Business Environment, PESTLE, SWOT, Porter's Five Force Model

1. FUNDAMENTALS OF
BUSINESS ENVIRONMENT
DR. CHHAVI JAIN

2. Business + Environment

3. Business
• It includes all activities which are organised
and operated to :
– Provide goods and services to the society
– Creation of employment opportunities
– Offer of better quality of life
– Contribution to the economic growth of the
country

4. Characteristics of Business
• Exchange of goods and services
• Profit motive
• Continuity in dealings
• Entrepreneurship and Risk
• Creation of utility
• Customer satisfaction
• Innovation and research
• Human activity

5. Changing characteristics of Business
Globalisation
Increased
Competition
Liberalisation
Social Values
and Ethics
PrivatisationCSR
Information
Diversification
Technological
Changes

6. Environment
• It refers to the surroundings and
circumstances which influence a business
entity or a person.

7. Business Environment
• It refers to the totality of all such factors which
influence the working and decision making of
a business organisation. Every business has to
operate under a given environment, which is
called business environment.

8. Business Environment
Internal and
External Factors
Impact the
functioning and
performance of
Organisation
Affect Decision
Making

9. Business Environment
• Business environment
consists of all those
factors that have a
bearing on the business,
such as:
• strengths,
• weaknesses,
• internal power
relationships &
organisation orientations,
• government policies and
regulations,
• economy and economic
conditions,
• socio-cultural factors,
• demographic trends,
• natural factors,
• global trends,
• cross border
developments.

10. Business Environment
• Business environment means all of the
internal and external factors that affect how
the company functions including employees,
customers, management, supply and demand
and business regulations.

11. Business
decision
Internal
environment
External
environment

12. Survival and
Success of
Organisation
Internal/
Organisational
Factors
Strengths Weaknesses
External
Factors
Opportunities Threats

13. Internal Factors
• Controllable factors
– Value system
– Vision, mission and objectives
– Management structure and nature
– Internal power relationship
– Human resources
– Company image and brand equity

14. Macro
Micro
Internal
• PESTEL
• Consumers
• Stakeholders
• Suppliers
• Men
• Money
• Machinery
• Material
• Minutes

15. Characteristics of Business
Environment
• Complex
• Dynamic
• Affects different firms differently
• Has both long term and short term impact
• Unlimited effect of external environmental efforts
• Uncertain
• Interdependent components
• Includes both internal and external environment

16. Nature of Business Environment
BE
Social
Responsibility
Approach
System
ApproachCreative
Approach

17. System Approach
• In original, business is a system by which it
produces goods and services for the
satisfaction of wants, by using several inputs,
such as, raw material, capital, labour, etc. from
the environment.

18. Social Responsibility Approach
• In this approach business should fulfill its
responsibility towards several categories of
the society such as consumers, stockholders,
employees, government etc.

19. Creative Approach
• As per this approach, business gives shape to
the environment by facing the challenges and
availing the opportunities in time. The
business brings about changes in the society
by giving attention to the needs of the people.

20. Significance of Business Environment
• Help to understand Internal Environment
• Help to Understand Economic System
• Help to Understand Economic Policy
• Help to Understand Market Conditions

21. Relation between Business and
Environment
• Mutually related
• Dynamic
• Opportunities and threats

24. Internal Environment
It consists of the factors in the company’s
immediate environment that affects the
performance of the company.

25. Internal Environment
The factors in internal environment of
business are to a certain extent controllable
because the firm can change or modify these
factors to improve its efficiency.

26. Internal Environment
Value System
Mission and Objectives
Organisation Structure
Corporate Culture
Human Resource
Labour Union
Physical Resources and
Technological capabilities

27. Value System
The value system of an organisation means the
ethical beliefs that guide the organisation in
achieving its mission and objectives.
It is a widely acknowledged fact that the extent to
which the value system is shared by all in the
organisation is an important factor contributing to
its success.

28. Mission and objectives
The business domain of the company, direction of
development, business philosophy, business policy etc
are guided by the mission and objectives of the
company.
The objective of all firms is assumed to be maximisation
of profit.
Mission is defined as the overall purpose or reason for
its existence which guides and influences its business
decision and economic activities.

29. Organisation structure
• The organisational structure, the composition of
the board of directors, the professionalism of
management, etc. are important factors
influencing business decisions.
• The nature of the organisational structure has a
significant influence over the decision making
process in an organisation. An efficient working
of a business organisation requires that the
organisation structure should be conducive for
quick decision-making.

30. Corporate culture
• Corporate culture is an important factor for
determining the internal environment of any company.
• In a closed and threatening type of corporate culture
the business decisions are taken by top level managers
while the middle level and lower level managers have
no say in business decision-making. This leads to lack
of trust and confidence among subordinate officials of
the company and secrecy pervades throughout the
organisation. This results in a sense of alienation
among the lower level managers and workers of the
company.

31. Corporate culture
• In an open and participating culture, business
decisions are taken by the lower level managers
and top management has a high degree of
confidence in the subordinates. In this type of
culture, participation of workers in managerial
tasks is encouraged.
• Development of work culture and the growing
involvement of the workers or employees in
company affairs and the sympathetic attitude of
the management towards its employees are all
equally responsible for maintaining a healthy
internal environment in the business.

32. Quality of Human Resources
• The characteristics of the human resources like
skill, quality, capabilities, attitude and
commitment of its employees, etc. could
contribute to the strength and weaknesses of an
organisation.
• Some organisations find it difficult to carry out
restructuring or modernisation plans because of
resistance by its employees.

33. Labour Union
• Labour unions collectively bargains with the
managers for better wages and better working
conditions of the different categories of
workers.
• For the smooth working of a business firm
good relations between management and
labour unions is required.

34. Physical resources and technological
capabilities
Physical resources such as, plant and equipment and
technological capabilities of a firm determine its
competitive strength which is an important factor for
determining its efficiency and unit cost of production.
Research and development capabilities of a company
determine its ability to introduce innovations which
enhances productivity of workers. It is, however, important
to note that the rapid technological growth and the growth
of information technology in recent years have increased
the relative importance of intellectual capital and human
resources as compared to physical resources of a company.

35. External environment
Macro Micro

36. Micro environment
Suppliers
Customers
Competitors
Marketing
Intermediaries
Financers
Public

37. Micro Environment
• Micro environment includes those parties
whose decisions and actions have a direct
impact on the company.

38. Supplier
An important factor in the external micro
environment of a firm is the supplier of its inputs
such as raw materials and components.
Normally, most firms do not depend on a single
supplier of inputs. To reduce risk and uncertainty
business firms prefer to keep multiple suppliers
of inputs.

39. Customer
The people who buy and use a firm’s product and services
are an important part of external micro environment.
Since sales of a product or service is critical for a firm's
survival and growth, it is necessary to keep the customers
satisfied.
A concern for customers’ satisfaction is essential for the
success of a business firms. Besides, a business firm has to
compete with rival firms to attract customers and thereby
increase the demand and market for its product.

40. Micro environment
Business
Environment
Company
Suppliers
Marketing
intermediaries
Competitors
Public
Customer

41. Marketing intermediaries
In the firm's external micro environment,
marketing intermediaries play an essential
role of selling and distributing its products to
the final customers.
Marketing intermediaries provide an
important link between a business firm and its
ultimate customers.

42. Competitors
Different firms in an industry compete with each other for sale of
their products.
This competition may be on the basis of pricing of their products
and also non- price competition through competitive advertising
such as sponsoring some events to promote the sale of different
varieties and models of their products.
Now, Indian firms have to compete not only with each other but
also with foreign firms whose products can be imported. In
America, American firms faced a lot of competition from the
Japanese firms producing electronic goods and automobiles.

43. Public
• Public is an important force in external micro
environment. Environmentalists, media
groups, women’s associations, consumer
protection groups, local groups, Citizens
Association are some important examples of
publics which have an important bearing on
the business decisions of the firm. The
existence of various types of publics
influences the working of business firms and
compels them to be socially responsible.

44. Macro environment
Demographic
Economic
Natural
Technological
Political
Cultural

45. Macro Environment
• The larger societal forces that affect the micro
environment – demographic, economic,
natural, technological, political and cultural
forces.
.

46. ECONOMIC
ENVIRONMENT

47. General
economic
conditions
Industrial
conditions
Supply of
resources for
production

48. Economic Factors
Inflation Rate Interest Rate
Buyer’s
Disposable
income
Credit
accessibility
Unemployment
rates
Monetary /
Fiscal Policies
Foreign
Exchange rate

49. Economic Environment
Economic environment includes all those forces which
have an economic impact on business.
It consists of agriculture, industrial production,
infrastructure, planning, basic economic philosophy,
stages of economic development, trade cycles, national
income, per capita income, savings, money supply,
price level and population.
Business and economic environment is closely related.
Business usually collect all its required inputs from the
economic environment available and also absorbs the
output of business units.

50. DEMOGRAPHIC
ENVIRONMENT

51. Demographic Environment
• The demographic environment includes the size and growth of
population, life expectancy of the people, rural-urban distribution
of population, the technological skills and educational levels of
labour force.
• All these demographic features have an important bearing on the
functioning of business firms. The labour force in the country is
always changing. This will cause changes in the work force of a
firm.
• The business firms have to adjust to the requirement of their
employees. They have to provide child care services, labour welfare
programmes etc. The demographic environment affects both the
supply and demand sides of business organisations.

52. Demographic Environment
• The technological and educational skills of the workers of a firm are
determined by the human resources available in the economy
which are part of the demographic environment. The size of the
population and its rural- urban distribution determine the demand
for the products of industrial firms.
• The growth rate and the age composition of the population
determine the demand pattern of goods. If the child population is
high then the demand for baby foods and baby clothes will be high.
On the other hand, if the life expectancy of the people is high then
the demand for goods will be those that will cater to the tastes and
needs of elderly people.
• The demographic environment is also important for business firms
as it determines the choice of technology by them.

53. Age
Sex
Educational
background
Marital status
Family size
Life style
Religion

54. SOCIO-CULTURAL
ENVIRONMENT

55. Cultural
Implications
Gender and
Connected
Demographics
Social Lifestyles
Domestic
structures
Education levels
Distribution of
Wealth

56. Socio-Cultural Environment
• Social and cultural environment includes people’s
attitude to work and wealth, ethical issues, role
of family, marriage, religion and education and
also social responsiveness of business.
• The social and cultural environment also
influences the demand for a variety of goods and
the type of employees the industry require.

57. Technological
environment

58. Technological Environment
• Technology implies systematic application of
scientific or other organised knowledge to
practical tasks or activities.
• Business makes it possible for technology to
reach the people in proper format.
• As technology is changing fast, businessmen
should keep a close look on those technological
changes for its adaptation in their business
activities.

59. Innovation and
technology change
Product
improvement
Research and
development

60. New
Discoveries
Technological
obsolescence
Rate
Innovative
Technological
Platforms
Technological
Advances
Rate

61. •Options available in
technology
•Government’s approach in
respect of technology
•Technology selection

62. Political and Legal
Environment

63. Political-legal Environment
• Business firms are closely related to the government.
The political- legal environment includes the activities
of three political institutions, namely, legislature,
executive and judiciary which usually play a useful role
in shaping, directing, developing and controlling
business activities.
• The legislature takes decisions on a particular course of
action, the executive implements those decisions
through government agencies and the judiciary serves
as a watch-dog for ensuring public interest in all the
activities of legislature and executive.

64. Stable Government
Role of private sector
Government policies
Role of SSI and service sector
Type of government

65. Political Factors
Government Policies
Taxes, law and Tariffs
Stability of Government
Entry Mode Regulations

66. Legal Factors
Product Regulations
Employment Regulations
Competitive Regulations
Patent Infringements
Health and Safety Regulations

67. Global Environment
• Global environment plays an important role in
shaping business activity.
• With the liberalisation and globalisation of the
economy, business environment of an
economy has become totally different wherein
it has to avail all opportunities and face the
threats arising out of global environment.

68. Natural Environment
• The natural environment is the ultimate source of
many inputs such as raw materials and energy, which
firms use in their productive activity.
• The availability of natural resources in the region or
country is the basic factor in determining business
activity in it. The natural environment which includes
geographical and ecological factors such as minerals
and oil reserves, water and forest resources, weather
and climatic conditions are all highly significant for
various business activities.

69. Natural Environment
• For example, steel producing industries are set up near the
coalmines to save cost of transporting coal to distant
locations.
• The natural environment also affects the demand for
goods. For example, in places where temperatures are high,
the demand for coolers and air conditioners are
high. Similarly, weather and climatic conditions influence
the demand pattern for clothing, building materials for
housing etc. Natural calamities like floods, droughts,
earthquake etc. are devastating for business activities.

70. Environmental Factors
Geographical Location
Climate and Weather
Waste Disposal Laws
Energy Consumption Rgulation
People’s attitude towards
environment

71. • Due to the efforts of environmentalists and international
organisations such as the World Bank the people have now
become conscious of the adverse effects of depletion of
exhaustible natural resources and pollution of environment
by business activity.
• Accordingly, laws have been passed for conservation of
natural resources and prevention of environment pollution.
These laws have imposed additional responsibilities and
costs for business firms. But it is socially desirable that
these costs are borne by business firms if we want
sustainable economic growth and also healthy environment
for human beings.

72. Environmental Analysis
• Evaluation of the possible or probable effects
of external forces and conditions on an
organisation’s survival and growth strategies is
called environmental analysis.

73. Environmental and Industry Analysis
• The overall economic, regulatory, social and
political conditions that affect all participants
in an industrial market in a similar way and
cannot readily be influenced by marketing.
The industry environment experienced by a
business can include such things as
demographics, lifestyle shifts and economic
cycles.

75. Environmental scanning
It is a process that systematically surveys and
interprets relevant data to identify external
opportunities and threats. An organization
gathers information about the external world,
its competitors and itself. The next step is to
conduct an internal scan of the organization.

76. • Environmental scanning is the process of
gathering information about events and their
relationships within an organization's internal
and external environments.
• The basic purpose of environmental
scanning is to help management determine
the future direction of the organization.

77. Purpose of Environment Scan

79. Types of Environmental Scans
• AdHoC
• Periodic
• Continuous

84. Sources of Information

85. Sources of INFORMATION

86. Failures- Environmental Scanning

87. Porter’s Five Force Model
• The Five Forces model of Porter is an outside-in
business unit strategy tool that is used to make an
analysis of the attractiveness/value of an industry
structure.
• It captures the key elements of industry competition.

88. BuyersSuppliers
Substitute
products
Potential
entrants
Industry competitors
Rivalry among
existing firms
Threat of
new entrants
Bargaining power
of suppliers
Bargaining power
of buyers
Threat of
substitutes
PORTER’s FIVE FORCES MODEL

89. Threat of
New EntrantsThreat of New
Entrants
PORTER’s FIVE FORCES MODEL

90. Threat of New Entrants
Barriers to
Entry
Government Policy
Expected Retaliation
Economies of Scale
Product Differentiation
Capital Requirements
Customer Switching Costs
Access to Distribution Channels

91. Bargaining
Power of
Suppliers
Threat of
New EntrantsThreat of New
Entrants
PORTER’s FIVE FORCES MODEL

92. Bargaining Power of Suppliers
Suppliers exert power
in the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Suppliers are likely to be powerful if:
Supplier industry is dominated by a few firms
Suppliers’ products have few substitutes
Buyer is not an important customer to supplier
Suppliers’ product is an important input to
buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high switching costs

93. Bargaining
Power of
Buyers
Threat of
New EntrantsThreat of New
Entrants
Bargaining
Power of
Suppliers
PORTER’s FIVE FORCES MODEL

94. Bargaining Power of Buyers
Buyers compete with the
supplying industry by:
* Bargaining down prices
* Forcing higher quality
* Playing firms off of
each other
Buyer groups are likely to be powerful if:
Buyers are concentrated
Purchase accounts for a significant fraction of
supplier’s sales
Products are undifferentiated
Buyers face few switching costs
Buyer presents a credible threat of backward
integration
Buyer has full information

95. Threat of
Substitute
Products
Threat of
New EntrantsThreat of New
Entrants
Bargaining
Power of Buyers
Bargaining
Power of
Suppliers
PORTER’s FIVE FORCES MODEL

96. Threat of Substitute Products
Products with
similar
function limit
the prices
firms can
charge
Keys to evaluate substitute products:
Products with improving
price/performance tradeoffs
relative to present industry
products
Example:
Electronic security systems in place
of security guards
Fax machines in place of overnight
mail delivery

97. Threat of
Substitute
Products
Threat of
New EntrantsThreat of New
Entrants
Rivalry Among Competing
Firms in Industry
Bargaining
Power of Buyers
Bargaining
Power of
Suppliers
PORTER’s FIVE FORCES MODEL

98. Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Using price competition
Staging advertising battles
Making new product introductions
Increasing consumer warranties or service
Occurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but may be costly to
smaller competitors

99. Coca-cola
• Traditional competition:
 Prices of Pepsi, local brands
 Market share
 Promotional actions of competition
• New entrants:
 New “look-a-like” manufacturers
• Substitute products:
 Fashionable new drinks, milk drinks, coffee, beer, ...

100. Coca-cola
• Suppliers:
 Price and availability of ingredients on world market
 Quality ,speed, safety, traceability, flexibility of supply
chain
• Buyers/consumers:
 High as a result of intense competition both among
branded and unbranded products.
 Combined purchase power of shops, bars, supermarkets

101. Competitive Advantage
• The Competitive Advantage model of Porter learns that
competitive strategy is about taking offensive or defensive
action to create a defendable position in an industry, in order
to cope successfully with competitive forces.
• Companies can combat the pressure of the five forces and
create competitive advantages.
• There are 2 basics types of Competitive Advantage :
 Cost leadership (low cost)
 Differentiation

102. Strengths of five forces model:
 The model is strong tool for competitive
analysis at industry level.
 It provides useful input for performing a
SWOT analysis.

105. Significance of Business Environment
• The significance of business environment is explained with the help of the following points:
• (i) Help to understand internal Environment:
• It is very much important for business enterprise to understand its internal environment, such as
business policy, organisation structure etc. In such case an effective management information
system will help to predict the business environmental changes.
• (ii) Help to Understand Economic System:
• The different kinds of economic systems influence the business in different ways. It is essential for a
businessman and business firm to know about the role of capitalists, socialist and mixed economy.
• (iii) Help to Understand Economic Policy:
• Economic policy has its own importance in business environment and it has an important place in
business. The business environment helps to understand government policies such as, export-
import policy, price policy; monetary policy, foreign exchange policy, industrial policy etc. have
much effect on business.
• (iv) Help to Understand Market Conditions:
• It is necessary for an enterprise to have the knowledge of market structure and changes taking
place in it. The knowledge about increase and decrease in demand, supply, monopolistic practices,
government participation in business etc., is necessary for an enterprise.