An Overview of Business Environment

By Nikunj Nayak Ganpat University

Meaning of Business Environment

No business enterprise function in a vacuum. Business is an integral part of the ecology and social system. Business Environment refers to all those internal and external factors which impact the functioning / performance of a firm and / or its decision making, particularly strategies.

Example: Transformation of the Indian Two Wheeler Market.

Business Ecology
Human ecology: Survival and success of any individual depend on his innate capability. Same way, business ecology says that survival and success of a business firm depend on: 1. Its innate strength - recourses at its command Physical resources, financial resources, human resources, skill etc. 2. Adaptability to the environment

So, survival and success depend on two sets of factors: 1. 2. Internal factors External factors
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Business Environment Interrelationship

The strategy formulation is properly pitting the organizational factors (internal environment) against the opportunities and threats in the external environment. Formulation of strategy is sometimes defined as establishing a proper firm-environment fit. A SWOT analysis in strategic management process. Business dynamics is depend on the environmental dynamics.

Factors Influencing Business Decision

Strengths Weaknesses

Opportunities Threats
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Types of Business Environment

Types of Business Environment

BE may be considered at three levels: 1. 2. 3. Internal Environment Micro environment / task environment / operating environment Macro environment / general environment / remote environment

Environmental Factors
Internal factors (Environment): Controllable factors Have bearing on strategy and decisions External Factors (Environment): Beyond the control of the company Micro environment: have direct and intimate impact on the firm. (like supplier and distributors)

Macro environment: affect an industry very generally (Like industry policy, demographic)
It has been noted that a firm may not sometimes have complete control over all the internal factors. Also, it is some times possible to change 8 certain external factors.

Internal Environment
Value system: Has important bearing on the choice of business, the mission, and objectives. The value system of the organization influences its portfolio strategy, HRM, marketing strategy and CSR.

The value system and ethical standards are also among the factors evaluated by many companies in the selection of suppliers, distributors, collaborators etc.

Internal Environment
Examples of Value system: Infosys views its employees as its key resources. With wealth creation for employees as one of its stated objectives, Infosys provides innovative compensation and benefit packages. After the Parry group was taken over by the Murugappa group, one of the most profitable business(liquor) of the ailing Parry group was sold off as the liquor business did not fit into the value system of the Murugappa group.

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Internal Environment
Vision, Mission and Objectives: Vision, Mission and objectives set the scope, direction, philosophy and pace of development. Ranbaxys thrust in to the foreign markets and development have been driven by its mission to become a research based international pharmaceutical company.

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Internal Environment
Management Structure and Nature: Quality of the Board is very critical factor for the development and performance of company. Some management structures and styles delay decision making while some facilitate quick decision making.

Share-holding patter. (Wipro- majority hold of promoters, Tata groupPromoters position is very vulnerable)
Hold of financial institutions in Indian companies.

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Internal Environment
Internal Power Relationship: Support to top management from different levels of employees, share holders and Boards of Directors. Relationship between the members of Board of Directors and between chief executive and board. Influence on decisions and implementation.

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Internal Environment
Human Resources: Characteristics like skill, quality, morale, commitment, attitude could contribute to the strength and weaknesses of an organization. Example: John Towers, M.D., Rover Group, observes that a Japanese company of 30,000 employees is 30,000 process improvers. In a Western company, it is 2,000 process improvers and 28,000 workers.

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Internal Environment
Company Image and Brand Equity: The image of company matters while: Raising finance Forming JV or other alliances Soliciting marketing intermediaries Entering purchase or sale contracts

Launching new products

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Miscellaneous Internal Factors

1) Physical Asset and Facilities: Like production capacity, technology and efficiency of productive apparatus, distribution logistics etc..

2)

R & D and Technological Capabilities: Determine a companys ability to innovate and compete.

3)

Marketing Resources: Organization for marketing, quality of marketing men, brand equity and distribution network have impact on marketing efficiency. Also important for brand extension, new product introduction.

4)

Financial factors:

Like financial policies, position and capital structure.

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Micro Environment
Companys immediate environment that affect the performance. Direct bearing on the operation of the firm. Suppliers: Reliable source/sources of supply to the smooth functioning of the business is obvious. Maintain high inventories causing cost increases. Factories in India maintained indigenous stocks of 3-4 months and imported stocks of 9 months as against an average of a few hours to two weeks in Japan.

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Micro Environment
Suppliers: Supply chain management is critical to the efficiency of a firm. Vertical integration (vendor development) or Backward integration (own production) Multiple sources of supply reduce risks. Partnering / Relationship marketing increasing.

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Micro Environment
Customers: Major task of a business is to create and sustain customers. Indian customer is becoming more global in his shopping. Depending on a single customers is often too risky.

Choosing the customer segments a company should considers such factors as the relative profitability, dependability, stability of demand, growth prospects and the extent of competition.

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Micro Environment
Competitors: Competition has different levels and dimensions. Share of wallet. The liberalization has dramatically transformed the competitive environment in India. Marketing Intermediaries: Merchants and agents who help the company find customers or close sales. Physical distribution firms which assist in stocking and moving goods. Marketing service agencies, advertising agencies, marketing research firms, media firms and consulting firms. 20

Micro Environment
Marketing Intermediaries: Firms that aid the company in promoting, selling and distributing its goods to final buyers. Link between company and final consumers. Wrong choice of the link, may cost heavily. Boycott by distributors and retailers. Hindustan Lever faced major challenge when it faces a collective boycott in Kerala on the issue of trade margin.

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Micro Environment
Financiers: Financing capabilities, policies and strategies, attitude towards risk, ability to provide non-financial assistant. Publics: Media publics, citizen action publics, local publics etc Growth of consumer publics (Like NGOs) affecting business. Protests against child labor, cruelty against animals, environmental problems, deindustrialization resulting from import.

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Macro Environment
When the macro environment is uncontrollable, the success of a company depends on its adaptability to the environment.

If the cost of imported components increases substantially because of the depreciation of the domestic currency, a solution may be their domestic manufacturer.
Various Macro environments are: 1. 2. 3. 4. 5. 6. Political / Govt. environment Legal environment Demographic environment Social / Culture environment Technological / Natural environment Global environment

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Global Environment
Global factors which are relevant to business, such as: WTO principles and agreements Other international conventions / treaties / agreements / declarations / protocols Economic and business conditions / sentiments in other countries Certain developments like hike in crude prices. Recession in other countries can increase the import threats Developments in IT and communication facilities fast cross border spread of cultures, significantly influencing attitudes, testes, preferences etc
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Competitive Structure of Industries

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Environmental Analysis and Strategic Management

Chandler describes SM as the determination of the basic long-term goals and objectives of an enterprise and the adoption of course of action and allocation of recourses necessary to carry out these goals.

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Environmental Analysis and Strategic Management

Establishing the right firm-environment fit is the essence of strategy formulations. SWOT analysis plays a very important role in SM and business. Strategy is shaped by mission/objectives and SWOT. SWOT factors determine the course of actions to ensure the survival and / or growth of the firm. The general success of the Japanese in the world market is attributed to the right choice of the products and markets, based on a proper understanding of the environment and the internal strength. Japanese companies saw an opportunity in the U.S. market segments for compact fuel efficient cars, small screen T.Vs, low horse power tractors 27 etc which were rather neglected by the American firms.

Thank You
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