Business environment


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Business Environment In developing country like India.

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Business environment

  2. 2. Introduction to BusinessIntroduction to Business  Business is the organized efforts of enterprises to supply consumers with goods and services. Businesses vary in size as measured by number of employees or by sales volume.  All businesses share the same purpose to earn Profits. However, the purpose 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 the global map
  3. 3. Scope of Business ◦ Business included all activities connected with production, trade, banking, insurance, finance, agency, advertising, packaging and numerous other related activities. Businesses include all efforts to comply with legal restrictions and government requirements and discharging obligations to consumers, employees, owners and to other interest groups which have stakes in business directly or indirectly.
  4. 4. EnvironmentEnvironment  Environment refers to all external forces which have a bearing on the functioning of business. ”Environment are largely if not totally external, and beyond the control of individual industrial enterprises and their management. These are essentially the givers within which firms and their managements must operate in a specific country and they vary, from country to country”.  However, the term business environment refers to the External Factors. The external environment has two components ie business opportunities and threats to business.  Similarly, the organizational environment has two components ie. strengths and weaknesses of the organization. A SWOT analysis is thus the first step in strategy formulation Business DecisionInternal Environment External Environment Factors influencing Business Decision
  5. 5. Business Decision Internal Environment Mission / Objectives Management Structure Internal Power Relationship Physical Assets & facilities Company image Human resources Financial Capabilities Technological Capabilities Marketing Capabilities Financiers Suppliers Customers Competitors Public Mktg Intermediaries Micro Environment Economic Technological Global Demographic Socio-Cultural Political Macro Environment BUSINESS ENVIRONMENT
  6. 6. INTRODUCTIONINTRODUCTION  Business decisions are influenced by two sets of factors Internal factors (The Internal Environment External Factors( The External Environment)  Business Environment presents two challenges to the enterprise The challenge to combat the environmental threats Exploit the business opportunities
  8. 8. INTERNAL ENVIRONMENTINTERNAL ENVIRONMENT Important internal factorsare 1) Value System Thevaluesystem of foundersand thoseat thehelm of affairshasimportant bearing on thechoiceof business, the mission and objectives of theorganization, business policiesand practices. 2) Mission and Objectives Thebusinessdomain of thecompany , priorities, direction of development, businessphilosophy, businesspolicy etc. areguided by themission and objectivesof thecompany.
  9. 9. INTERNAL ENVIRONMENTINTERNAL ENVIRONMENT 3) Management Structure and Nature Theorganizational structure, thecomposition of the Board of Directors, extent of professionalization of management etc. areimportant factorsinfluencing businessdecisions. 4) Internal PowerRelationship Factorsliketheamount of support thetop management enjoysfrom lower levelsand workers, shareholdersand Board of Directorshaveimportant influenceon the decisionsand their implementation. Therelationship between themembersof Board of Directorsisalso acritical factor.
  10. 10. INTERNAL ENVIRONMENTINTERNAL ENVIRONMENT 5) Human Resources Thecharacteristicsof thehuman resourceslikeskill, quality, morale, commitment, attitudesetc. could contributeto thestrength and weaknessof the organization. Theinvolvement, initiativeetc. of thepeopleat different levelsmay vary from organization to organization. 6) Company Image and Brand Equity Theimageof thecompany matterswhileraising finance, forming joint venturesor other alliances, soliciting market intermediaries, entering purchaseor salecontracts, launching new productsetc.
  11. 11. INTERNAL ENVIRONMENTINTERNAL ENVIRONMENT OTHERFACTORS 1.Physical Assetsand Facilities 2.R&D and Technological Capabilities 3.Marketing Resources 4.Financial Factors
  12. 12. EXTERNAL ENVIRONMENTEXTERNAL ENVIRONMENT Two Types a)Micro Environment Consistsof actorsin thecompany’simmediate environment, that affectstheperformanceof the company. a)Macro Environment Consistsof larger societal forcesthat affect all theactorsin company’smicro environment.
  13. 13. MICROENVIRONMENTMICROENVIRONMENT  Also known astaskenvironment and operating environment  Include Thesuppliers Marketing intermediaries Competitors Customers Publics  Moreintimately linked with thecompany than macro factors  Themicro forcesneed not necessarily affect all the firmsin aparticular industry in thesameway.  Someof themicro factorsareparticular to afirm
  14. 14. supplierssuppliers Thosewho supply theinputsto thecompany. Source/Sourcesshould beReliable Uncertainty regarding thesupply or other supply constraints compel companiesto maintain high inventoriescausing cost increases. Very risky to depend on asinglesupplier Thepurchasing department should “market” itself to suppliers, to obtain favourable treatment during theperiodsof shortages.
  15. 15. customerscustomers  Major task of businessisto createand sustain customers  Different categoriesof consumers Individuals Households Industriesand other commercial establishments Government and other institutions  Depending on singlecustomer istoo risky  Choiceof customer should bedoneby considering Relativeprofitability dependability stability of demand growth prospectus extent of competition
  16. 16. competitorscompetitors A firm’scompetitorsincludenot only the other firmswhich market thesameor similar product but also all thosewho competefor theincomeof theconsumers Desirecompetition Generic competition Product form competition Brand competition
  17. 17. Marketing intermediariesMarketing intermediaries  Firmsthat aid thecompany in promoting, selling and distributing itsgoodsto final buyers.  Include themiddlemen and merchantswho “help thecompany find customersor closesaleswith them” Physical distribution firmswhich “ assist thecompany in stocking and moving goodsfrom their origin to their destinations” Marketing serviceagencies which “assist thecompany in targeting and promoting itsproductsto theright markets” Financial intermediarieswhich “financemarketing activitiesand insurebusinessrisks”  Vital linksbetween thecompany and thefinal consumers.
  18. 18. PublicsPublics  Any group that hasan actual or potential interest in or impact on an organization’sability to achieveits interests E.g. Mediapublics, citizensaction publics, local publics  Mediaattack on any company can influencethe government decisions affecting thecompany.  Environmental pollution isan issueoften taken up by number of local publics  Publicsarenot alwaysthreat to thebusiness.  Fruitful cooperation between acompany and thelocal publicsmay beestablished for themutual benefit.
  19. 19. MACRO ENVIRONMENTMACRO ENVIRONMENT Consistsof larger societal forcesthat affect all the actorsin company’smicro environment-namely thedemographic, economic, natural, technological, political and cultural forces Also known asSo cietal Enviro nment TheSocietal Environment includesgeneral forces that do not directly touch on short-run activitiesof theorganization but that can, and often do, influenceitslong-run decisions.
  20. 20. Economic EnvironmentEconomic Environment Important factorsare: Economic conditions Economic policies Economic systems Economic condition Theeconomic conditionsof acountry –for example, thenatureof theeconomy, thestageof development of theeconomy, economic resources, thelevel of income, thedistribution of incomeand assets, etc.- are among thevery important determinantsof business strategies. In adeveloping country, thelow incomemay bethe reason for thevery low demand for theproduct.
  21. 21. Economic EnvironmentEconomic Environment Economic policies Sometypesor categoriesof businessarefavourably affected by government policy, someadversely affected, whileit isneutral to someothers. E.g. arestrictiveimport policy may greatly help the import competing industries, whilealiberalisation of the import policy may createdifficultiesfor such industries Economic System Thescopeof theprivatebusinessdependson the economic system. Thefreedom of theprivateenterpriseis thegreatest in the freemarket economy.
  22. 22. Political & GovernmentPolitical & Government EnvironmentEnvironment Hascloserelationship with theeconomic system and economic policy. In many countriesregulationsto protect consumer interestshavebecomestronger. Somegovernmentsspecify certain standards for theproductsto bemarketed in thecountry; some even prohibit themarketing of certain products. Promotional activitiesaresubject to varioustypes of controls. E.g.: In India, Advertisement of alcoholic product isprohibited and thepackagesmust carry “injuriousto health” warnings
  23. 23. Socio-cultural environmentSocio-cultural environment Major factorsare: thebuying and consumption habitsof people, their languagebeliefsand values, customsand traditions, tastesand preferences, Education Strategy should beappropriatein thesocio- cultural environment. Eg: nestlebrewsavery largevariety of instant coffeeto satisfy different national tastes
  24. 24. Colour Blue: feminineand warm in Holland ; but masculineand cold in Sweden Green: favouritein Muslim world; but representsillnessin Malaysia Red: popular in communist countries; but representsdisaster in Africa White: death and mourning in Chinaand Korea; but it expresseshappinessin some countries.
  25. 25. Demographic environmentDemographic environment Factors: Size, growth rate, agecomposition, sex composition of population, family size, educational levels, economic stratification of thepopulation, language, caste, religion, etc. E.g. Declinein birth ratesin USA have affected thedemand for baby products. So Johnson &Johnson repositioned their productslikebaby shampoo and baby oil, to theadult segment, particularly to females.
  26. 26. Physical & technologicalPhysical & technological environmentenvironment  Businessprospectsdemandsavailability of certain physical facilities E.g. demand for electrical appliancesisaffected by theextent of electrification and thereliability of power supply. Demand for LPG stovesdepend on rateof growth of gasconnections  Differing technological environment of different marketsmay call for product modifications E.g. Many appliancesaredesigned for 110 V in USA. They should be converted for 240v in India  Technological developmentsmay increaseor decreasethedemand for someexisting products E.g. voltagestabilizers help increasein saleof electrical appliancesin marketscharacterised by frequent voltagefluctuations Introduction of TVs, Refrigerators, etc. with in-built stabilizers adversely affectsthedemand for voltagestabilizers.
  27. 27. International EnvironmentInternational Environment Particularly important for theindustries directly depending on importsor exportsand import-competing industries Recession, economic boom, liberalization Major international developmentshavetheir spread effectson domestic business. E.g. Oil pricehikesincreased thecost of production and thepricesof certain productssuch asfertilizers, synthetic fibres. So usually, the demand for natural fibresand manuresincreased.
  28. 28. SWOT Analysis SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Identification of the threats and opportunities in the external environment and strengths and weaknesses in the internal environment of the firms are the cornerstone of business policy formulation. It is the SWOT analysis which determines the course of action to ensure the growth / survival of the firm.
  29. 29. Strengths •Strengths—internal to the unit; are a unit’s resources and capabilities that can be used as a basis for developing a competitive advantage; strength should be realistic 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 this organization 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
  30. 30. Weaknesses •Weaknesses—internal force that could serve as a barrier to maintain or achieve a competitive advantage; a limitation, fault or defect of the unit . It should be truthful so that they may be overcome as quickly as possible. Your 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 more effectively/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 function more effectively, what would you change? •Examples: gaps in capabilities, financial, deadlines, morale, lack of competitive.
  31. 31. Opportunities •Opportunities—any favorable situation present now or in the future 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
  32. 32. Threats •External force that could inhibit the maintenance or attainment of a competitive advantage; any unfavorable situation in the external environment that is potentially damaging now or in the future. •Examples: shifts in consumer tastes, new regulations, political or legislative effects, environmental effects, new technology, loss of key staff, economic downturn, demographic shifts, competitor intent; market demands; sustaining internal capability; insurmountable weaknesses; financial backing. Your 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?
  33. 33.   POSITIVE/  HELPFUL to achieving the  goal    NEGATIVE/  HARMFUL to achieving the  goal    INTERNAL Origin facts/ factors of the organization Strengths Things that are  good now,  maintain them,  build on them  and use as  leverage  Weaknesses Things that are bad  now, remedy,  change or stop  them.    EXTERNAL Origin facts/ factors of the environment in which the organization operates Opportunities Things that are  good for the  future, prioritize  them, capture  them, build on  them and  optimize Threats Things that are bad  for the future,  put in plans to  manage them or  counter them
  34. 34. Competitive Structure of IndustriesCompetitive Structure of Industries The competitive structure of industries is a very important business environment. Identification of forces affecting the competitive dynamics of an industry is very useful in formulation of strategies. As per Michael Porter’ well known model of structural analysis of industries, the state of competitions depends on: Porter’s analysis determines the competitive intensity of the industry and the attractiveness of the market. A highly competitive industry is one approaching “Perfect Competition” whereby businesses are only able to earn normal profits. Rivalry among firms Buyers Substitutes New Entrants Suppliers Threat of new entrants Threat of substitutes Bargaining powerBargaining power
  35. 35. Rivalry Among Existing Firms: Firms in an industry are mutually dependent – competitive motives of a firm usually affects others and may be retaliated. Factors influencing the intensity of rivalry are:  Number of firms and their Relative market share  State of Growth of Industry: In stagnant, declining and slow growth industries, a firm is able to increase its sales by increasing the market share.  Fixed or storage costs: In case of high fixed costs, strategy of firms is to increase sales which in turn would improve on capacity utilization.  Indivisibility of capacity augmentation : Where there are economies of scale, capacity increases would be in large blocks necessitating, efforts to increase sales to achieve capacity utilization norms.  Product standardization
  36. 36. Threat of EntryThreat of Entry  New entrants are newcomers to an existing industry. They typically bring new capacity. A desire to gain market share and substantial resources. Therefore they are threats to an established corporation.  The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors .  An entry barrier is an obstruction that makes it difficult for a company to enter an industry.
  37. 37. Threat of Entry Potential competition tends to be high if the industry is profitable or critical and entry barriers are low. Some of the common entry barriers are:  Government Policy: Government can limit entry into industry through licensing requirements by restricting access to raw materials.  Product Differentiation: Characterized by brand image, customer loyalty etc. may deter new firms from entering the market.  Capital Requirements : High capital intensive nature of the industry is an entry barrier to small firms .  Economies of Scale : Scale economies in production and sales of microprocessors, gave Intel a significant cost advantage over any new arrival.  Switching Costs : Once a software program such as excel or word becomes established in Office, office managers are reluctant to switch to a new program because of high training costs.
  38. 38. Threat of SubstitutesThreat of Substitutes  An industry which has close substitutes available is highly competitive in nature. Existence of close substitutes increases the propensity of consumers to switch to alternatives in response to price increases.  Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in industry can profitably charge.
  39. 39. Bargaining power of BuyersBargaining power of Buyers Buyers affect an industry through their ability to force down prices , bargain for higher quality or more services and play competitors against each other. A buyer or distributor is powerful if some of the following factors is true :  A buyer purchases a large proportion of sellers product or service (eg : oil filters purchased by a major automaker)  A buyer has the potential to integrate backward by producing the product itself (eg: a newspaper chain could make its own paper)  Alternate suppliers are plentiful because the product is standard or undifferentiated.  Changing suppliers cost title. (eg: office supplies are sold by many vendors)  The purchased product is unimportant to the final quality or a price of a buyers products (eg: electric wire bought for use in lamps)
  40. 40. Bargaining power of SuppliersBargaining power of Suppliers Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and services. A buyer or distributor is powerful if some of the following factors is true :  Supplier industry is dominated by a few companies but it sells too many(eg: petroleum industry)  Service is unique or it has built up switching costs (eg: word processing software)  Substitutes are not readily available (eg: electricity)  Suppliers are able to integrate forward and compete directly with their present customers (eg: a microprocessor producer like Intel could make the complete PC)  A purchasing industry buys only a small portion of the suppliers groups goods (eg: sales of lawn mower tires are less important to the tire industry than are sales of auto tires)
  41. 41. Environment Scanning And MonitoringEnvironment Scanning And Monitoring “The pro cess by which strategists mo nito r the eco no mic, go vernmental/legal, market/co mpetitive,techno lo gical, geo graphic and so cialsettings to determine o ppo rtunities and threats to their firms”
  42. 42. Stages of Environmental Analysis: The analysis consists of four steps: Scanning : It is process of analyzing environment for the identification of factors which impact or have implications for business. Monitoring : It involves more in-depth analysis of environmental trends identified at the scanning stage . Purpose of monitoring is to assemble sufficient data to discern whether certain patterns are emerging. Forecasting : Anticipating future is essential for identifying future threats and opportunities and formulating strategic plans. Assessment : It involves drawing up implications/possible impacts
  43. 43. THANK YOU….