INFORMATION ABOUT INTERNAL AND EXTERNAL FACTOR IMPACTING BUSINESS

3.  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

4. 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.

5.  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

6. 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

7.  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. 1) INTERNAL ENVIRONMENT
2) EXTERNAL ENVIRONMENT
BUSINESS
DECISION
INTERNAL
FACTORS
EXTERNAL
FACTORS

9. Important internal factorsare
1) Value System
Thevaluesystem of foundersand thoseat thehelm of affairshas
important bearing on thechoiceof business, themission and
objectives of theorganization, businesspoliciesand practices.
2) Mission and Objectives
Thebusinessdomain of thecompany , priorities, direction of
development, businessphilosophy, businesspolicy etc. areguided
by themission and objectivesof thecompany.

10. 3) Management Structure and Nature
Theorganizational structure, thecomposition of theBoard of Directors,
extent of professionalization of management etc. areimportant factors
influencing businessdecisions.
4) Internal PowerRelationship
Factorsliketheamount of support thetop management enjoysfrom lower
levelsand workers, shareholdersand Board of Directorshaveimportant
influenceon thedecisionsand their implementation.
Therelationship between themembersof Board of Directorsisalso a
critical factor.

11. 5) Human Resources
Thecharacteristicsof thehuman resourceslikeskill, quality, morale,
commitment, attitudesetc. could contributeto thestrength and weakness
of theorganization.
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.

12. OTHERFACTORS
1.Physical Assetsand Facilities
2.R&D and Technological Capabilities
3.Marketing Resources
4.Financial Factors

13. Two Types
a)Micro Environment
Consistsof actorsin thecompany’simmediateenvironment,
that affectstheperformanceof thecompany.
a)Macro Environment
Consistsof larger societal forcesthat affect all theactorsin
company’smicro environment.

14.  Also known astaskenvironment and operatingenvironment
 Include
Thesuppliers
Marketing intermediaries
Competitors
Customers
Publics
 Moreintimately linked with thecompany than macro factors
 Themicro forcesneed not necessarily affect all thefirmsin aparticular
industry in thesameway.
 Someof themicro factorsareparticular to afirm

15.  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 favourabletreatment during theperiods
of shortages.

16.  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

17.  A firm’scompetitorsincludenot only theother
firmswhich market thesameor similar product but
also all thosewho competefor theincomeof the
consumers
Desirecompetition
Generic competition
Product form competition
Brand competition

18.  Firmsthat aid thecompany in promoting, selling and distributing its
goodsto final buyers.
 Include
themiddlemen and merchantswho “help thecompany find customersor close
saleswith 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 insurebusiness
risks”
 Vital linksbetween thecompany and thefinal consumers.

19.  Any group that hasan actual or potential interest in or impact on
an organization’sability to achieveitsinterests
E.g. Mediapublics, citizensaction publics, local publics
 Mediaattack on any company can influencethegovernment
decisions affecting thecompany.
 Environmental pollution isan issueoften taken up by number of
local publics
 Publicsarenot alwaysthreat to thebusiness.
 Fruitful cooperation between acompany and thelocal publics
may beestablished for themutual benefit.

20. Consistsof larger societal forcesthat affect all theactorsin company’s
micro environment-namely
thedemographic,
economic,
natural,
technological,
political and
cultural forces
Also known asSo cietal Enviro nment
TheSocietal Environment includesgeneral forcesthat do not directly
touch on short-run activitiesof theorganization but that can, and often
do, influenceitslong-run decisions.

22.  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.- areamong thevery important determinantsof business
strategies.
In adeveloping country, thelow incomemay bethereason for the
very low demand for theproduct.

23. Economic policies
Sometypesor categoriesof businessarefavourably affected by
government policy, someadversely affected, whileit isneutral to some
others.
E.g. arestrictiveimport policy may greatly help theimport competing
industries, whilealiberalisation of theimport policy may createdifficulties
for such industries
Economic System
Thescopeof theprivatebusinessdependson theeconomic system.
Thefreedom of theprivateenterpriseis thegreatest in thefreemarket
economy.

24.  Hascloserelationship with theeconomic system and economic
policy.
 In many countriesregulationsto protect consumer interestshave
becomestronger.
 Somegovernmentsspecify certain standards for theproductsto
bemarketed in thecountry; someeven prohibit themarketing of
certain products.
 Promotional activitiesaresubject to varioustypesof controls.
 E.g.: In India, Advertisement of alcoholic product isprohibited
and thepackagesmust carry “injuriousto health” warnings

25.  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

26. 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 somecountries.

27.  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 haveaffected the
demand for baby products. So Johnson &Johnson
repositioned their productslikebaby shampoo and baby oil,
to theadult segment, particularly to females.

28.  Businessprospectsdemandsavailability of certain physical facilities
 E.g. demand for electrical appliancesisaffected by theextent of electrification and the
reliability 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 beconverted for 240v
in India
 Technological developmentsmay increaseor decreasethedemand for some
existing products
 E.g. voltagestabilizers help increasein saleof electrical appliancesin markets
characterised by frequent voltagefluctuations
 Introduction of TVs, Refrigerators, etc. with in-built stabilizersadversely affectsthe
demand for voltagestabilizers.

29.  Particularly important for theindustriesdirectly depending
on importsor exportsand import-competing industries
 Recession, economic boom, liberalization
 Major international developmentshavetheir spread effects
on domestic business.
E.g. Oil pricehikesincreased thecost of production and theprices
of certain productssuch asfertilizers, synthetic fibres. So usually,
thedemand for natural fibresand manuresincreased.

30. SWOTAnalysis
SWOTstands forStrengths, Weaknesses, Opportunities
andThreats.
Identification of thethreatsand opportunitiesin theexternal
environment and strengthsand weaknessesin theinternal
environment of thefirmsarethecornerstoneof businesspolicy
formulation.
It istheSWOT analysiswhich determinesthecourseof action to
ensurethegrowth / survival of thefirm.

31. Strengths
•Strengths—internal to theunit; areaunit’sresourcesand capabilitiesthat can
beused asabasisfor developing acompetitiveadvantage; strength should be
realistic and not modest.
Your list of strengthsshould beableto answer:
•What aretheunit’sadvantages?
•What doesthe unit do well?
•What relevant resourcesdo you haveaccessto?
•What do other peopleseeasyour strengths?
•What would you want to boast about to someonewho knowsnothing about this
organization and itswork?
•Examples: good reputation among customers, resources, assets, people, :
experience, knowledge, data, capabilities
•Think in termsof: capabilities; competitiveadvantages; resources, assets,
people(experience, knowledge); marketing; quality; location; accreditations
qualifications, certifications; processes/systems

32. 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 areyou 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.

33. Opportunities
•Opportunities—any favorablesituation present now or in the
futurein theexternal environment.
Examples: unfulfilled customer need, arrival of new technologies,
loosening of regulations, global influences, economic boom,
demographic shift.
•Wherearethegood opportunitiesfacing you?
•What aretheinteresting trendsyou areawareof?
•Think of: market developments; competitor; vulnerabilities;
industry/ lifestyletrends;; geographical; partnerships

34. Threats
•External force that could inhibit themaintenanceor attainment of a
competitiveadvantage; any unfavorablesituation in theexternal environment that
ispotentially damaging now or in thefuture.
•Examples: shiftsin consumer tastes, new regulations, political or legislative
effects, environmental effects, new technology, lossof key staff, economic
downturn, demographic shifts, competitor intent; market demands; sustaining
internal capability; insurmountableweaknesses; financial backing.
Your list of threatsshould beableto answer:
•What obstaclesdo you face?
•What isyour competition doing?
•Aretherequired specificationsfor your job/serviceschanging?
•Ischanging technology threatening your position?
•Do you havefinancial problems?

35.
POSITIVE/
HELPFUL
to achieving the
goal
NEGATIVE/
HARMFUL
to achieving the
goal
INTERNAL Origin
facts/ factors of the
o rganizatio n
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

37. Thecompetitivestructureof industriesisavery important businessenvironment.
Identification of forcesaffecting thecompetitivedynamicsof an industry isvery useful
in formulation of strategies.
Asper Michael Porter’ well known model of structural analysisof industries, thestateof
competitionsdependson:
Porter’sanalysisdeterminesthecompetitiveintensity of theindustry and the
attractivenessof themarket. A highly competitiveindustry isoneapproaching “Perfect
Competition” whereby businessesareonly ableto earn normal profits.
Rivalry among firms Buyers
Substitutes
New Entrants
Suppliers
Threat of new entrants
Threat of substitutes
Bargaining powerBargaining power

39. Rivalry Among Existing Firms:
Firmsin an industry aremutually dependent – competitivemotivesof afirm
usually affectsothersand may beretaliated. Factorsinfluencing theintensity of
rivalry are:
 Numberof firms and theirRelative market share
 State of Growth of Industry: In stagnant, declining and slow growth
industries, afirm isableto increaseitssalesby increasing themarket share.
 Fixed orstorage costs: In caseof high fixed costs, strategy of firmsisto
increasesaleswhich in turn would improveon capacity utilization.
 Indivisibility of capacity augmentation : Wherethereareeconomiesof
scale, capacity increaseswould bein largeblocksnecessitating, effortsto
increasesalesto achievecapacity utilization norms.
 Product standardization

40.  New entrantsarenewcomersto an existing industry. They typically bring
new capacity. A desireto gain market shareand substantial resources.
Thereforethey arethreatsto an established corporation.
 Thethreat of entry dependson thepresenceof entry barriersand the
reaction that can beexpected from existing competitors.
 An entry barrier isan obstruction that makesit difficult for acompany
to enter an industry.

41. Threat of Entry
Potential competition tendsto behigh if theindustry isprofitableor
critical and entry barriersarelow. Someof thecommon entry barriers
are:
 Government Policy: Government can limit entry into industry
through licensing requirementsby restricting accessto raw materials.
 Product Differentiation: Characterized by brand image, customer
loyalty etc. may deter new firmsfrom entering themarket.
 Capital Requirements : High capital intensivenatureof theindustry
isan entry barrier to small firms.
 Economies of Scale : Scaleeconomiesin production and salesof
microprocessors, gaveIntel asignificant cost advantageover any new
arrival.
 Switching Costs : Onceasoftware program such asexcel or word
becomesestablished in Office, officemanagersarereluctant to switch
to anew program becauseof high training costs.

42.  An industry which hasclosesubstitutesavailableishighly competitivein
nature. Existenceof closesubstitutesincreasesthepropensity of
consumersto switch to alternativesin responseto priceincreases.
 Substitutes limit the potential returnsof an industry by placing aceiling
on thepricesfirmsin industry can profitably charge.

43. Buyers affect an industry through theirability to force down
prices , bargain forhigherquality ormore services and play
competitors against each other.
A buyerordistributoris powerful if some of the following factors is true :
 A buyer purchasesalargeproportion of sellersproduct or service(eg : oil filters
purchased by amajor automaker)
 A buyer hasthepotential to integratebackward by producing theproduct itself
(eg: anewspaper chain could makeitsown paper)
 Alternatesuppliersareplentiful becausetheproduct isstandard or
undifferentiated.
 Changing supplierscost title. (eg: officesuppliesaresold by many vendors)
 Thepurchased product isunimportant to thefinal quality or apriceof abuyers
products(eg: electric wirebought for usein lamps)

44. Suppliers can affect an industry through theirability to raise prices
orreduce the quality of purchased goods and services.
A buyer or distributor ispowerful if someof thefollowing factorsistrue:
 Supplier industry isdominated by afew companiesbut it sellstoo many(eg:
petroleum industry)
 Serviceisuniqueor it hasbuilt up switching costs(eg: word processing
software)
 Substitutesarenot readily available(eg: electricity)
 Suppliersareableto integrateforward and competedirectly with their present
customers(eg: amicroprocessor producer likeIntel could makethecomplete
PC)
 A purchasing industry buysonly asmall portion of thesuppliersgroupsgoods
(eg: salesof lawn mower tiresarelessimportant to thetireindustry than are
salesof auto tires)

45.  “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”

46. Stages of Environmental Analysis:
Theanalysisconsistsof four steps:
Scanning : It isprocessof analyzing environment for the
identification of factorswhich impact or haveimplicationsfor
business.
Monitoring : It involvesmorein-depth analysisof environmental
trendsidentified at thescanning stage. Purposeof monitoring isto
assemblesufficient datato discern whether certain patternsare
emerging.
Forecasting : Anticipating futureisessential for identifying future
threats and opportunitiesand formulating strategic plans.
Assessment : It involvesdrawing up implications/possible
impacts

47. • The concept of strategic groups
– Within an industry, a competitor grouping using similar
strategies that differ from other industry groups.
• Implications of strategic groups
– The closest industry competitors are those in the group.
– The various industry groups are differentially and
competitively advantaged and positioned.
– Mobility barriers inhibit the movement of competitors
from one strategic group to another.

49. • Both models are static and ignore innovation.
• Their focus is on industry and group structures
rather than individual companies.
– Innovation creates change in
industry structures, altering the
competitive environment.
– Industry structure cannot
fully explain the performance
differences between industry
competitors.

50.  The demand for primary industry products
depends on the size of the total market for
complementary products.
◦ Network economics result in
positive feedback loops that
foster rapid demand increases.
◦ Market competitors are
protected by switching
cost entry barriers.

51. • Globalization
– Globally dispersed production lowers
costs and increases quality.
– Global markets are replacing
national markets.
• Trend implications
– No isolated national markets
– More competitors, more intense competition
– More rapid innovation and shorter product life cycles

52.  The determinants of competitive advantage:
Factor
endowments

53. THANK YOU….