Business.environment

BUSINESS AS A SYSTEM
Which of the following represent the ‘ Integrated Whole Thing “ :
Digestive System
Sound System
Music System
Computer System

Digestive Method
Sound Method
Music Method
Computer Method

Digestive Process
Sound Process
Music Process
Computer Process

Political System
Social System
Cultural system
Economic System
Technological System
Legal System
26/01/2014

vashusuman@yahoo.com

1
Contd …

BUSINESS AS A SYSTEM
System will:
Draw Input
Process it Internally and

Releases output into environment

Business
Draw Input – Material , Energy , Information
Process it Internally - Into different Material , energy and Information
Releases output into environment – Tangible, Intangible and
Information


2
Contd …

Business & Environment Interface
Interaction of Business & its Surroundings

I. Micro environment of business.
1) Suppliers

Supply raw materials and other components
(Inputs)

Importance
-

Reliable supply – continuous supply for
smooth functioning

Contd …
3

Micro environment of business.
2) CUSTOMERS

Different categories of customers
i.

Industrial customers

ii. Wholesale customers
iii. Retail customers
iv. Government customers

v. Foreign customers

Contd …
4


3) Market intermediaries
i.

Middlemen.

ii. Physical distribution Firms: (warehouses and
transport firms)
iii. Marketing service agencies (Advertising
agencies market research firms, media firms,
consulting firms)
iv. Financial intermediaries


Contd …
5


 4. Competitors:






The Threat of entry of new firms
The Power of Buyers
The Power of Suppliers
The Power of Substitutes
The Intensity of Rivalry among existing firms


Contd …
6


 Competitors:
1. The Threat of entry of new firm

1. Economies of scale
2. Capital Requirement
3. Access to Channel
4. Absolute cost advantage
5. Expected Retaliation
5. Government Policy
7. Differentiation

• Economies of Scale
• Unit cost Inverse to units produced
Measured by ‘ Minimum Efficient Scale ‘
Or Market share
MES volume is necessary to compete
at minimum cost.

Strategy : ‘Just in time ‘ & Lean
manufacturing to counter
economies of scale
• Capital requirement
• Internet / Knowledge based services
less costly


7


 Competitors:
1. The Threat of entry of new firm

1. Economies of scale
2. Capital Requirement
3. Access to Channel
4. Absolute cost advantage
5. Expected Retaliation
5. Government Policy
7. Differentiation
Access to Channel
Self help groups / Social networks –
New channels of distribution

Absolute cost advantage
‘Learning curve effect’ – Cost advantage
Expected Retaliation
GSM Players like NTC,NCELL ,Smart
retaliated entry of CMDA player UTL
to operate in GSM field
Government Policy
Import of sugar, Edible oils, Steel ,
Liberation of Insurance & other
sectors
Differentiation
Existing company – Strong brand
image, wide range of products to
cover all segments


8


 Competitors:
2. The Power of Buyers:
1. Concentration of buyers
2. Alternative source of supply
3. Component cost as a
percentage of total cost
4. Possibility of backward
integration

Concentration of buyers
Small no. of buyer + High Volume
purchase – High buyer power
Coca-Cola – cannot bargain with Malls
Alternative source of supply
More supply source – high buyer power
Bajaj Scooter – Honda, Suzuki, TVS etc
Component cost as a % of total cost
High proportion of component/material
cost to finished goods leads to looking
for alternatives.
Possibility of backward integration
Buyer’s own supply chain – more
buyer power – Co-opratives , Self
help groups, MLM


9

Concentration of Sellers
 Competitors:
Small no. of Sellers– High seller power
Like Monopoly & Oligopoly
3. The Power of Sellers:
Switching Costs
1. Concentration of Sellers
High switching cost to other seller
source - Seller power increase
2. Switching costs
High-Tec & Specialised goods - SAP
3. Brand power
Brand Power
4. Possibility of forward integration
High brand power – High power
5. Dependence on customers
Ariel , Rin - Supermarkets have to sell it
Dependence on customers
Possibility of forward integration
Not depending on High volume small
no.of buyers – more seller power
Seller’s own distribution operation –
More power


10


 Competitors:
4. Threat of Substitution:
Non-essential goods where there is the
ultimate substitute of doing without
That:
1. Relative Price & Performance of
substitutes
2. Switching Costs
3.Buyer’s willingness to substitute

Relative performance & Price of
Substitutes
Substitutes with same cost – High
threat – Email replaced Post Offices
Switching costs
The Cheaper switching cost - High
threat
Pet foods , Fast foods , Malls
Buyer’s Willingness to substitute
Low-cost articles & infrequent purchase
of articles – little effort made to go
for substitutes
Match box – Lighter


11

High fixed costs
 Competitors:
High Fixed cost – High break even point
5. Competitive Rivalry:
In depression times – Price war to
1. Industry Growth
maintain turnover
2.High Fixed costs
1990 – UK & USA accused each of
dumping Steel on Export market
3. Volatile Demand
Volatile Demand
4.Product Differentiation
5. Extra Capacity in large increments May lead to intermittent Over-capacity
Steel war -1990
6. Balance of firms
Product Differentiation
7. High exit barriers
Homogeneous products – More intense
Industry Growth:
the rivalry - Steel
Rapid Growth – Competition need
Extra capacity in large increments
not be intense
Maturity Phase- Intense competition Creates short term over capacity .
Honda Nissan – plant in UK

12


 Competitors:
5. Competitive Rivalry:
1. Industry Growth
2.High Fixed costs
3. Volatile Demand
4.Product Differentiation
5. Extra Capacity in large increments
6. Balance of firms
7. High exit barriers

Balance of firms
If the no. of firms is large / similar size
the rivalry will be intensive. Clear
market leader can bring discipline
High exit barriers
High exit barriers – Excess capacity to
persist and rivalry to be intense


13

Macro environment of business.

 1. Demography:
 Quantitative aspects of
population.
 Qualitative aspects of
population.
1. Population Growth
2. Drivers of Population Changes
3. Ethnicity of Population
4. Implications of Demographic
Changes
Population Growth:
Year 1000 – Estimated 300 million
Year 1750 – Actual 728 million
Year 1900 – Actual 1500 million
Year 1960 – Actual 3 billion
Year 2000 – Actual 6 billion

Drivers of Population Changes
Birth Rate – No. of births per 1000 population
Fertility Rate- Av. No. of birth per women
Death Rate - No. of deaths per 1000
Migration – Country to Country movement
Implication – Consumer, Labour , Employment
participation


14

2. Economic environment
i.

Economic conditions-

ii.

Economic policies

GDP, Business Cycle, Unemployment,
Inflation, Balance of Payment, Fiscal Policy, Monetary Policy,
Exchange rate Policy, Interest Rate.

a) Budget
b) Industrial policy
c) Trade policy
d) Agricultural policy

iii. Economic system- Capitalistic, Socilalitic, Mixed

Contd …
15

3.Political environment

i. Legislature - Labour Laws like Factories Act, EPF Act, ESI
Act, Industrial Disputes Act, Minimum Wages Act, Payment of
Wages Act, etc
MRTP Act, Law of Contracts, Companies act, IDRA Act, FERA,
Import & Export Control act, Tax Laws

i. Executive- Administrators
ii. Judiciary - District, High Courts, Supreme Court, Tribunals

Contd …
16

4. Socio cultural environment
i.

Attitude of people towards work
and health.

ii. Role of family.
iii. Marriage.
iv. Religion.
v. Education
vi. Ethical issues

vii. Social responsibility of business

Contd …
17

5. Natural environment
i.

Natural resources.

ii. Weather and climatic conditions.
iii. Locational aspects.

iv. Nearness to port facilities.


Contd …
18

6. Technological environment
i.

Nature of technology

ii. Scope for innovation


Contd …
19

7. International environment
i.

Economic

ii. Political
iii. Legal

iv. Demography
v. Technology


Contd …
20


Uses of environment studies
1) Awarness
2) Policy decisions
3) Demand forecasting
4) Competitor’s strategies.
5) To innovate


21


Techniques for environmental studies
i. Verbal and written information
ii. Search and scanning
iii. Forecasting and formal studie


22


Limitations of environmental analysis
a) Unexpected events
b) Future is not a guarantee
c) Too much of information.
d) Overcautions approach


23

Business Sectors

Primary Sector – Agriculture, Mining
Secondary sector - Manufacturing Industries
Manufacturing activities – Electricity Generation and Construction

Tertiary Sector – Services industries
Trade , Commerce, Insurance, Banking,Repair, Transport


24

Classification of Business – Based on Scope of Business
1. Business which Produce Goods:
Two categories of Goods:
a.

Commodities – Goods produced by Primary sector

- Will not undergo any processing
- Agriculture , Fisheries, Mining,
b.

Products

- Goods produced by Secondary sector
– Conversion of Raw material into another form
- Farms, Diaries,
-Manufacturing Enterprises – Machinery, Materials for
-other business, Producing goods for consumption


25

Classification of Business – Based on Scope of Business
2. Business which Produce Services:
Transport , Telephone , Electric Light ,Hotels ,Entertainment
3. Business which Distribute Goods:

Wholesale merchants
Retail Merchants
Importers & Exporters
4. Business which Facilitates Distribution of Goods:
Warehouse, Auction Houses, Advertising, Financing
5. Business which Deals in Finance:
Commercial Banks, Co-Operative Banks, Development Bankd, Insurance Stock
Exchange


26

Classification of Business – Based on the Nature of Activity
1.Extractive Industries:
Extract goods from natural resources- Oil extraction, Farming, Fishing
2. Genetic Industries:

Produce goods by breeding- Poultries, Bio Tech
3. Manufacturing Industries:
Process Raw materials into finished goods – 4 Types
1. Basic Industries : Iron, Steel
2. Capital goods Industries : Machines
3. Intermediate Industries : Tyre , Tubes
4.Consumer goods Industries : Soap
4. Construction Industries
Canals, Dams, Road, Buildings, Road
5. Service & IT Industries

27

Classification of Business – Based on Uses of Goods Produced
1. Basic Industries :
Provide essential inputs to other industries
Iron, Steel, Fertilizer, Chemicals
2. Capital goods Industries :
Instrumental in producing goods and services
Do not directly produce goods for consumption
Capital intensive
Machines, Tools,
3. Intermediate Goods Industries :
Goods already had undergone manufacturing process but which forms input for

other

industries for further processing
Tyre , Tubes
4.Consumer goods Industries : For consumption – Durable / Nondurable goods

Durable – Usage for more than 3 years
Non-durable – Usage within 3 years

28

Classification of Business – Based on Competitive Structure
1.

Monopoly :
Single –Firm Industry
Monopsony – Single Buyer
Bilateral Monopoly – single Buyer and Single seller

MRTP Act
2.Duopoly
Two sellers
3. Oligopoly

Only few firms holding 80 to 85 % market share
4.Monopolistic competition
Large sellers & similar but not Substitute products – Textile
5.Perfect competition

Large sellers & Homogeneous & free entry , exit & no single firm has any control
over the market & Perfect knowledge about market & no transport cost & complete
mobility of factors of production between industries.

29

Business Motives & Objectives

Objective:
The end actions

Motive:
The desire which stimulate action

Motive – Profit, Non-Profit
Objective – Supply Quality Products, Customer Satisfaction, Exploit labour, Tax
evation


30

Importance of Objectives
1. Justifies existance
2. Provide Direction
3. Help coordination
4.Provide standards for assesment & control
5. Help decentralisation


31


I. Economic Objectives
a) Earning of adequate profit.
b) Creation of customers
c) Innovation

d) Generation of employment
e) Control of inflation
f) Economic development

g) Reduction of inequalities of income

32
Contd …


II. Social Objectives
a) Supply of goods and services.
b) Good treatment of customers.
c) Fair treatment of employees.

d) Good working environment
e) Customer Counseling
f) Social responsibility.

g) Pollution control.

33
Contd …


III. National Objectives
a) Implement of government laws.
b) Payment of taxes.
c) Democratic practices.


34
Contd …

Business Ethics

Study of good and evil ,right and
wrong actions of Business
Dishonesty – Unethical , then being dishonest with
employees, Customers and shareholders is
unethical.
Protecting others from harm – Ethical then recalling
defective products is ethical action.


35
Contd …

Business Ethics
Sources of Business Ethics :
Religion

Culture &
Law
Religion : Advocate orderly social system
Culture : Rules and standards transmitted among
generations to produce behaviours- Sathi, Child
marriage, Untouchability, Joint family
Law : Rules of conduct approved by Legislators –
Companies act , Labour laws etc


36
Contd …

Business Ethics
Codes of Business Ethics :
Codes of conducts of business

FICCI
1.

Business must maintain highest standard of
behaviour for the benefit of industry, employees,
customers, shareholders

2.

Goods and services must conform to committed
quality

3.

Customers must be treated with respect and
fairness


37
Contd …

Business Ethics
UnEthical Actions :
1.Kentucky Fried Chicken ( KFC ) – Use of Harmful
hormons & Monosodium glutamate to fatten the
chicken
2. Neem – Oil : Ptent by U.S company
3. Women Harassment – Sacking of Chief Executive of
Infosys


38

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