very good, export prospects are generally very goodand vice versa. Recession in other countries can increase the import threats, including dumping.

International political factors can also affect business, like war or political tensions oruncertainties, strained political relations between the nation and other countries (which sometimeseven culminates in sanctions).

Developments in information and communication technologies facilitate fast cross-border spreadof cultures, significantly influencing attitudes, aspirations, tastes, preferences and even customs,traditions and values. This has significant implications for business.

COMPETITIVE STRUCTURE OF INDUSTRIESThe competitive structure of industries is a very important business environment. Identification

of forces affecting the competitive dynamics of an industry will be very useful in formulatingstrategies.

According to Michael Porter’s well-known model of structural analysis of industries, the stateof competition in an industry depends on five basic competitive forces, viz.,

1. Rivalry among existing firms

2. Threat of new entrants

3. Threat of substitutes

Even

dom

estic

bus

iness

isaf

fect

ed b

y ce

rtain

globa

lfac

tors.


POTENTIALENTRANTS

Entry Barriers Threat of New Entrants

SUPPLIERS Bargaining RIVALRY AMONG Bargaining BUYERSPower EXISTING FIRMS Power

Constraints On Pricing

SUBSTITUTES

4. Bargaining power of suppliers

5. Bargaining power of buyers.

Fig. 1.3 depicts the five forces competitive structure of industry. The diagram is a slightlymodified presentation of the one provided by Porter. The arrows in the diverse directions indicateopposing forces. For example, just as the buyers and suppliers may have bargaining power over thefirm, the firm may also have some bargaining power over the buyers and suppliers.

Threat of EntryA growing industry often faces threat of new entrants that can alter the competitive environment.

There may, however, be a number of barriers to entry. Potential competition tends to be high if theindustry is profitable or critical, entry barriers are low and expected retaliation from the existingfirms is not serious.

Fig.

1.3

For

ces

Dri

ving

Ind

ustr

y C

ompe

titio

nBe

sides

com

petiti

on fr

om e

xistin

g firm

s in

the

indu

stry

, a

firm

may

fac

e co

mpe

titio

n fro

msu

bstitu

tes

and

new

entra

nts

includ

ing fo

rwar

dint

egra

tion b

y sup

plier

s and

back

ward

inte

grat

ionby

buy

ers a

s also

their

bar

gaini

ng p

ower

.

Gove

rnm

ent p

olicie

s, str

ateg

ies o

f exis

ting

playe

rs a

nd in

dust

ry c

hara

cter

istics

like

tech

nolog

ical fa

ctors

and

capit

al inv

estm

ent

size c

an cr

eate

entry

bar

riers.

The following are some of the important common entry barriers:

1. Government Policy: In many cases, government policy and regulation are important entrybarriers. For example, prior to the economic liberalisation in India, government-dictatedentry barriers were rampant, like reservation of industries/products for public sector andsmall-scale sector, industrial licensing, regulations under MRTP Act, import restrictions,restrictions on foreign capital and technology etc.

2. Economies of Scale: Economies of scale can deter entry in two ways: it keeps out smallplayers and discourages even potentially large players because of the risk of large stakes.

3. Cost Disadvantages Independent of Scale: Entry barrier may also arise from the costadvantages, besides that of economies of scale, enjoyed by the established firms whichcannot be replicated by new firms, such as proprietary product technology, learning or


experience curve, favourable access to raw materials, favourable location, governmentsubsidies etc.

4. Product Differentiation: Product differentiation characterised by brand image, customerloyalty, product attributes etc. may form an entry barrier forcing new entrants to spendheavily to overcome this barrier.

5. Monopoly Elements: Proprietary product/technology, monopolisation/effective control overraw material supplies, distribution channels etc. are entry barriers which are insurmountableor difficult to overcome.

6. Capital Requirements: High capital-intensive nature of the industry is an entry barrier tosmall firms. Further, the risk of huge investment could be a discouraging factor even forother firms.

Rivalry among Existing CompetitorsRivalry among existing competitors is often the most conspicuous of the competitions.

Firms in an industry are “mutually dependent” – competitive moves of a firm usually affectothers and may be retaliated. Common competitive actions include price changes, promotionalmeasures, customer service, warranties, product improvements, new product introductions, channelpromotion etc.

There are a number of factors, which influence the intensity of rivalry. These include:

1. Number of Firms and their Relative Market Share, Strengths etc.: Rivalry is likely to beaffected by the number firms, their relative market shares, competitive strengths, etc.

2. State of Growth of Industry: In stagnant, declining and, to some extent, slow growthindustries, a firm is able to increase its sales only by increasing its market share, i.e., atthe expense of others.

3. Fixed or Storage Costs: When the fixed or storage costs are very high, firms are provokedto take measures to increase sales for improving capacity utilisation or reducing storagecosts.

4. Indivisibility of Capacity Augmentation: Where there are economies of scale, capacityincreases would be in large blocks necessitating, in many cases, efforts to increase salesto achieve capacity utilisation norms.

5. Product Standardisation and Switching Costs: When the product of different firms arestandardised, price, distribution, after-sales service, credit etc. become important strategicvariables of competition. Absence of switching costs makes firms more vulnerable.

6. Strategic Stake: Rivalry in an industry becomes more volatile if a number of firms havehigh stakes in achieving success there. For example, a firm which regards a particularindustry as its core business will give great importance to success in that industry.

7. Exit Barrier: High exist barriers (for example, compensation for labour, emotional attachmentto the industry etc.) tend to keep firms competing in an industry even though the industryis not very attractive.

8. Diverse Competitors: Rivalry becomes more complex and unpredictable when competitorsare very diverse in their strategies, origins, personalities, relationships to their parents etc.

9. Switching Costs: In some cases, a barrier to entry is created by switching costs (i.e., one-time costs facing the buyer of switching from one supplier’s product to another’s) such ascost of retraining the employees, cost of new ancillary equipment etc.

Com

petiti

on am

ong e

xistin

g play

ers

is in

fluen

ced

by t

echn

olog

ical

fact

ors,

co

st

stru

ctur

e,ch

arac

terist

ics of

firm

s, ex

it bar

riers

and

antic

ipatio

ns.


10. Expected Retaliation: The potential entrants’ expectations about the reactions of the existingcompetitors may also sometimes deter entry.

Threat of SubstitutesAn important force of competition is the power of substitutes. “Substitutes limit the potential

returns in an industry by placing a ceiling on the price firms in the industry can profitability charge.The more attractive the price performance alternative offered by substitutes, the firmer the lid onindustry profits.”13

Firms in many industries face competition from those marketing close or distant substitutes.Porter points out that substitute products that deserve the most attention are those that are:(1) subject to trends improving their price-performance trade-off with the industry’s product, or (2)produced by industries earning high profits.14

Bargaining Power of BuyersFor several industries, buyers are potential competitors – they may integrate backward. Besides,

they have different degrees of bargaining power. “Buyers compete with the industry by forcingdown prices, bargaining for higher quality or more services, and playing competitors against eachother – all at the expense of industry profitability”.15

Important determinants of the buyer power, explained by Porter, are the following:

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

2. The importance of the product to the buyer in terms of the total cost.

3. The extent of standardisation or differentiation of the product.

4. Switching costs.

5. Profitability of the buyer (low profitability tends to pressure costs down).

6. Potential for backward integration by buyer.

7. Importance of the industry’s product with respect to the quality of the buyer’s product orservices.

8. Extent of buyers’ information.

Bargaining Power of SuppliersThe important determinants of supplier power are the following:

1. Extent of concentration and domination in the supplier industry.

2. Importance of the product to the buyer.

3. Importance of the buyer to the supplier.

4. Extent of substitutability of the product.

5. Switching costs.

6. Extent of differentiation or standardisation of the product.

7. Potential for forward integration by suppliers.

Porter’s analysis, thus, shows that competition in an industry goes well beyond the establishedplayers. “Knowledge of these underlying sources of competitive pressure highlights the critical

The b

arga

ining

powe

r and

pote

ntial

for

back

ward

inte

grat

ion o

f buy

ers

may

affe

ct a f

irm.

A firm

may

be

chall

enge

d by

the

barg

aining

powe

r and

the p

oten

tial fo

r for

ward

inte

grat

ionof

supp

liers.


strengths and weaknesses of the company, animates its positioning in its industry, clarifies the areaswhere strategic changes may yield the greatest payoff, and highlights the areas where industrytrends promise to hold the greatest significance as either opportunities or threats. Understandingthese sources will also prove to be useful in considering areas for diversification, though the primaryfocus here is on strategy in individual industries. Structural analysis is the fundamental underpinningfor formulating competitive strategy.”16

STRATEGIC GROUPS

The analysis of an industry within the framework of the five forces model will give a generalpicture of the competitive forces. Useful as this analysis is, it is not sufficient enough for formulatingcompetitive strategies. More in-depth knowledge of the competitive situation is needed because thecompetitive environment and competitive strategies of different firms within an industry may not bethe same. The size, resources and strengths of the firms etc. may differ between firms. Again, firmsdiffer with respect to portfolio strategy, product mix in each business, market segments targeted,marketing mix strategy, backward or forward integration, extent of outsourcing, intra-corporatelinkages, parent-subsidiary relationships etc. The strategic dimensions for a particular firm usuallyform an internally consistent set. An industry normally has firms with a number of different, thoughinternally consistent, combinations of dimensions. Analysis of the strategic dimensions of thehomogeneous sets of firms in a heterogeneous industry is an important step in structural analysisof industry. In other words, it is necessary to identify the various strategic groups within an industry.According to Porter, “a strategic group is the group of firms in an industry following the same orsimilar strategy along the strategic dimensions”.17 Normally, a small number of strategic groupscapture the essential strategic differences among firms in the industry although one may even thinkof the extreme cases of an industry having only one strategic group (i.e., all the firms are similarvis-à-vis the strategic dimensions) on the one end and each firm in an industry amounting to astrategic group on the other end. For example, in advanced countries like USA, there are twosignificant strategic groups in the pharmaceutical industry, namely, the proprietary group (i.e., firmsthat concentrate on patented drugs and who expend enormous resources on R&D), and the genericgroup (i.e., firms depending on off-patent drugs). In India, in many industries there are, at a verybroad level, firms in the organised sector and firms in the unorganised sector. Competitive strategiesof the unorganised sector firms are often different from those in the organised sector (it is possiblethat there are more than one strategic group in each of these sectors). Organised sector firms arenormally national or at least regional players whereas the unorganised sector firms, by and large,are local or at best regional player. The direct and major competitors and market/target customersof these groups would be different and, therefore, the marketing strategies would be different. Inthe furniture industry, for example, Godrej and Allwyn are national players and their importantcustomers are corporates and other quality-conscious customers – organisations and individuals –who are not very price-sensitive. The numerous firms in the unorganised sector in this industry arelargely local players and they cater mostly to price-sensitive customers. In the hotel and restaurantindustry, the competitors of a five star hotel is mostly other five star hotels and they have manycommon strategic dimensions. The five star hotels, therefore, form one strategic group. Similarly,three star hotels constitute another strategic group.

There may be barriers to shifting strategic position from one strategic group to another. Suchbarriers are referred to as mobility barrier. For example, an assembler of personal computers mayencounter several barriers to shift to the position of a fully integrated computer manufacturer, suchas barriers of technology, capital investment, human resources and organisation, brand image andmarket standing of established firms etc. Similarly, there are several barriers to entering the proprietarygroup by generic drug firms, such as capital investment, research facilities, human resources, highrisks of investment on R&D etc. In contrast, it is easier for a proprietary drug firm to enter thegeneric group.

The

strat

egic

grou

p m

ay b

e co

nside

red

as th

em

icro

com

petiti

ve en

viron

men

t for

a firm

.


Implications of Strategic GroupsThe concept of strategic groups has implications for industry analysis and identification of

opportunities and threats. A company’s immediate competitors are firms within the same strategicgroup.

Second, the nature and intensity of competition and business prospects vary from strategicgroup to strategic group. The choice of strategic group is, therefore, very important.

Third, high mobility barriers normally help insulate the group from new entrants and facilitatehigh profitability. “The firms in strategic groups with high mobility barriers will have greater profitpotential than those in groups with lower mobility barriers. These barriers also provide a rationalefor why firms continue to compete with different strategies despite the fact that all strategies are notquickly successful”.18

Fourth, “just like entry barriers, mobility barriers can change; and as they do (such as if themanufacturing process becomes more capital-intensive), firms often abandon some strategic groupsand jump into new ones, changing the pattern of strategic group. Mobility barriers can also beinfluenced by firm’s choices of strategy. A company in an undifferentiated product industry, forexample, can attempt to create a new strategic group (with higher mobility barriers) by investingheavily in advertising to develop brand identification…Or it can try to introduce a new manufacturingprocess with greater economies of scale”.19

Fifth, the competitive standing of the different strategic groups would be different with respectto each of the five competitive forces. For example, the threat of new entrants is less in respect ofthe proprietary group compared to the generic drug group. The bargaining power of the buyers isalso weak for patented drugs because of no or limited alternative. Such is the case with competitionfrom substitutes. Players in the strategic group of fully integrated firms may not be subject to asmuch supplier power as other firms because of their lesser dependence on the outside suppliers.(It is, of course, true that in a number of cases outsourcing firms have advantages over integratedones.)

Limitations of Porterian ModelsThe five forces and strategic group models provide very useful frameworks for analysing the

nature of competition in an industry. These models, however, suffer from some important shortcomingsmentioned below.

In many industries, competition is a process driven by innovation and industry structures arevery significantly changed by innovation. In a later work, Porter has recognised the role of innovationin revolutionising industry structure. Innovations, according to him, can unfreeze and reshapeindustry structure. He holds that after a period of turbulence triggered by innovation, the structureof an industry once more settles down to a stable pattern. Once the industry stabilises in its newconfiguration, the five forces and strategic group concepts can once more be applied. This view ofthe evolution of industry structure is often referred to as punctuated equilibrium. The punctuatedequilibrium view holds that long periods of equilibrium, when industry’s structure is stable, arepunctuated by periods of rapid changes when industry structure is revolutionised by innovation.Thus, there is an unfreezing and refreezing process.

COMPETITOR ANALYSIS

Competitor analysis is necessary for formulating right strategies and determining the rightpositioning for the firm in the industry.

Inte

r-firm

riva

lry is

the

stron

gest

in th

e str

ateg

ic gr

oup.


Competitor analysis seeks to find answers to certain basic questions such as:

1. Who are the competitors of the firm?

2. What are the current strategies of the competitors?

3. What are their future goals and likely strategies?

4. What drives the competitor?

5. Where is the competitor vulnerable?

6. How are the competitors likely to respond to the strategies of others?

Porter has suggested a framework for competitor analysis, consisting of four diagnosticcomponents, viz., future goals, current strategy, assumptions and capabilities.

As Porter observes, “its goals, assumptions, and current strategy will influence the likelihood,timing, nature, and intensity of competitor’s reactions. Its strengths and weaknesses will determineits ability to initiate or react to strategic moves and to deal with environmental or industry eventsthat occur”.20

Competitor Response ProfileAn analysis of these components will help to formulate what Porter calls competitor’s response

profile, i.e., answers to critical questions such as: What moves or developments will provoke thecompetitor and how is the competitor likely to respond or retaliate?

The competitor response profile seeks to predict the competitor’s offensive moves and defensivecapabilities.

Future GoalsAnalysis of future goals would be helpful to identify the attitude and behaviour of the competitor

and likely strategies. As Porter observes, “a knowledge of goals will allow predictions about whetheror not each competitor is satisfied with its present position and financial results and, thereby, howlikely that competitor is to change strategy and the vigour with which it will react to outsideevents.... or to moves by other firms?”21

Knowledge of competitor’s goals may help to predict its reactions to strategic changes.

Goals of both the business unit and corporate parent need to be examined.

In 1996, the CEO of ICI had revealed that it wanted to increase the contribution of its Asianoperations from 15 per cent to 25 per cent of the total and earmarked 800 million pounds forinvestment in Asia, including 200 million for India. It was believed that a part of it would go foracquisitions. Similarly, the CEO of Hindustan Lever (now HUL) revealed the intention to raise thecompany’s contribution to the Unilever’s global turnover from about 5 per cent to 10 per centwithin a decade. Falling in line with the parent’s portfolio strategy, HLL identified the processedfood business as a major thrust area. It was, thus, clear that the HLL would go for massive capacityexpansion, including M&A.

AssumptionsIt is critical to understand:

1. The competitor’s assumptions about itself.

2. The competitor’s assumptions about the industry and the other companies in it.

Com

petito

r ana

lysis

enco

mpa

ses g

oals,

strat

egies

, cap

abilit

ies a

nd p

erce

ption

s.


A firm may perceive itself as a socially-conscious organisation, the industry leader, quality-conscious firm, highly ethical etc. Such assumptions will, obviously, guide the way the firm behaves,including reactions to competitors’ moves.

A firm would also have assumptions about the industry and competitors, like the industryprospects; competitors’ goals, capabilities and weaknesses; competitors’ possible behaviours andreactions etc.

The strategies and moves of a firm will be influenced by the above two assumptions.

The assumptions may or may not be correct.

Current StrategyIdentification of the current strategies of the competitors is a very important component of

competitor analysis. “A competitor’s strategy is most usefully thought of as its key operating policiesin each functional area of the business and how it seeks to interrelate the functions.”22

CapabilitiesThe ability of a firm to accomplish its goals and to respond to competitor’s moves depends

on its strengths and weaknesses. Analysis of the strengths and weaknesses of the competitors is,therefore, very important.

VALUE CHAIN

Porter points out that a firm’s value chain is an important determinant of competitive advantage.

Value is the amount buyers are willing to pay for what a firm provides them. The total revenuereflects the value. Creating value for buyers that exceeds the cost of doing so is the goal of anygeneric strategy.

The value chain displays total value and consists of value activities and margin. Value activitiesare the physically and technologically distinct activities a firm performs.

There are, broadly, two types of value activities, namely, primary activities and support activities.

Primary activities include: (i) inbound logistics (activities associated with receiving, storing anddisseminating inputs to products); (ii) operations (processing activities); (iii) marketing and sales; and(iv) services.

Support activities include: (i) procurement (purchasing of inputs); (ii) technology development;(iii) human resource management and (iv) firm infrastructure (includes general management, planning,finance, accounting, legal and government affairs and quality management).

Each of these activities may be subdivided into several activities. For example, marketing andsales include activities such as advertising, sales promotion, sales force management, marketingresearch etc.

A firm gains competitive advantage by performing these strategically important activities morecheaply or better than its rivals. A firm should strive to understand not only its own value chainactivities but also of the competitors’, distributors’ and suppliers’. This has important implicationsfor the business marketers.

A fir

m’s

strat

egies

are

sha

ped

by it

sas

sum

ption

s and

cap

abilit

ies.

The

effic

ienc

y wi

th w

hich

val

uecre

ating

activ

ities a

re ca

rried

out is

anim

porta

nt d

eter

mina

nt o

f com

petiti

vead

vant

age.


BENEFITS OF STRUCTURAL ANALYSIS

The purpose of the structural analysis is to diagnose the competitive forces and to identify thestrengths and weaknesses of the firm vis-à-vis the industry, to help formulate an effective competitivestrategy that “takes offensive or defensive action in order to create a defendable position against thefive competitive forces”.23

Structural analysis would enable a firm to answer such questions as:

1. How vulnerable is the firm against potential entrants? In other words, are there or howinsurmountable are the entry barriers? Or, what measures can it take to ward off newentrants?

2. How serious is the threat of substitutes? What strategies should the firm employee againstthem?

3. What is the nature of supplier power? How to combat it?

4. How powerful are the buyers? How to deal with their bargaining power?

5. What are the strengths and weaknesses and strategies of the established competitors andhow to cope with them?

ENVIRONMENTAL ANALYSIS AND STRATEGIC MANAGEMENTAn analysis of SWOT (i.e., strengths and weaknesses of the company and the opportunities

and threats in the environment) plays a very important role in the strategic management or businesspolicy. A look at the strategic management process would make the importance of the external-internal factors nexus more clear.

Glueck defines strategy as a “unified, comprehensive and integrated plan relating the strategicadvantages of the firm to the challenges of the environment. It is designed to ensure that the basicobjectives of the enterprise are achieved.”24 Strategic management is defined as “that set of decisionsand actions which leads to the development of an effective strategy or strategies to help achievecorporate objectives.”25

Chandler describes strategic management as “the determination of the basic long-term goalsand objectives of an enterprise and the adoption of courses of action and allocation of resourcesnecessary to carry out these goals”.26 According to Paine and Naumes, “Strategic managementinvolves the decision-making and the activities in an organisation which: (1) have wider ramifications,(2) have a long time perspective, and (3) use critical resources towards perceived opportunities orthreats in a changing environment”.27

Strategic management or business policy is, thus, the means to achieve the organisationalpurpose. Strategic management process involves determining the mission and objectives, analysisof the environmental opportunities and threats and evaluating the strengths and weaknesses of thefirm to tap the opportunities or to combat the threats, formulating strategies to achieve the objectiveson the basis of the SWOT analysis, choosing the most appropriate strategy, implementation of thestrategy and reformulation of the objectives or strategy, if needed.

The strategic management process is schematically presented in Fig. 1.4. A very brief accountof the steps in the strategic management process is given below. A detailed discussion of strategicmanagement is, obviously, beyond the scope of this book; what is given below is only a sketch.

Esta

blish

ing th

e rig

ht fi

rm-e

nviro

nmen

t fit

is th

ees

senc

e of s

trate

gy fo

rmula

tions

.


As the objective of this chapter is to the highlight the importance of the environmental analysis tomanagerial decision-making, more space is devoted to the description of this step than the othersteps.

Formulation of Mission and Objectives

Determining the mission and objectives of the company is the first step in the strategicmanagement process. A strategy is, in fact, a means to achieve the ends or objectives. It should,however, be noted that objectives should not be static, they should be dynamic. That is changesin the environment and/or changes in the organisational strengths and weaknesses may call formodifications to the objectives. A company should, therefore, appraise how well its objectives tapthe firm’s opportunities and resources. Dynamic companies conduct audit of their objectives andreformulate or reorient the objectives, if desirable, to ensure that the company’s objectives are themost appropriate, given the environment and the company’s resources. It is such appraisal and theresultant reorientation of the business which have enabled many companies to achieve remarkablesuccesses.

To formulate clear objectives, it is essential to get definite answers to certain questions, viz.,“What business the company is in?”, “What should the company’s business be?”, “What will thecompany’s business be?” As Gluek aptly remarks, “objectives help define the organisation in itsenvironment.”28 Environmental analysis will help find answer to the question “What should thecompany’s business be?” If ‘what should be the business’ is different from ‘what is the business’,there is certainly a need for redefining the business, matching the company resources to theenvironment. The question ‘what will the company’s business be?’ exposes another dimension ofbusiness objectives, namely, the long-term perspective. As Drucker succinctly puts it, ‘what will thebusiness’ is related to ‘what changes in the environment are already discernible that are likely tohave high impact on the characteristics, mission, and purpose of our business?’ and ‘how do wenow build these anticipations into our theory of business, into its objectives, strategies and workassignments?’”29

SWOT Analysis

Identification of the threats and opportunities in the environment and the strengths andweaknesses of the firm is the cornerstone of business policy formulation; it is these factors whichdetermine the course/courses of action to ensure the survival and/or growth of the firm.

The environment might present many opportunities, but a company might not have the strengthsto exploit all the opportunities. Similarly, sometimes a firm will not have the strength to meet theenvironmental threats. If a company, thus, finds that it will not have the competence to survive ina particular line of business, it will be prudent to give it up and concentrate on such business/businesses for which the firm is most competent. The economic liberalisation ushered in India in1991 drastically changed the business environment. Many companies have exited several of theirbusinesses and have been concentrating on their core businesses. For example, the Ceat to concentrateon its core business – tyre. Funds obtained by the divestment have been used, in many cases, toconsolidate or further develop the businesses they have decided to focus on.

Indeed, strategic management has come to assume great importance as a result of theliberalisation. The liberalisation, by substantially expanding the scope of private enterprise andremoving the entry and growth restrictions, has given a substantial leeway to private enterprise todecide the portfolio strategy. A number of companies have changed their business portfolios (i.e.,the businesses they are in). Many have entered new businesses (Reliance, for example) and exitedsome of their businesses, while many have done both (like the Tata Group and RPG Group). A

Miss

ion a

nd o

bjecti

ves

defin

e th

eph

iloso

phy,

scop

e an

d ta

sks

of a

nor

ganis

ation

.


number of companies have been growing organically as well as by acquisitions (e.g., GujaratAmbuja).

Changes in the business environment across the world may change the industrial scenario ofnations. Wells, for example, has pointed out in his well-known International Product Life Cyclemodel30 that certain products which were exported in the early stages of the product life cycle byhigh income countries like the USA were later imported by them. Other countries which acquiredthe technology would be able to produce them cheaper because of low labour cost or wouldsometimes improve the technology. Thus, although the US had a very dominant position in electronicproducts and had been exporting them in the beginning, later countries like Japan started exportingthem to the US and replacing the US in other markets too. An analysis of products traded bycountries like Japan, Korea, Taiwan etc. would show the changes in the comparative advantages.

The environmental opportunities and threats should be evaluated in the light of the strengthsand weaknesses of the internal factors comprising finance, technology and skill, production facilities,personnel and marketing capabilities. The capability of a company to exploit the environmentalopportunities or to meet the challenges depends on the strength of these factors. Procter andGamble (P&G), Unilever’s arch rival globally, had a tough time in India because Hindustan Leversitting entrenched with its long standing familiarity of the Indian market and marketing prowess wasa formidable force in India.

Japanese companies saw an opportunity in the US market segments for compact fuel-efficientcars, small screen T.V.s, low horsepower tractors etc., which were rather neglected by the Americanfirms. As the Japanese firms were marketing these products in the home market, they were, unlikethe American counterparts, comfortable with these products. The conjecture of the market opportunityand the strategic strength enabled the Japanese companies to penetrate the American market. Afterhaving consolidated their position in these segments, they have moved up to other segments withthe strength of the reputation they established.

The general success of the Japanese in the world market is attributed to the right choice of theproducts and markets, based on a proper understanding of the environment and the internal strengths.Kotler and Fahey point out that “the Japanese government and companies work hard to identifyattractive global markets. They favour industries that require high skills, high labour intensity andonly small quantities of natural resources: candidates include consumer electronics, cameras, watches,motorcycles and pharmaceuticals. They prefer product markets that are in a state of technologicalevolution. They like product markets where consumers around the world would be willing to buythe same product designs. They look for industries where the market leaders are complacent orunderfinanced.”31

Strategic Alternatives and Choice of StrategyAfter the identification of the environmental opportunities and threats and the organisational

strengths and weaknesses (and the reformulation of the mission and objectives, if needed), the nexttasks in the strategic management process are the consideration of strategic alternatives and thechoice of the most appropriate strategy/strategies.

A company may be confronted with several alternatives such as:

• Should the company continue in the same business or get out of it?

• If it should continue in the same business, should it grow by expanding the existing units,establishing new units or by acquiring other units in the industry?

• If it should diversify, should it diversify into related areas or unrelated areas?

• Should it grow by vertical integration?

Stra

tegy

is s

hape

d by

miss

ion/

objec

tives

and

SW

OT.

business · profound impact on the business. the type of product to be manufactured and marketed,...

Documents