Macro < Environment > Meso <— Environment —> Substitutes Technological - Forces ° Fi : . ig. 7.1: The Environment of Business73.2 MESO ENVIRONMENT ‘Meso environment, also called intermediate environment, includes factors and forces that are present and/or arises from an organisation’s industry context. Meso environment lies between micro and macro ‘avironment. All the firms belonging to a particular industry (pharmaceuticals, chemicals, information ‘echnology etc.) are equally affected by meso environment. It include factors which are not in control fora particular firm. To understand its meso or intermediate environment, a firm can draw upon five-force framework Sloped by Michael Porter. This model is popularly known as Porter’s Five Forces Framework. It oe Published in Michael E. Porter’s book, “Competitive Strategy: Techniques for Analysing Industries Competitors” in 1980. The five forces are frequently used to measure competition intensity, deme, and profitability of an industry or market, The following section explains each and every nt in detail, .A 90 || BUSINESS ORGANISATION Porter's Five Forces Framework Michael porter developed five forces framework to help a firm identify the factg intermediate environment, i.c., industry factors that affects its profit potential, The five Py fy is an invaluable tool for managers as it helps them understand the overall environments fr to which their firm belongs. ; According to this framework, the industry’s environment is shaped by five fetes. (a) Rivalry and intensity of rivalry between the firms in an industry (©) Threat of entry, (©) Threat of substitutes, (a) Bargaining power of buyers, and (©) Bargaining power of suppliers. Mn, hig! Fig.7.2: Porter’s five forces framework ist fe (a) Rivalry and intensity of rivalry between the firms in an industry: ion the framework is the extent and nature of rivalry in an industry. ae Porte, val? competitors and analyse the intensity of competition. According to Leoath target be said to be existing when two firms deal in similar goods and aa starbucks set of customers. For example, Pepsi and Coca-Cola, Domino’s- toe a Coffee day and so on. The intensity of competition increases further when: * firms are of roughly equal size; * they are aggressive in seeking leadership; et * they belong to high fixed costs industries (e.g. industries requiring costs like the steel industry); * there is a low level of differentiation between products; and * in case where the product is perishable. ioe intensity of cor In case of large number of competitors and in situations where "The more se high, a firm needs to be very active in its marketing strategies. 7% pet creating a differentiatedbrand, more it will be able to win over we capital evi igh cap a ait_ t of entry and barriers to entry: i 6) ret alae the threat Seen a force is the threat of new entrants. A fi monopoly ad incase of industries with huge ene 1 A : ential- i attractive to enter the industry and acquire market share ofthe ee oe ig threat of entry is Tess when there are bariers on at a fined as factors that need to be ov ee be defi ° a ‘ercome by new entrants if they want to compete with established firms in an industry. These factors include economies of scale, non- scale based advantages (for example patents), difficult to imitate know- how (Apple’s ser interface), superior information about customers (rich database), experience and learning, inaccessible supply and distribution channels, high differentiation and market penetration costs, cartelisation petween existing firms, etc. ‘Afirm with high threat of potential entrants and low barriers to entry need to adopt a defensive strategy. Itneeds to be very strong with its market research and product development. It should endeavour towards creating a loyal customer base. The firm that has successfully fought threat of new entrants is Maggie. Irrespective of the number of brands introduced, Maggie has a unique product and a loyal customer base which defends it. (Q) Threat of ‘substitutes: Substitutes are products or services that offer a similar benefit and targets the same customer group but through different products all together such as tea and coffee. ‘Availability of substitute products has ability to give potential threat to firm’s profitability especially in cases where ptice/performance ratio of one substitute is better than the other one. Laptops replacing computers, smart phones replacing cameras and calculators, happened because of better price/ performance ratio of the former products. In India Tata’s ‘one lakh” car may become a substitute for motorcycles and rickshaws. Substitutes can be considered as indirect competitors or second layer of competitors for a firm in the industry. The only strategy to help a firm in case of substitutes is investment in improvement of existing product and continuous innovation. (@) Bargaining power of buyers: Buyers are the organisation’s immediate customers, although not necessarily the ultimate consumers. If buyers are powerful, then they can demand huge discounts or product/service improvements at same price, thereby putting downward pressure on firm's profitability, Therefore, higher the bargaining power of buyer, more is the threat to a firm. Bargaining power of buyers is likely to be high when buyers have many options available in, the market, ic., too many sellers of same product; few buyers account for the majority of sales of a firm; and when buyers are capable of backward vertical integration they are capable of becoming a producer themselves. For example, you were getting your clothes designed by a professional and now you saved the cost of a designer by self-designing. / In these cases, a firm can adopt the mantra that “Customer is the King”. A nee ee No matter how powerful he is in its bargaining power, may help a firm in maintaining ! = ini f suppliers. &® Bargaining power of suppliers: Lastly, @ firm should analy Oe te : ae it ae Suppliers are those who supply what organisations need in order to PtPowerful suppliers can eat into an organisation’s profits. Supplier power is likely to 5, when suppliers are few in numbers; they provide a specialied or rare input; there are og te firms buying from them and hence a single firm represents only a small part of sales} supplier; switching costs (i.¢. shifting from one supplier to another) are high and itis, disap or expensive to change; and suppliers can integrate forwards. Higher the bargaining pov: supplier, more is the threat to the firm. Porter suggested that a firm should classify each factor on continuum ranging from high ln ‘This analysis helps a firm in analysing the threats and opportunities and also helps in dss tactical strategies.like Syria are high on political risk whereas tas to be very careful in analysing these ma looks for business friendly environment that business friendly environment has followi cro environment fact is which offers them ing characteristics: (a) Political stability: Political risk is the risk of financial, market or personnel losses be of political decisions or disruptions such as terrorism, riots, coups, civil wars, itteriational wars, and even political elections that may change the ruling government. These factors eo dramatically affect businesses’ ability to operate. Syria, Libya and Egypt are the three countries that have highest level of political risk in terms of terrorism and political instability. Therefore, a friendly business environment is one which offers political stability that is stable government, no riots, and friendly relation with neighbouring countries and so on. Strong protection to intellectual property rights: Intellectual property refers to property that is the product of intellectual activity such as developing new software, a chemical formula for a new drug, etc. Intellectual property rights include patents, trade mark, copyrights, etc. The philosophy behind intellectual property laws is to reward the originator of new invention for his ideas and effort. Laws protecting the IPRs’are every important to give stimulus to innovation and creative work. The protection of IPRs differs from country to country. As IPRs are intangible in nature they are very difficult to protect. Internet has created new challenges to this issue. The country which fails to protect IPRs fails to create a business friendly environment today. Hence a strong legal system which provides strong protection to intellectual property rights is a business friendly environment today. ; ; (©) Strong economic indicators: A country with booming economy presents various lucrative opportunities for firms for example: A céuntry like India with “huge Population, sing income, changing lifestyle such as fitness and health makes it a very pro! Oe o oat a for international firms. Along with these factors, foreign exchange stat 7 rd be oad important factor of economic environment of a ee A conn with stal currency becomes the most sought after for international sag : eruett Cultural openness: Culture refers to learned, shared and interrelated belief hs citing te members of one group fom the member of Ot Bt geri i i st jut a " gisele ofowncatr Tcl ania tors. While going international, a firm maximum returns with minimum risk. © @.d Saturdays. This is a cultural thing which I firms fails to understand such belief syste a Fay fe it faced hi .W en aa, came to India with its globally popular Hamburgers, it faced huge setback Whee Meng ionalists as i ling beef in its menu. McDonatyn i nationalists as it was sel : : ; J nad’ ete Teal and political systems are based and derived from religious nee onl I risk for business firms. Cultural openness i tail huge cultural . ; It ae of the rises trait of a business friendly environment. 7.5 RECENT DEVELOPMENTS IN BUSINESS IN INDIA The business environment in India has undergone a significant shift with the introduct forms in the 90s. The reforms have influenced the overall growth of the country. Va vegetarian on Tuesdays an understand but international 7 its ston et gher ina “ome ner in Atay elie. Ther ty towards interna ny tion of ec Ms THOUS reforms hy ‘ook place are explained below: ‘ (a) Liberalisation: Liberalisation is the relaxation of government regulations and estrctions the private sector enterprises. In developing countries, it refers to opening up of the economy fo, foreign capital and investments. The measures taken by ‘the government towards liberatisatog are reforms in the industrial sector, financial sector, tax rates, foreign exchange rules and trade policy. The liberalisation policy has posed challenges for small producers. The entry of Myc; increased competition and the domestic producers were not able to meet these challengss For instance, in electronic industry, the entry of MNCs like LG, Samsung, etc., has adver affected the market share of domestic firms like Videocon, Godrej, Voltas, etc. (b) Privatisation: Privatisation refers to the transfer of ownership, enterprise or business from te government to the private sector. India followed the mixed economy system by combining tk market economy with the planned economy. There were number of rules and regulations whic aimed at regulating the economy. It hampered the growth and development by resulting declining foreign exchange reserves, rise in exports and increase in inflation. Due to econo crises and pressure from the international agencies, changes in the economic policy ¥* meee make the country economically and globally competitive. The changes ae ay 3 haeaae impact in the overall growth of the economy on various se (© Globalis ° al 7 nancial, health sector, etc. ation: Globalisatio ee taken by the I lity of rupee, imp h sector, ete, / ot n refers to integrating domestic economy with the world | nt Indian government to achieve the objective of global iat io ae, : Import liberalisation, allowing direct foreign investment, 12 follows: ‘Or public sector, etc. The impact of globalisation can be explained as ( Globalisation h, i i as led t . enable to acquire knowledge a of better technology, The use of internet has aa imp! Communication with d services from different parts of the world. It es raised ti Production standards other countries. The Indian companies as a result ha (i) The retin oval i s “tof tact bariers has resulted in growth of international trade.a icturing facilities in diffe 4 erent parts yyment and higher standards fling Multinational corporations have established manuf; the world resulting in increase in production, em, mk : of people. fee (wv) ‘The local companies supplying raw material to these multinati ational firm: (v) Consumers have a greater choice, improved quality and | to greater competition among the producers ind lower (vi) Some en ot have entered in collaborations, mergers and acquisiti ventures with the foreign companies to survive and prosper in the cnisiat ice joint sing environment. - Gi) mal firms have prospered. Prices for several goods due 6 MANAGERIAL RESPONSE TO ENVIRONMENTAL CHALLENGES identified that there are changes going on in the busi 7 usiness environment, it is i Torespond to these changes. The management of te busines may fe tour tonni tives to deal with changing environment: fom among the fer having je rmanagers slowing alternat @ Adapting: Managers can constantly monitor environmental conditions and adapt accordingly to environmental changes. The managers can make internal adjustments in the organisation to adapt itself to external demands. For instance, the airlines during summer vacations can anticipate the access. demand for the places of tourists” interests and increase the number of flights during that period. (0) Mergers and acquisitions: Some Indian companies have entered into merging with or acquiring another firm to increase their competitive strength. For instance, merger’ ‘of Hindustan ‘Unilever and Tata Oil Mills company, acquisition of Kwality and Kissan by HUL to take on competition from Procter and Gamble, Coca-Cola acquired Parle to gain over pepsi. (© Competitive advertising: Business enterprises use competitive advertising to maintain or increase their market share, Some advertisements specifically mention the name of the other company, while others may refer to “other leading brands’ or ‘brand X” in comparison advertising. For instance, in the popular Pepsi versus Coke advertisement where taste of Pepsi is preferred over Coke by most of the people in a blind fold test, Pepsodent claimed that it's 102 per cent better than the leading toothpaste, referring to Colgate. (@ Brand building: The MNCs spend a lot of money on building brands through advet i Rs i competitors and create promotions and sponsoring events. The aim is to differentiate oe - a un e ie a.unique identity in the market. For instance, Samsung, Coca-Cola, Apple, ete» @ huge amounts on brand building. (© Diversification strategy: Many companies have enter product for the market other than the current business a business activity that doest not react negatively to envi business. For instance, Reliance Industries have diversi information technology, retail, media ‘and entertainments a : © Technological upgradation: Business enterprises Pa ae Me against snd rece cost. The purpose i 0 compermmaceutical ndustieS Produce similar products. For instance, SY? tising, red into new markets or created @ new: s activity. The idea is to expand into ronmental changes as the current fied into textiles, petrochemicals, increase productivity ther companies that ‘Limited, an Indianmultinational, is the largest pharma company in India and ees Pharma compa, the world with 72 percent of its sales coming from markets outsi : inc eH : rations: The domestic enterprise can enter into alliance with fore » ae oa mutual benefit of both the firms. The domestic firm gains access ee finance, technology, management consultancy, etc., of the foreign counterpart. The foreig company has the advantage of cheap labour, inexpensive high quality raw materials, low ey infrastructure facilities, favourable geographic location and so on. For instance, collaboratio. of Tata consumer products and Starbucks corporation to provide unparalleled experience Indian consumer and improve the quality of coffee through sustainable practices. h) Strengthening distribution network: The companies strengthen the distribution network increase their sales. Several companies like HUL, Coca-Cola, Heinz, Tata Sky, Levi Straus have been concentrating on marketing in rural areas by launching low end models of thet products. There is a major shift in consumer lifestyle and preferences in the rural mates offering huge potential for the retailers to expand their business.