Nature of business environment (2)


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Nature of business environment (2)

  1. 1. Nature of Business Environment
  2. 2. Introduction to Business Business is the organized efforts of enterprises to supply consumers with goodsand services. Businesses vary in size as measured by number of employees orby sales volume. All businesses share the same purpose to earn Profits. However, thepurpose of business goes beyond earning profits. It is an important institution in society and the role of business is crucial. Be it for the supply of goods and services Creation of job opportunities Offer of better quality of life Contributing to the economic growth of the country and putting it on theglobal mapScope of Business Business included all activities connected with production, trade,banking, insurance, finance, agency, advertising, packaging andnumerous other related activities. Businesses include all efforts tocomply with legal restrictions and government requirements anddischarging obligations to consumers, employees, owners and toother interest groups which have stakes in business directly orindirectly.Society cannot do without business and vice versa.
  3. 3. Characteristics of Today’s BusinessBusinessInformationCompetitionChange - TransitionOpportunitiesDiversificationGlobalisationTechnologyBusiness during the 21stCentury• There is a trend towards mini organizations alongwith large corporations.• Existence of flexible, flat and team based structures• Business is knowledge based. Processes have become complex. Brain power is in great demand.• Information technology will take care of all data management and networked computers handleinformation.• Organisations have become flat.• Dispersed ownership, open minded and a transparent environment is encouraged1. Three types of diversification maybe distinguished : Concentric, horizontal and conglomeratediversification. Concentric diversification refers to the process of adding new, but related products orservices. Eg : HLL which as Liril, Pears, Rexona, Lux and Lifebuoy. Horizontal diversification isadding of new, unrelated products or services for present consumer base. Conglomeratediversification refers to adding new and unrelated products or services.
  4. 4. Environment Environment refers to all external forces which have a bearing on thefunctioning of business. ”Environment are largely if not totally external,and beyond the control of individual industrial enterprises and theirmanagement. These are essentially the givers within which firms andtheir managements must operate in a specific country and they vary,from country to country”. However, the term business environment refers to theExternal Factors. The external environment has twocomponents ie business opportunities and threats to business. Simmilarly, the organisational environment has two componentsie. strengths and weaknesses of the organisation. A SWOTanalysis is thus the first step in strategy formulationBusiness DecisionInternal Environment External EnvironmentFactors influencing Business Decision
  5. 5. BusinessDecisionInternal EnvironmentMission / ObjectivesManagement StructureInternal Power RelationshipPhysical Assets & facilitiesCompany imageHuman resourcesFinancial CapabilitiesTechnological CapabilitiesMarketing CapabilitiesFinanciersSuppliersCustomersCompetitorsPublicMktg IntermediariesMicro EnvironmentEconomicTechnologicalGlobalDemographicSocio-CulturalPoliticalMacro EnvironmentBUSINESS ENVIRONMENT
  6. 6. Internal Environment Any business has certain vision, mission and objectives and astrategy to achieve them. Formulation of strategy is defined asestablishing a proper firm-environment fit. Indeed the objectivesshould be based on an assessment of the external environmentand the organizational factors (internal environment). Vision Mission Objectives Management Structure Human Resources Financial Factors Company Image and Brand Equity
  7. 7.  The macro environment consists of factors which are beyond the control ofthe business. There is a symbiotic relationship between business and theenvironmental factors, environmental factors are dynamic and a particularbusiness firm, by itself, may not be in a position to change it’s environment.Macro Environment includes: Political Environment Economic Environment Technological Environment Socio-cultural Environment Global Environment.Macro EnvironmentMicro EnvironmentThe Micro environment consists of different types of stakeholders -customers, employees, suppliers, marketing intermediaries, competitors. It isalso known as the Task Environment and Operating Environment and has adirect bearing on the operations of the firm. Changes in the microenvironment will directly affect and impinge on the firms activities.
  8. 8. Technological Environment Technological is the systematic application of scientific or otherorganized knowledge to practical tasks. Technological environment hold new technological innovation, newproducts, the state of technology, the utilization of technology formaximum inputs and outputs, the obsolescence of technology and thedynamic changes that frequently occur in technologies which enablefirms to get a competitive advantage Technology reaches people through business Helps in increased productivity Business needs to spend on R & D and keep up with the technologicaladvances around them Technology leads to introduction of new products and older productsbecoming outdated and redundant. Technological advances leads to high expectations of consumers interms of quality Leads to system complexity Demand for capital
  9. 9. Political EnvironmentPolitical Environment refers to the influence exerted by the threepolitical institutions ie. legislature, executive and judiciary inshaping, directing, developing and controlling businessactivities. The constitution of a country Political Organisation Political Stability Image of the country and its leaders Foreign Policy Laws governing business Flexibility and adaptability of laws The Judicial System
  10. 10. Economic Environment Economic Environment refers to all forces which have an economicimpact on Business. The economic environment consists of the demand dynamics, supplysituation, pricing factors, degree of competitiveness, and impact ofprofitability. It includes the fiscal policy, monetary policy and thetaxation policy, the FDI norms, the investment criterion and financingdecisions. Economic environment includes: Growth strategy Industry Agriculture Infrastructure Money and Capital Markets Per capita and national income Population New Economic Policy.
  11. 11. Global Environment:The global environment refers to those factors which are relevant tobusiness, such as the WTO principles and agreements; otherinternational conventions/ treaties / agreements / sentiments in othercountries etc. For eg hike in crude oil prices has a global impact etc. World is becoming one market Improving quality Competition from MNCs Capital and technology transfers Deciding which markets to enter and what products to manufacture Adjusting the management processSocio-Cultural Environment: Culture creates people Culture and globalization Culture determines people’s attitude to business and work. Caste system Spirit of collectivism Education Ethics in business Social responsibility Social audit Corporate governance
  12. 12. External Environmental AnalysisEnvironmental Analysis has three goals: Provides an understanding of current and potential changes taking place Environmental Analysis should provide input for strategic decision making. Facilitate and lead to strategic decisions within an organization.Environmental Analysis and diagnosis give strategists time to anticipateopportunities and to plan to take optional responses to these opportunities. Italso helps strategists to develop an early warning system to prevent threats or todevelop strategies which can turn a threat to a firm’s advantage”. Firms whichsystematically analyse and diagnose the environment are more effective thanthose which do not.Process of Environmental Analysis:The analysis consists of four steps: Scanning : Detect early signals of possible environmental change and detectenvironmental change already underway. Monitoring : Purpose of monitoring is to assemble sufficient data to discernwhether certain trends are emerging, identification of the trends andidentification of areas for further scanning. Forecasting : It is concerned with developing projections of the direction, scopeand intensity of environmental change. Assessment : To determine implications for the organisation’s current andpotential strategy.
  13. 13. Environmental Analysis and Strategic ManagementDefining Business Mission and ObjectivesSWOT AnalysisEnvironmental Analysis + Self AppraisalStrategic Alternatives and Choice of StrategyImplementation of StrategyEvaluation and Control of Strategy
  14. 14. Competitive Structure of IndustriesThe competitive structure of industries is a very important businessenvironment. Identification of forces affecting the competitivedynamics of an industry is very useful in formulation of strategies.As per Michael Porter’ well known model of structural analysis ofindustries, the state of competitions depends on:Porter’s analysis determines the competitive intensity of the industryand the attractiveness of the market. A highly competitive industryis one approaching “Perfect Competition” whereby businesses areonly able to earn normal profits.Rivalry among firms BuyersSubstitutesNew EntrantsSuppliersThreat of new entrantsThreat of substitutesBargaining powerBargaining power
  15. 15. Rivalry among Existing firms:Firms in an industry are mutually dependent – competitivemotives of a firm usually affects others and may beretaliated. Factors influencing the intensity of rivalry are:Number of firms and their Relative market shareState of Growth of Industry: In stagnant, declining andslow growth industries, a firm is able to increase its salesby increasing the market share.Fixed or storage costs: In case of high fixed costs,strategy of firms is to increase sales which in turn wouldimprove on capacity utilization.Indivisibility of capacity augmentation : Where there areeconomies of scale, capacity increases would be in largeblocks necessitating, efforts to increase sales to achievecapacity utilization norms.
  16. 16. Rivalry among Existing firms:• Product standardization, after sales service: In caseof firms which have standardized products; it is price,distribution and after sales service which become thedistinguishing factors.Strategic stake: Rivalry becomes more intensive ifthe firms have high stakes in achieving successthere.Exit Barrier: If exit barriers are high, firms would keepcompeting in the same industry even though it mightnot be very attractive.Diverse Competition: Competitors with diversestrategies make the industry highly competitive.Switching costs: One time costs that the buyer faceson switching from one supplier’s product to that ofanother ie cost of new ancillary equipment etc.Expected Retaliation
  17. 17. Threat of Entry:Potential competition tends to be high if the industry is profitable orcritical and entry barriers are low. Some of the common entry barriersare: Government Policy Cost Disadvantages: Cost advantages enjoyed by established firmsmay discourage entry of new firms such as learning curve, favorablelocation etc. Product Differentiation: Characterized by brand image, customer loyaltyetc. may deter new firms from entering the market. Monopoly Elements Capital Requirements : High capital intensive nature of the industry isan entry barrier to small firmsThreat of substitutes An industry which has close substitutes available is highly competitivein nature. Existence of close substitutes increases the propensity ofconsumers to switch to alternatives in response to price increases. Perceived level of product differentiation in the minds of the consumeris also a highly influential factor.
  18. 18. Bargaining power of Buyers:Buyers can in turn also be potential competitors as they may integratebackwards or bargain for lower costs, better quality of the product etc. The volume of purchase relative to the total sale of the seller The importance of the product to the buyer in terms of the total cost Extent of standardization or differentiation of the product Switching costs Extent of buyer’s informationBargaining power of sellers:Important determinants of supplier power are the following: Extent of concentration and domination in the supplier industry Importance of the product to the buyer Importance of the buyer to the supplier Extent of substitutability of the product Switching costs Extent of standardization of the product Potential for forward integration by suppliers
  19. 19. SWOT AnalysisSWOT stands for Strengths, Weaknesses,Opportunities and ThreatsIdentification of the threats and opportunities inthe external environment and strengths andweaknesses in the internal environment of the firmsare the cornerstone of business policy formulation.It is the SWOT analysis which determines thecourse of action to ensure the growth / survival ofthe firm.
  20. 20. Strengths•Strengths—internal to the unit; are a unit’s resources and capabilities that canbe used as a basis for developing a competitive advantage; strength should berealistic and not modest.Your list of strengths should be able to answer:•What are the unit’s advantages?•What does the unit do well?•What relevant resources do you have access to?•What do other people see as your strengths?•What would you want to boast about to someone who knows nothing about thisorganization and its work?•Examples: good reputation among customers, resources, assets, people, :experience, knowledge, data, capabilities•Think in terms of: capabilities; competitive advantages; resources, assets,people•(experience, knowledge); marketing; quality; location; accreditations•qualifications, certifications; processes/systems
  21. 21. Weaknesses•Weaknesses—internal force that could serve as a barrier to maintain orachieve a competitive advantage; a limitation, fault or defect of the unit;•It should be truthful so that they may be overcome as quickly as possibleYour list of weaknesses should be able to answer:•What can be improved?•What is done poorly?•What should be avoided?•What are you doing as an organization that you feel could be done moreeffectively/efficiently?•What is this organization NOT doing that you feel it should be doing?•If you could change one thing that would help this department functionmore effectively, what would you change?•Examples: gaps in capabilities, financial, deadlines, morale•lack of competitive
  22. 22. Opportunities•Opportunities—any favorable situation present now or in thefuture in the external environment.Examples: unfulfilled customer need, arrival of new technologies,loosening of regulations, global influences, economic boom,demographic shift•Where are the good opportunities facing you?•What are the interesting trends you are aware of?•Think of: market developments; competitor; vulnerabilities;industry/ lifestyle trends;; geographical; partnerships
  23. 23. Threats•External force that could inhibit the maintenance or attainment of acompetitive advantage; any unfavorable situation in the externalenvironment that is potentially damaging now or in the future.•Examples: shifts in consumer tastes, new regulations, political orlegislative effects, environmental effects, new technology, loss of key staff,economic downturn, demographic shifts, competitor intent; marketdemands; sustaining internal capability; insurmountable weaknesses;financial backingYour list of threats should be able to answer:•What obstacles do you face?•What is your competition doing?•Are the required specifications for your job/services changing?•Is changing technology threatening your position?•Do you have financial problems?•Could any of your weaknesses seriously threaten your unit?
  24. 24.  POSITIVE/ HELPFULto achieving the goal  NEGATIVE/ HARMFULto achieving the goal  INTERNAL Originfacts/ factors of theorganizationStrengthsThings that are good now, maintain them, build on them and use as leverage WeaknessesThings that are bad now, remedy, change or stop them.  EXTERNAL Originfacts/ factors of theenvironment inwhich theorganizationoperatesOpportunitiesThings that are good for the future, prioritize them, capture them, build on them and optimizeThreatsThings that are bad for the future, put in plans to manage them or counter them
  25. 25. SWOT Analysis of Indian EconomyStrengths• Huge pool of labor force• High percentage of cultivable land• Diversified nature of the economy• Availability of skilled manpower• Extensive higher education system• High growth rate of economy• Rapid growth of IT / ITes Sector• Abundance of natural resourcesWeaknesses• High percentage of workforce involvedin agriculture• Approx a quarter of population belowthe poverty line• High unemployment rate• Inequality in prevailing socio economicconditions, rural – urban divide• Low productivity• Huge population leading to scarcity ofresources• Low level of mechanization• Red tapism, Bureaucracy• Low literacy ratesOpportunities• Scope for entry of private firms in varioussectors of business• Inflow of FDI• Huge foreign exchange prospects in IT / ITeS• Investment in R & D• Area of infrastructure• Huge domestic market : Opportunity for MNCs• Huge agricultural resourcesThreats• High fiscal deficit• Threat of government intervention insome states• Growing import bill• Population explosion, rate of growth ofpopulation• Agriculture excessively dependent onmonsoon
  26. 26. AN ORGANIZATION’S ENVIRONMENTIndustry SectorCompetitors,Industry size andCharacteristics, RelatedIndustriesRaw MaterialsSectorSuppliers,Manufacturers,Real EstateHumanResourcesSectorLabor Market, EmploymentAgencies, Universities, TrainingSchools, Employees in OtherCompanies, UnionizationFinancial Resources SectorStock Markets, Banks,Savings and Loans,Private InvestorsMarketSectorCustomers, Clients,Potential Users ofProducts and ServicesTechnologySectorTechniques ofProduction, Science,Research Centers,Automation, NewMaterialsEconomicConditions SectorRecession, UnemploymentRate, Inflation rate, Rate ofInvestment, Economics,GrowthGovernment SectorCity, State, Federal Laws andRegulations, Taxes, Services,Court System, PoliticalProcessesSocio-Cultural sectorAge, Values, Beliefs, Education,Religion, Work Ethic, Urban vs.Rural, Birth RateORGANIZATIONDOMAINTask EnvironmentMacroEnvironment