Nature of Business Environment Factors and Analysis

Nature of Business Environment

Introduction 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
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.
Society cannot do without business and vice versa.

Characteristics of Today’s Business
Business
Information
Competition
Change - Transition
Opportunities
Diversification
Globalisation
Technology
Business during the 21st
Century
• 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 handle
information.
• Organisations have become flat.
• Dispersed ownership, open minded and a transparent environment is encouraged
1. Three types of diversification maybe distinguished : Concentric, horizontal and conglomerate
diversification. Concentric diversification refers to the process of adding new, but related products or
services. Eg : HLL which as Liril, Pears, Rexona, Lux and Lifebuoy. Horizontal diversification is
adding of new, unrelated products or services for present consumer base. Conglomerate
diversification refers to adding new and unrelated products or services.

Environment
 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.
 Simmilarly, the organisational environment has two components
ie. strengths and weaknesses of the organisation. A SWOT
analysis is thus the first step in strategy formulation
Business DecisionInternal Environment External Environment
Factors influencing Business Decision

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

Internal Environment
 Any business has certain vision, mission and objectives and a
strategy to achieve them. Formulation of strategy is defined as
establishing a proper firm-environment fit. Indeed the objectives
should be based on an assessment of the external environment
and the organizational factors (internal environment).
 Vision
 Mission
 Objectives
 Management Structure
 Human Resources
 Financial Factors
 Company Image and Brand Equity

 The macro environment consists of factors which are beyond the control of
the business. There is a symbiotic relationship between business and the
environmental factors, environmental factors are dynamic and a particular
business 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 Environment
Micro Environment
The Micro environment consists of different types of stakeholders -
customers, employees, suppliers, marketing intermediaries, competitors. It is
also known as the Task Environment and Operating Environment and has a
direct bearing on the operations of the firm. Changes in the micro
environment will directly affect and impinge on the firm's activities.

Technological Environment
 Technological is the systematic application of scientific or other
organized knowledge to practical tasks.
 Technological environment hold new technological innovation, new
products, the state of technology, the utilization of technology for
maximum inputs and outputs, the obsolescence of technology and the
dynamic changes that frequently occur in technologies which enable
firms 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 technological
advances around them
 Technology leads to introduction of new products and older products
becoming outdated and redundant.
 Technological advances leads to high expectations of consumers in
terms of quality
 Leads to system complexity
 Demand for capital

Political Environment
Political Environment refers to the influence exerted by the three
political institutions ie. legislature, executive and judiciary in
shaping, directing, developing and controlling business
activities.
 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

Economic Environment
 Economic Environment refers to all forces which have an economic
impact on Business.
 The economic environment consists of the demand dynamics, supply
situation, pricing factors, degree of competitiveness, and impact of
profitability. It includes the fiscal policy, monetary policy and the
taxation policy, the FDI norms, the investment criterion and financing
decisions. Economic environment includes:
 Growth strategy
 Industry
 Agriculture
 Infrastructure
 Money and Capital Markets
 Per capita and national income
 Population
 New Economic Policy
.

Global Environment:
The global environment refers to those factors which are relevant to
business, such as the WTO principles and agreements; other
international conventions/ treaties / agreements / sentiments in other
countries 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 process
Socio-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

External Environmental Analysis
Environmental 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 anticipate
opportunities and to plan to take optional responses to these opportunities. It
also helps strategists to develop an early warning system to prevent threats or to
develop strategies which can turn a threat to a firm’s advantage”. Firms which
systematically analyse and diagnose the environment are more effective than
those which do not.
Process of Environmental Analysis:
The analysis consists of four steps:
 Scanning : Detect early signals of possible environmental change and detect
environmental change already underway.
 Monitoring : Purpose of monitoring is to assemble sufficient data to discern
whether certain trends are emerging, identification of the trends and
identification of areas for further scanning.
 Forecasting : It is concerned with developing projections of the direction, scope
and intensity of environmental change.
 Assessment : To determine implications for the organisation’s current and
potential strategy.

Environmental Analysis and Strategic Management
Defining Business Mission and Objectives
SWOT Analysis
Environmental Analysis + Self Appraisal
Strategic Alternatives and Choice of Strategy
Implementation of Strategy
Evaluation and Control of Strategy

Competitive 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

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.

Rivalry among Existing firms:
• Product standardization, after sales service: In case
of firms which have standardized products; it is price,
distribution and after sales service which become the
distinguishing factors.
Strategic stake: Rivalry becomes more intensive if
the firms have high stakes in achieving success
there.
Exit Barrier: If exit barriers are high, firms would keep
competing in the same industry even though it might
not be very attractive.
Diverse Competition: Competitors with diverse
strategies make the industry highly competitive.
Switching costs: One time costs that the buyer faces
on switching from one supplier’s product to that of
another ie cost of new ancillary equipment etc.
Expected Retaliation

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
 Cost Disadvantages: Cost advantages enjoyed by established firms
may discourage entry of new firms such as learning curve, favorable
location etc.
 Product Differentiation: Characterized by brand image, customer loyalty
etc. may deter new firms from entering the market.
 Monopoly Elements
 Capital Requirements : High capital intensive nature of the industry is
an entry barrier to small firms
Threat 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.
 Perceived level of product differentiation in the minds of the consumer
is also a highly influential factor.

Bargaining power of Buyers:
Buyers can in turn also be potential competitors as they may integrate
backwards 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 information
Bargaining 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

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.

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

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

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

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?
•Could any of your weaknesses seriously threaten your unit?

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

SWOT Analysis of Indian Economy
Strengths
• 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 resources
Weaknesses
• High percentage of workforce involved
in agriculture
• Approx a quarter of population below
the poverty line
• High unemployment rate
• Inequality in prevailing socio economic
conditions, rural – urban divide
• Low productivity
• Huge population leading to scarcity of
resources
• Low level of mechanization
• Red tapism, Bureaucracy
• Low literacy rates
Opportunities
• Scope for entry of private firms in various
sectors 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 resources
Threats
• High fiscal deficit
• Threat of government intervention in
some states
• Growing import bill
• Population explosion, rate of growth of
population
• Agriculture excessively dependent on
monsoon

AN ORGANIZATION’S ENVIRONMENT
Industry Sector
Competitors,
Industry size and
Characteristics, Related
Industries
Raw Materials
Sector
Suppliers,
Manufacturers,
Real Estate
Human
Resources
Sector
Labor Market, Employment
Agencies, Universities, Training
Schools, Employees in Other
Companies, Unionization
Financial Resources Sector
Stock Markets, Banks,
Savings and Loans,
Private Investors
Market
Sector
Customers, Clients,
Potential Users of
Products and Services
Technology
Sector
Techniques of
Production, Science,
Research Centers,
Automation, New
Materials
Economic
Conditions Sector
Recession, Unemployment
Rate, Inflation rate, Rate of
Investment, Economics,
Growth
Government Sector
City, State, Federal Laws and
Regulations, Taxes, Services,
Court System, Political
Processes
Socio-Cultural sector
Age, Values, Beliefs, Education,
Religion, Work Ethic, Urban vs.
Rural, Birth Rate
ORGANIZATION
DOMAIN
Task Environment
Macro
Environment

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