Business environment 1 st module mba Management

MODULE -1
BUSINESS ENVIRONMENT
14/10/2013 Babasabpatilfreepptmba.com

Business Environment
• Learning objectives:
Environmental scanning-meaning,nature and scope
Economic and non-economic environment
Interaction between internal and external environments
Overview of political, socio-cultural, legal technological
Global environment

Business EnvironmentWhat is Business?
Business is an activity which involves buying and selling of goods
& services.
Modern business covers a complex field of industry and commerce which
involve activities related to both production and distribution.
These activities on the one hand satisfy societal need and desires and on the
other hand bring profits to business firms.
All the business activities are normally motivated by profits, in case , any of
these activities is carried out by some organization for the purpose other than
profit seeking, it cannot be justifiably considered as business.

What are the contribution from business?
Economic growth
creates employment opportunities
Provides all kinds of goods and services
which we need for consumption

NATURE OF MODERN BUSINESS
Large size
Oligopolistic character
Diversification
Global reach of modern business
Technological orientation
Change
Government control

NATURE OF MODERN BUSINESS.
• Business that matters today is large in size.
• Indian companies in terms of revenues, profits, assets and
stockholders equity are relatively small as compared to the
companies in developed countries.
• Reliance industries
• Hindustan Lever
• Telco
• Larsen and Toubro
• Tata Motors
• Maruti Udyog
• Hero Honda

Nature of Modern Business
Only Four companies figure in the Fortune list of 2003.
• Indian Oil
• Bharat Petroleum
• Hindustan petroleum
• Reliance industries
Most of the fortune 500 companies are located in the
USA – Biggest capitalist economy, 189 of the worlds largest
Co’s belong to US
Japan - second largest with 104 of the Fortune 500
Europe – Western Europe holds 138 of the worlds
largest companies.

Nature of Modern Business.
Present day business is Oligopolistic in its nature.
Small No. of firms selling a homogeneous /differentiated
product. Interdependence among the sellers.
Any change in its price & sales or in the quality of its
product, or any other variable whose value under is
control is likely to evoke retaliation from other other firms
in the same line of business.

Nature of modern of business
DIVERSIFICATION:
• Today not many corporate confine their activities to production of a
single commodity.
• Some business firms prefer related products to their existing
production. This is called concentric diversification.
Ex: Maruti Udyog
• Adding new unrelated products or services for existing customers is
known as conglomerate diversification.
• Ex: JK Group has interest in textiles, engineering, Computers
•

• Big business houses usually expand their activity by
establishing new companies which undertake production of
unrelated new products or services. This is conglomerate
diversification.
• Ex: TATA’s
• However, diversification may not always contribute to
growth of a business enterprise.
In the recessionary phase, it is quite risky to aspire for
growth by going for unplanned diversification.

Nature of modern business
In India some big companies including DCM, Britannia, ITC and Nelco
did not benefit from diversification.
Companies lacking resources and managerial expertise do not foray
into new business.
In some of the developed countries even some of the business giants
have preferred takeover of companies operating in their own lines of
production
Even in the Indian markets some of the business giants have preferred
takeover of companies in their own areas.
Ex: Coco-cola , for example has taken Parle Soft Drinks,
Honda has taken over Kinetic Honda
Whirlpool has taken over Kelvinator Refrigerators.

Nature of modern business
Technology Orientation:
Modern business is technology oriented. People expect that the quality
of products should improve overtime and the real cost.
All this can be accomplished by the business if It pays attention to
sophistication of technology.
Modern companies regard technological research strategic to their
future, They carry out their R & D activities very close to their
headquarters.

Change: Today a business firm clearly needs to move faster if the fear of
irrevalance is not to become a reality.
A modern firm must be vigilant all the time and be ready for change.
Improvement in quality, packaging or product design is not sufficient to
retain customers, the firm should promptly introduce new products and
create demand for them.
The business through its innovative moves can always
Create synthetic wants and thus find space to produce new goods
To satisfy them.

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Government control: Since the late 1980’s role of
the government in both developed and
underdeveloped economies has diminished.
Advantage of Government in business is required
to correct market failure manifested in the form
of monopoly & pollution.
Government through monetary & fiscal regulation
attempt to create stable business conditions
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Environment by definition is something external of an
individual or an organization.
Therefore in strict sense, business environment refers to an
external factors which have a direct or indirect bearing on
the activities of business.
Certain aspects of both internal and external environment
pose a threat to business, other aspects provide
opportunities for business growth.

ENVIRONMENTAL SCANNING
• What do you mean by Environmental
scanning?
• It is the process of monitoring & collecting
the information about the various current
and potential changes taking place in the
environment to facilitate in decision
making and problem solving.

ENVIRONMENTAL SCANNING
• Objectives of Environmental scanning:
1. To provide and understanding of current and
potential changes taking place in the environment.
2. To provide inputs for strategic decision-making.
3. To facilitate and foster strategic thinking in
organization.

Benefits of Environmental scanning
• “Firms which systematically analyze and diagnose the environment
are more effective than those which don’t”
1. Development of broad strategies and long –term policies of
the firm.
2. Development of action plans to deal with technological
advancements.
3. To foresee the impact of socio-economic changes at the
national & international level.
4. To analyze the competitors strategies and formulation of
effective counter-measures.
5. TO keep oneself dynamic.

Business Environment-Internal Factors
• Internal Environment :
• Value system, Goals and objectives,
Management structure,
• Relationship among the various
constituents,
• Physical assets,
• Technological capabilities
• Human, financial and marketing
resources make the internal environment
of business.

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• Internal Environment :
• Persons holding top positions in certain modern enterprises have
some values which influence their policies, practices and overall
internal environment.
• Ex: JRD TATA –Value system – responsibilities towards his
employees did some some commendable work in the field of labor
welfare.
• Attitude of TATA’s to employ 8 disabled persons out of their total
workforce of more than sixty thousand.
• The company value system need not be always positive. It can be
totally negative.
• Cases of pharmaceutical companies selling banned drugs world
over.
• Rational firms attempt maximize long-run profit.

Business Environment-Internal Facto
• There are often differences in the goals and objectives of the
various firms, which in turn, lead to differences in the overall
internal environment and also in priorities, policies and direction
of development.
• Ex: Corporate enterprise professionally managed or family
controlled.
• Board of Directors - dynamic entrepreneurs capable of taking
quick decisions or the BOD may be dominated by persons with
conservative or bureaucratic outlook.
• Nominees of Financial institutions having large holdings – their
decision making.
• Conflicts among BOD’s, Erosion of shareholders confidence in the
BOD’s
• Serious differences among the senior executives officers on critical
matters are critical factors in the Co’s internal working conditions.

• Functioning & Competitiveness of a company are very much
influenced by physical resources, Production technology,
R&D work and distribution logistics.
• Co’s R&D activity and the speed at which technological
changes occur determine Co’s internal environment which
in turn influence Business decisions.
• Quality of Human Resources of a Company,
• Depends on Commitment, attitude and morale of the
employees also have an impact on business as an internal
factor.

Business Environment-External Factors
• External Environment of Business consists of institutions,
Organizations and forces operating outside the company.
• External Environment of business may be classified into :
• A) Micro Environment
• B) Macro Environment
• Micro environment refers to such players whose decisions
and actions have a direct bearing on the company. Since
modern business broadly has two aspects, Viz, Production
and selling of goods,

Micro Environment of Business
• The micro environment of business can be
divided :
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BUSINESS
Customers
Input Suppliers
Competitors
Workers & their unions Publics
Marketing
Intermediaries

Micro Environment of Business
25
Micro Environment has great relevance on Co’s business
operations.
The players in micro-environment do not effect all the
companies in an industry in the same way. Their decisions
and actions often differ in accordance with the size,
capability and strategies of each company.
Ex: 1. Suppliers of inputs are more accommodating if
the Company is large.
2. Competitor does not mind starting price war if the
rival co. is small

• Suppliers of inputs: Important factor in Co’s success is low
cost of production of goods.
• Availability of raw materials without any interruption
especially raw materials thru out the year lessen the financial
burden on the company.
• Sometimes monopolistic suppliers manages to secure
monopoly control over the supply of some strategic raw
material, such as iron ore or copper, it starts regulating its
supply to generate maximum possible monopoly profits.
• No Co. should depend for the supply of some input on single
source.
• Supply management should be high on agenda of the
company.

Business Environment-Internal factors
• Workers and their Unions:
• Labor is an important input in production.
• Any policy that disturbs labor peace at the company level
may adversely affect its competitiveness.
• Also constant conflict between labor and management will
not allow the company to grow and overtime may
transform into a sick unit.

• Customers: Demand for product – individuals, business
enterprises, institutions & the government.
• loyalty depicts customer satisfaction.
• Universally accepted fact that the satisfaction of customers
is the ultimate bench mark of the Co’s success.

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• Marketing intermediaries: Wholesalers, retailers, distribution firms agents etc
constitute an important element .
• Co. lacking its own distribution channels can’t afford to have conflict or
strained business relations.
• Some Co’s adopt direct mail or data base marketing.
• EX; nestle –slump in demand for baby products – France
• CO. could have responded to this situation by lowering production laying-off
workers.

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• Competitors: Brand Competition: affect sales operations of the business
firms.
• A Company encounters various forms of competition. The most common
competition which a company’s products faces is from differentiated
products of other companies.
• Ex: In the Air conditioner market Voltas air conditioner faces competition
from other branded air conditioner such as Videcon, Elgi, Samsung
companies.
• Public : Environmentalists, consumers protection groups & media
persons may influence both Production & Sales.

Macro environment
• Macro environment of business consist of the
following factors:
• A. Economic Environment
• National
• Global
• B. Non –Economic Environment
• Political
• Socio Cultural
• Demographic
• Technological
• Natural

Economic Environment of the Business (National)
• Business enterprise is essentially an economic institution. It conducts its activities
in the market system with the objective profit maximisation.
• In Modern economy there are five sectors contribute to the development of the
economy they are:
• The Business sector
• The household sector
• The capital market
• The Government
• These factors determine the prospects of business activity.
In a recessionary situation business firms encounter steep fall in effective demand
leads to business slowdown. Developed financial system –precondition for the
efficient mobilization of financial resources for the business.

Global Environment
• Globalization- expansion of business
activities across boundaries of the nation
states.
• It refers to a process of increasing economic
openness growing economic
interdependence and deepening economic
integration between countries in the world
economy.

Global Environment
• Over the past ten years the Indian economy
is integrates into the global economy.
• The three policy measures initiated to realize
the objectives of globalization are:
• 1. Exchange rate adjustment and rupee
• convertibility.
• 2. Import liberalisation &
• 3. Opening upto foreign capital

Political Enviroment
• A stable & dynamic political environment due
influences business growth.
• In a capitalist economic system corporate firms are
very powerful, yet they have to operate within the
parameters which are determined by the broad
policies of the government.
• Ex: MRTP Act, FERA because of the experiences of
the colonial era, Foreign capital & the multinationals
corporations were suspects.

Legal enviornment
• Govt. sets the legal framework within which business
firms operate.
• Legislations defining:
property and business organizations,
• laws of contracts
• bankruptcy( one who’s assets are used to repay
debts),
• Mutual obligations of labour & management
• Laws and regulations, the way the business are
carried out constitute legal environment of business.

Legal enviornment
• Economic legislations can be classified into two categories:
• 1. legislations – facilitatory role in business.
• Ex: contract act –rules for systematic exchange transactions.
• 2. legislations- restrictive role in business
• Ex: Sherman anti-trust act in 1890, Clayton anti-trust act 1914
• Federal trade commission act 1914 of USA to prevent unfair
• monopolistic unfair practices.
• In India – MRTP-Monopolies & restrictive Trade Practice ACT-1969.
• Foreign Exchange Regulation Act (FERA) -1973 –directly regulated the foreign
exchange related transactions of the indian business.
• Both MRTP & FERA – diluted – stringent & restrictive in nature.

SOCIO-CULTURAL ENVIRONMENT
• Business firms operate in a socio-cultural
environment & their strategies needs to be
formulated keeping this factor in view.
• Ex: western countries are modern & liberal.
• People-more receptive to new products & no
prejudice against any kind of advertising.
• Health conscious-product injurious to health of
the people can’t be successfully introduced.

SOCIO-CULTURAL ENVIRONMENT
• Muslim societies –conservative. Womens still under Purdah.
• Demand for cosmetics & western cloths are limited.
• Business firm aiming at capturing markets for its products in
these diversified societies has to be careful about the cultural
sensitivities of these societies.
• India- liberal outlook, modeling by young women for
advertising fashionable products, wine & beer is acceptable in
Indian society.

Technological environment
Technology- Knowledge about machines & processes.
Any business- cannot survive with outdated techniques in
international competition.
Four decades ago –technology of Fiat was unsophisticated.
Users had no choice & thus product survived for a long period.
Setting up of Maruti udyog Ltd., the situation changed due to
superior technology.
Technological environment affects business from the demand side as well.
Ex: In a country where power is scarce, demand for electrical appliances will be
limited.
Erratic power supply and frequent load shedding creates market for inverters.

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Business environment 1 st module mba Management

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