Business environment

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Business environment

  1. 2. <ul><li>Environment means the surroundings, external objects, influences or circumstances under which someone or something exists. The environment of any organisation is the aggregate of all conditions, events & influences that surround & affect it. </li></ul>
  2. 3. <ul><li>Purchase decision: Automobile </li></ul><ul><li>Supplier of raw materials </li></ul><ul><li>Manufacturer </li></ul><ul><li>Dealer </li></ul><ul><li>Advertising agency </li></ul><ul><li>Banker </li></ul><ul><li>Insurance agent </li></ul>
  3. 4. <ul><li>Business- economic activity </li></ul><ul><li>Business firm- economic unit </li></ul><ul><li>Business decision making- economic in nature </li></ul><ul><li>Business achieve objectives by using resources optimally </li></ul><ul><li>Decisions taken in the presence of environmental factors </li></ul>
  4. 5. <ul><li>Business firm is micro economic unit </li></ul><ul><li>Business environment furnishes macro economic context for its operation </li></ul><ul><li>Environment in which business operates </li></ul><ul><li>Includes conditions, events, factors that influence the working of business </li></ul>
  5. 6. <ul><li>Classification: </li></ul><ul><li>Time: past, present & future environment of business </li></ul><ul><li>Space: local, regional, national , international environment of business </li></ul><ul><li>Forces: forces of market like demand, supply </li></ul><ul><li>Factors: economic & non-economic </li></ul>
  6. 7. <ul><li>The classification of relevant environment into components helps the organisation to cope with its complexity, comprehend the different influences operating & relating the environmental changes to its strategic management process. </li></ul><ul><li>Business firms: adaptability & adoptability to environment </li></ul><ul><li>Managers: capability & copability to deal with environment </li></ul>
  7. 8. BUSINESS DECISIONS INTERNAL ENVIRONMENT EXTERNAL ENVIRONMENT
  8. 9. <ul><li>Richman & Copen………… </li></ul><ul><li> Environment factors or constraints are largely, if not totally, external and beyond the control of individual industrial enterprises & their managements. These are essentially the ‘givers’ within which the firms & their managements must operate in a specific country & they vary often greatly from country to country. </li></ul>
  9. 10. <ul><li>Business environment for a firm- multi layered structure. </li></ul><ul><li>Layers: </li></ul><ul><li>favourable/ adverse </li></ul><ul><li>exhibit different characteristics </li></ul><ul><li>affect adjoining layer over a period of time </li></ul><ul><li>Closeness of interaction & interrelationship diff at diff levels </li></ul><ul><li>Example: changes in global business environment may effect the domestic growth environment significantly </li></ul>
  10. 11. INTERNAL ENVRNMNT EXTERNAL RIVAL FINANCIERS CUST OMR INPUT PRVIDER DOMESTIC MACRO ECNMC ENVRNMNT NON ECNMC MACRO ENVRNMNT SOCIAL CULTRL ECMNC STBLTY ECNMC SYSTM GRWTH &DIST ECO POLICY DEMGRPHC INTRNTNL ENVRNMT INTRNTNL ENVRNMT GOVT CONTD……
  11. 12. <ul><li>Change in environment presents opportunity to some & threat to others </li></ul><ul><li>Examples: </li></ul><ul><li>General agreement on trade & services (GATS) implemented in India on Jan 1, 2005: opportunity for research based pharmaceutical cos like Ranbaxy but threat to smaller companies. </li></ul><ul><li>HUL took advantage of new takeover & merger codes: acquired Kissan from UB group, Lakme from Tata, Modern foods from government. </li></ul>
  12. 13. <ul><li>Regarded as controllable factors: companies have control over them </li></ul><ul><li>Internal economy: some internal factors contribute increase in productivity </li></ul>
  13. 14. <ul><li>Mission & vision of the organisation </li></ul><ul><li>Management strategy </li></ul><ul><li>Industrial relations </li></ul><ul><li>Corporate culture & values </li></ul><ul><li>Line & staff relations </li></ul><ul><li>Quality control system </li></ul><ul><li>Team spirit among employees </li></ul><ul><li>Work culture </li></ul><ul><li>Compensation system </li></ul><ul><li>Career progression of employees </li></ul>
  14. 15. <ul><li>Conflict b/w different owner groups </li></ul><ul><li>Conflicts b/w workers & managers </li></ul><ul><li>Inter departmental conflicts </li></ul><ul><li>Unhealthy competition & conflict among employees </li></ul><ul><li>Office politics </li></ul><ul><li>Discrimination at work place </li></ul><ul><li>Absenteeism </li></ul>
  15. 16. <ul><li>Regarded as uncontrollable factors: by and large beyond the control of company. </li></ul><ul><li>External economy: some external factors contribute to the growth of the company. </li></ul>
  16. 17. <ul><li>Suppliers </li></ul><ul><li>Customers </li></ul><ul><li>Competitors </li></ul><ul><li>Financiers </li></ul><ul><li>Society </li></ul>
  17. 18. BUSINESS POLITICAL LEGAL ECONOMIC SOCIAL CULTURAL TECHNOLOGICAL GLOBAL NATURAL
  18. 19. <ul><li>Economic system </li></ul><ul><li>Growth & distribution environment </li></ul><ul><li>Macro economic stability (price level, exchange rate, interest rate, money supply, aggregate demand, BOP, employment rate) </li></ul><ul><li>Economic policy (monetary policy, fiscal policy, industrial policy, trade policy) </li></ul>
  19. 20. <ul><li>Political environment </li></ul><ul><li>Social / cultural environment </li></ul><ul><li>Demographic environment </li></ul><ul><li>Technological environment </li></ul><ul><li>Natural environment </li></ul><ul><li>Historical environment </li></ul>
  20. 21. <ul><li>State of world economy </li></ul><ul><li>International economic cooperation </li></ul><ul><li>Role of multilateral economic institutions </li></ul><ul><li>International economic laws, agreements, codes </li></ul><ul><li>Political condition & system in different countries </li></ul><ul><li>Cultural factors across countries </li></ul><ul><li>Growth & spread of MNCs </li></ul><ul><li>Technology growth & transfer </li></ul><ul><li>International market structure & competition </li></ul><ul><li>Barriers to international trade & investment </li></ul>
  21. 22. <ul><li>(I) POLITICAL ENVIRONMENT </li></ul><ul><li>Political stability- changes in the form & structure of government administration </li></ul><ul><li>Political organisation- ideology of ruling government; influence of premier groups; conflicting role of public & private sector </li></ul>
  22. 23. <ul><li>Example: </li></ul><ul><li>Nehru: transformation of agrarian economy into industrialised economy </li></ul><ul><li>Indira Gandhi: state became active in agriculture sector (subsidised fertilisers, expansion of institutional credit); tightening of state control over industrial finance, foreign investment, trade </li></ul><ul><li>Since 1990-91, political environment changed- economy increasingly being liberalised </li></ul>
  23. 24. <ul><li>Example: </li></ul><ul><li>In 1977, Janata govt came to power: Coca cola, IBM had to leave country. All liquor cos had to close operations. </li></ul><ul><li>1991 new economic order presented new opportunities for business & also threat to inefficient organizations. </li></ul>
  24. 25. <ul><li>(II) REGULATORY & LEGAL ENVIRONMENT </li></ul><ul><li>Legal policies- formulation & implementation </li></ul><ul><li>Economic legislations- facilitator and/ or restrictor </li></ul><ul><li>Playa a vital role- dictating dos & don’ts of business </li></ul><ul><li>Flexibility & adaptability of law- constitutional amendments </li></ul><ul><li>Foreign policy- tariffs, custom unions etc </li></ul>
  25. 26. <ul><li>(III) SOCIO- CULTURAL ENVIRONMENT </li></ul><ul><li>SOCIAL ENVIRONMENT </li></ul><ul><li>Made up of attitude, desires, expectations, education, beliefs & customs of people </li></ul><ul><li>Changes gradually </li></ul><ul><li>To forecast a change is difficult </li></ul>
  26. 27. <ul><li>CULTURAL ENVIRONMENT </li></ul><ul><li>Organisational culture is the customary or traditional ways on thinking & doing things, which are shared to a greater or lesser extent by all the members of the organisation, which new members must learn & at least partially accept in order to be accepted into the service of the firm. </li></ul>
  27. 28. <ul><li>A firm wanting to market its product in various regions with diversified cultures will have to carefully study the existing consumption pattern & scope for creating demand for new products & will have to adjust their marketing communication to cultural characteristics. </li></ul><ul><li>If the society is multi- cultural, then the firm can not meet the demands of different groups with a uniform product. To be successful in a multi cultural society, the firm will have to carefully study the consumption behaviour of different groups. </li></ul>
  28. 29. <ul><li>Example: </li></ul><ul><li>Companies have to change their product portfolio because of cultural differences as McDonald and KFC did when they launched their restaurant chain in India. </li></ul>
  29. 30. <ul><li>(IV) DEMOGRAPHIC ENVIRONMENT </li></ul><ul><li>(a) Size & growth rate of population </li></ul><ul><li>Growing population: boon </li></ul><ul><li>Increase in productive forces </li></ul><ul><li>Bigger market for products </li></ul>
  30. 31. <ul><li>Growing population: bane </li></ul><ul><li>Adverse impact on per capita income & standard of living </li></ul><ul><li>Adverse impact on savings: unfavourable impact on capital formation </li></ul><ul><li>Adverse impact on employment situation </li></ul><ul><li>Increasing pressure on agriculture </li></ul>
  31. 32. <ul><li>(b) age structure of population </li></ul><ul><li>It determines: </li></ul><ul><li>Productivity level </li></ul><ul><li>Demand pattern </li></ul><ul><ul><li>Young population: PTC high </li></ul></ul><ul><ul><li>Elderly population: high savings </li></ul></ul>
  32. 33. <ul><li>(c) urban- rural population </li></ul><ul><li>Proportion of urban rural population increasing </li></ul><ul><li>Reasons </li></ul><ul><li>Pull factors: </li></ul><ul><li>Better employment opportunities in urban areas </li></ul><ul><li>Better income </li></ul><ul><li>Better education </li></ul><ul><li>Better health facilities </li></ul>
  33. 34. <ul><li>Push factors: </li></ul><ul><li>Low level of agriculture productivity </li></ul><ul><li>Disguised unemployment </li></ul><ul><li>Wide disparity between urban & rural levels of living </li></ul><ul><li>In India, urban population increased from 17.3% of total population in 1951 to 27.78% of total population in 2001 (Source: Economic Survey 2003-04) </li></ul>
  34. 35. <ul><li>Example: </li></ul><ul><li>Demographic environment decides the marketing mix for an organisation. A one rupee sachet of shampoo or a five rupee ice-cream cone are some examples. </li></ul>
  35. 36. <ul><li>(V) TECHNOLOGICAL ENVIRONMENT </li></ul><ul><li>Refers to body of skills, knowledge & procedures for making, using & doing useful things </li></ul><ul><li>Positive effects of technology : </li></ul><ul><li>Increased productivity </li></ul><ul><li>Spread effects </li></ul><ul><li>Production of new & better goods of standardised quality with more efficient use of raw materials </li></ul><ul><li>Basis for fast growing urban & industrial system </li></ul>
  36. 37. <ul><li>Negative effects of technology : </li></ul><ul><li>Displacement of labour </li></ul><ul><li>Environmental pollution </li></ul><ul><li>Switching over might be costly </li></ul>
  37. 38. <ul><li>Example: </li></ul><ul><li>FIAT was using old technology but MUL had no option than to go for superior technology. </li></ul>
  38. 39. <ul><li>(VI) NATURAL ENVIRONMENT </li></ul><ul><li>Industrial activity not entirely independent of nature </li></ul><ul><li>Industrial units using weight losing inputs to be set up at sources of these inputs </li></ul><ul><li>Externalities </li></ul>
  39. 40. <ul><li>(VII) EDUCATIONAL ENVIRONMENT </li></ul><ul><li>Attitude towards education & acquisition of knowledge </li></ul><ul><li>Types of education- formal or informal </li></ul><ul><li>Literacy level </li></ul><ul><li>Educational match with skill requirement </li></ul>
  40. 41. <ul><li>(VII) HISTORICAL ENVIRONMENT </li></ul><ul><li>Historical events & ideologies have a strong impact on the current state of business </li></ul><ul><li>Example: business environment in a number of newly independent nation states has been determined by the colonial status that these countries had. </li></ul>
  41. 42. <ul><li>Dynamic </li></ul><ul><li>Uncertain </li></ul><ul><li>Element of Risk </li></ul><ul><li>Opportunities & threats </li></ul><ul><li>Internal & external factors </li></ul><ul><li>Economic & non-economic factors </li></ul>
  42. 43. <ul><li>Facilitates operations of the organisation </li></ul><ul><li>Forms the basis of long term policies, plans, strategies of organisation </li></ul><ul><li>Helps organisation in identifying & understanding its competitors </li></ul><ul><li>Helps the firm to expand & grow </li></ul>
  43. 44. <ul><li>CORPORATE RESPONSE & ADJUSTMENT TO SPECIFIC CHANGES IN BUSINESS ENVIRONMENT </li></ul>
  44. 45. <ul><li>Competitive environment </li></ul><ul><li>Marketing strategy </li></ul><ul><li>Developing new product </li></ul><ul><li>Satisfying customers </li></ul><ul><li>Measures for realisation of economies of scale & scope </li></ul>
  45. 46. <ul><li>Technological environment </li></ul><ul><li>R & D </li></ul><ul><li>Foreign technical collaborations </li></ul><ul><li>Choice of technology </li></ul><ul><li>Capital labour ratio </li></ul>
  46. 47. <ul><li>Labour environment </li></ul><ul><li>Productivity </li></ul><ul><li>Employee motivation </li></ul><ul><li>Employees’ turnover rate </li></ul><ul><li>Working conditions </li></ul><ul><li>Compensation </li></ul>
  47. 48. <ul><li>Legal environment </li></ul><ul><li>Procedures & documentation </li></ul><ul><li>Ethical practices </li></ul><ul><li>Intellectual property protection </li></ul><ul><li>Credibility </li></ul>
  48. 49. <ul><li>Social environment </li></ul><ul><li>Social responsibility </li></ul><ul><li>Welfare expenditure </li></ul>And so on………….
  49. 50. <ul><li>Environmental changes: </li></ul><ul><li>Liberalisation era forced businessmen to think of core competencies </li></ul><ul><li>Reckless diversifications made during pre liberalisation era became liabilities </li></ul>
  50. 51. <ul><li>Strategic responses: </li></ul><ul><li>Restructuring business </li></ul><ul><li>Internationally to consolidate strength in brewing & distilling </li></ul><ul><li>In India to focus on engineering, services, health care, brewing & distilling </li></ul><ul><li>Hiving of non core business like pharmaceuticals </li></ul>
  51. 52. <ul><li>Consequences: </li></ul><ul><li>With the excess baggage being shed, UB group looks slim & vibrant </li></ul>
  52. 53. <ul><li>Firms that are able to make appropriate adjustment to business environment changes reduce risk & uncertainty & gain competitive edge over others. Failure in making timely adjustment may erode profitability, competitiveness & market share. </li></ul>
  53. 54. <ul><li>Legal risk : arising from legal challenges or changes in laws </li></ul><ul><li>Regulatory risk : arising from regulatory design & its changes </li></ul><ul><li>Political risk : arising from political changes </li></ul><ul><li>Social risk : originating from social attitudes, perceptions </li></ul><ul><li>Natural risk : associated with natural calamities </li></ul>
  54. 55. <ul><li>Studies interaction, interdependence, interlocking of various environmental factors </li></ul><ul><li>Economic environment is both- endogenous & exogenous- it is determined as well as determining </li></ul>
  55. 56. Eco Envrnmt Non Eco Envrnmt  Eco. Sys. Eco. Stru Fnctng of the Eco Eco plng Eco. prgrm Eco. Policies Eco. contls & rgultions Eco. gwth & dvt Sociological + + + + + + + + Educational + + + + + + + + Political + + + + + + + + Historical + + + + + + + +
  56. 57. PRESENT ENVRNMNT NON PRESENT ENVRNMT PRESENT ECO ENVRNMT (1) PRESENT NON- ECO ENVRNMT (2) PAST ECONOMIC (1) + + NON ECONOMIC (2) + + FUTURE ECONOMIC (3) + + NON ECONOMIC (4) + +
  57. 58. <ul><li>Wiliam & Lawrence…….. </li></ul><ul><li>Environmental analysis & diagnosis give strategists time to anticipate opportunities & to plan to take optional responses to these opportunities. Its also helps strategists to develop an early warning system to prevent threats & to develop strategies which can turn a threat to the firm’s advantage </li></ul>
  58. 59. <ul><li>Scanning: general surveillance of environmental factors & their interactions </li></ul><ul><li>Monitoring: tracking environmental trends, events </li></ul><ul><li>Forecasting: developing plausible projections of direction, scope & intensity of environmental change </li></ul><ul><li>Assessment: identifying & evaluating how & why current & projected environmental changes will affect strategic management of organisation </li></ul>
  59. 60. <ul><li>Strategic planning in which managers try to determine best fit b/w organisation & its external environment </li></ul><ul><li>Important step towards corporate planning & business policy decisions </li></ul><ul><li>Aimed at continuous improvement of the company, its policies & programs. </li></ul>
  60. 61. <ul><li>INTERNAL SCANNING : acquisition, analysis, use of information from within the organisation that will help the management in determining future course of action of business </li></ul><ul><li>EXTERNAL SCANNING : acquisition, analysis, use of information about events & establishing the relationship of business with its external environmental variables </li></ul>
  61. 62. <ul><li>Corporate managers analyse the Strengths (S), Weakness (W), opportunity (O) & Threat (T) that exist for their organisation in the context of its environment. </li></ul><ul><li>O & T are external to the firm. With S the firm can seize the O & captilise on it & because of its W it becomes the victim of T in the environment </li></ul>
  62. 63. MONITORING SCANNING FORECASTING ASSESSMENT
  63. 64. <ul><li>To provide economic logic & perspective for managerial decision making </li></ul><ul><li>Integrating economic theory with practical business situations </li></ul><ul><li>Monitoring, scanning, careful analysis & interpretations of business environment </li></ul><ul><li>Forecasting, future panning & formulating future business strategy </li></ul>

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