Business Environment

Unit I

Human Resource Suppliers

Regulations

Technology

Customers Competitors

Suppliers-Salcomp

HR-Approx 9000 in India

Technology-CDMA/ GSM Regulations-DOT

CompetitorsSamsung, LG

Customers

Definition
Business covers a complex field of industry and commerce which involve activities related to both production and distribution. These activities on one hand satisfy societys needs and desires and on the other hand brings profit to the business firms. Business Environment refers to all those internal and external factors which impact the functioning/ performance of the firm and/ or its decision making, particularly strategies. Although the scope of the term Business Environment includes, in broad sense, both internal and external factors impacting the business in its common usage it often refers to the external factors.

 Any meaningful organization has certain vision (what the organization wants to be), mission (fundamental purpose of an organization), objectives (set of goals), and goals (measurable targets to achieve in limited timeframe) and a strategy to achieve them. Business Environment has an impact on the shaping of all these integral and interrelated elements.

Therefore formulation of strategy is sometimes defined as establishing a proper firm-environment fit.

Types of Environment
There are broadly two types of environment;
Internal Environment &

External Environment

Types of Business Environment

Internal Environment

External Environment

Micro Environment

Macro Environment

Macro(General/Remote) Environment Political/Government Environment LEGAL ENVIRONMENT Micro(Task/Operating) Environment Marketing intermediaries

Internal Environment
Promoters / Shareholders Value Mission/ Objectives Management Structure Internal Power Structure Physical Assets & Facilities

Suppliers

Customers Global Environment

Demographic Environment
Business Decisions

Publics Company Image/ brand Equity Human Resources Financial Capabilities Technological Capabilities Marketing Capabilities Financiers

Competitors

Social/ Cultural Environment

Nature/ Technological

ECONOMIC ENVIRONMENT

Environment

Internal Environment

 Internal Environment
Controllable Factors Alteration/ Modification Possible At times few factors may go out of control

Includes
Value System : Promoters/ Shareholders (Ex-TATA) Mission/Objectives/Goals : Provides direction (Mission of Reliance Comm.: Excellence in Communication Arena) Management Structure/ Nature : Composition of BOD, Professionalism, Decision making methods, Role of Financial Institutions Internal Power relationships : Extent of support for Top Management, Implementation of decisions

 Physical Assets & Facilities : Like Production Capacity Company Image/ Brand Equity : Important for tie-ups, Joint Ventures, Selecting Intermediaries, Product Launch Human Resource : Skill, involvement, morale, attitude, Process improvers/ workers, team work Financial Capability : Available Funds for project Technological Capability : Standing know-how with firm, R&D Facilities Marketing Capability : Marketing teams reach and skill

External Environment

External Environment

 External Environment
Micro Environment:
The Micro environment consists of the factors in the companys immediate environment that affect the performance of the company. Includes the suppliers, marketing intermediaries, competitors, customers and publics.

Macro Environment:
The Macro Environment consists larger societal forces that affect all the actors in the companys Micro Environment. Includes economic, demographic, legal, natural, political and cultural forces.

Micro Environment (Cont..)

The Micro forces need not necessarily affect all the firms in a industry in the same way. Some of the factors may be particular to the firm. Major Factors are:

A. Suppliers Uncertainties regarding supply compel for high inventories causing cost increase Indian Factories: generally stock for 3-4 months (against imported stock 9-10 months) High emphasis on Vendor development & Backward integration Risky to depend upon single supplier Purchase department should learn how to wine & dine suppliers for favourable treatment Depends upon Partnering/ Relation Marketing For Ex: Intel supplies 80% Processors of PC Market

B. Customers Major task of business to create and sustain customers Different categories of Customers individual, industrial, government etc. Depending upon single customer too risky Global Customers

B. Competitors

Include all those who compete for the discretionary income of customers Desire Competition For Basic Need of customers Generic Competition Selecting suitable means for particular basic desire Product form competition Type of product preferable by customer Brand Competition Selection of brand for transaction Sellers market converting to Buyers market

C. Marketing Intermediaries

Firms that aid the company in promoting, selling and distributing its products to final buyers Includes agents, physical distribution firms(like transport firms), marketing service agencies(advertising, research firms), financial intermediaries. Power of Intermediaries

D. Publics

A public is any group that has an actual or potential interest in or impact on an organizations ability to achieve its interest Includes media public, citizen action public or local public.

E. Financiers
Besides financial capabilities, their policies, strategies, attitudes towards risk and ability to provide non-financial assistance are very important.

Macro Environment (Cont..)

A.

Government/ Political Environment:

Extent of State intervention in business (Adam Smith- That Government is the best which governs the least) Upto 1991- High State Intervention in India Political Stability Taxation Policy (Corporate Tax : Heavy burden) Licensing Policy
1991 onwards only 15 industries related to security, safety & environmental concern require licensing). Later on changed to 5 industries only (Alcohalic drinks, cigarettes, defence equipments, industrial explosives and hazardous chemicals). Atomic Energy and Railways reserved for PSUs.

Foreign Direct Investment Policy

B.

Demographic EnvironmentImportant as people constitute Market Success of business largely depends upon competence and motivation of its people Demographic factors often used by business for market segmentation Important Demographic factors includea) Size of population including growth rate India 2.4% of total land with population above 17.5% of world population 1951-361 million, 2005-1065 million, 2011-1.21 billion Average Annual Growth Rate: 1951-1.25%, 1981-2.22%, 20051.7%, 2011-1.41% May be most populous by 2025 b) Age structure More than 50% below age 25, By 2020- Expected average age-29 years

c) Gender Composition: 1981-934, 1991-927, 2001-933, 2011-914. d) Rural urban Distribution: Rapid urbanization (2001-72.2% Villages) e) Occupation: Heavy dependence on Agriculture, Services and Industry f) Literacy rate: 1951-27% Males, 9% Females, 1981-64%M, 39%F, 2001-76%M,54%F, 2011-82.14%M, 65.46%F.

 Socio-Cultural Environment

 Socio-Cultural environment is made up of attitudes, desires, expectations, degree of intelligence, education, belief, lifestyle and customs of various groups
(Ford Fiera In Spanish-speaking Latin American countries Fiera means ugly old woman)

For example - Western Societies-Modern & Liberal, Receptive, Health conscious India has more than 2000 ethnic groups Laws are changing as per anticipation of changes-FEMA, Competition Act, Globalization Cultural difference & MNCs

 Natural & Technological Environment

Natural environment performs four basic functions including
Life support, Supply of resources, Waste absorption and Amenity services

Previous decades Businesses were concerned about Profit Maximization caused tremendous damage to natural resources such as forests. Water and Air contamination On account of natural imbalances, now humans are forced to take care of environment

 Technology refers to skills, knowledge and procedures for making, using and doing useful things Technological innovations are cost effective and demand increasing both Provided greater output, shorter working hours, safer working conditions, production of new and standardized quality goods with more efficient use of raw material Only negative impact of technology has been partial unemployment

 Legal Environment
Legislations defining business organizations, laws of contract, the way business activities are carried out in the business environment, economic legislations and upcoming legislations, may come under the purview of Legal Environment for business. Including
Indian Contract Act Companies Act Competition Act FEMA Act SEBI Act Information Technology Act Sale of Goods Act

 Global Environment
Refers to those global factors which are relevant to business mainly
WTO : Mission and Agreements (WTO is the international organization whose primary purpose is to open trade for the benefit of all) International Treaties (SAARC-South Asian Association for Regional Cooperation) Economic Conditions (Global)

Other factors, which become important at times like Crude Oil prices, International Political factors, Technological requirements worldwide.

 Economic Environment
Economic Environment includes Economic System (Capitalism, Socialism & Mixed Economy), National Income Concepts, Business Cycle, Inflation and Deflation. Any improvement in the economic conditions such as standard of living, purchasing power of public, demand and supply, distribution of income etc, influences business environment significantly.

Framework of Modern Business Environment

Ethical Consciousness
Oligopolistic Character Difficult to Predict Global Environment Dynamic

BUSINESS
Technology orientation Government Control Diversification Large Size of Businesses

Sum of Total Factors

Framework of Modern Business Environment Oligopolistic Character Small number of firms selling homogeneous or differentiated products Interdependence among sellers Causes of Oligopoly: Huge Capital Investment, Long gestation period, Barriers by competitors

Large Size of Businesses To enjoy economies of scale According to a study by Sarah Anderson & John Cavanagh for Corporate Watch 2000
Total sales of 2000 top corporations surpassed economies of 182 countries Among top 100 large economies in the world; 51 are global corporations and 49 are countries

Difficult for SMEs

 Global Environment Heavy Influence with inception of global agencies like WTO MNCs are following local trends Also termed as Neo-Colonial Powers Ex: Nestle (Swiss Comp), Philips (Dutch Comp), Unilever (British-Dutch Comp), TATA, Ranbaxy etc.

Diversification
Exposure to different businesses/ Products Spread of Risk Ex: P&G, Unilever Also possible through tie-ups as executed by Wipro, TATA etc.

 Technology orientation Big businesses are technology based Provides an edge over competitors Needed for large scale production, economies of scale, cost reduction and enhancing market size Tech driven countries are benefitted, Ex: Hyundai (Korea), Sony (Japan)

Government Control Govt. interferes generally in areas of social interests like environment pollution, monopolistic tendencies, market failures, controlling inflation and other macro factors Generally Reducing Control, but partial control is necessary

 Dynamic - The business environment keeps on changing, constantly Difficult to predict - It is very difficult to predict the exact nature of future happenings and the changes in economic and social environment & resultant Business Environment

 Ethical consciousness
Due to unethical practices and resultant losses to organizations, ethical consciousness is becoming important CSR Humanitarian Aspect & Values

Sum total of all factors - Business environment is the sum total of all
factors external to the business firm and that greatly influence their functioning.

Business Environment differs from place to place, region to region and country to country. Ex: Political conditions in India differ from those in Pakistan. Taste and values cherished by people in India and China vary considerably. Therefore factors of every business environment are unique in nature

Significance of Business Environment

An analysis of business environment helps to identify strength, weakness, opportunities & threats. Analysis is very necessary for the survival and growth of the business enterprise. The importance of business environment is briefly explained in an analysis below: (1) Identification of Strength: The analysis of the internal environment helps to identify strengths of the firm. For instance, if the company has good personal policies in respect of promotion, transfer, training, etc, then it can indicate strength of the firm in respect of personal policies. This strength can again be identified through the job satisfaction and performance of the employees. After identifying the strengths the firm must try to consolidate its strengths by further improvement in its existing plans & policies. (2) Identification of Weakness: The analysis of the internal environment indicates not only strengths but also the weakness of the firm. A firm may be strong in certain areas; where as it may be weak in some other areas. The firm should identify its weakness so as to correct them as early as possible.

(3) Identification of Opportunities: An analysis of the external environment helps the business firm to identify the opportunities in the market. The business firm should make every possible effort to grab the opportunities as and when they come. (4) Identification of Threats: Business may be subject to threats from competitors and others. Identification of threats at an earlier date is always beneficial to the firm as it helps to defuse the same. (5) Continuous Learning: Environmental analysis makes the task of managers easier in dealing with business challenges. The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in realm of business.

(6) Keeping Business Enterprise Alert: Environment study is needed as it keeps the business unit alert in its approach and activities. In the absence of environmental changes, the business activities will be dull and lifeless. The problems & prospects of business can be understood properly through the study of business environment. This enables an enterprise to face the problems with confidence and secure the maximum benefits of business opportunities available.

(7) Keeping Business Flexible and Dynamic: Study of business environment is needed for keeping business flexible and dynamic as per the changes in the environmental forces. This will enable the development of business organization.

(9) Making Business Socially Acceptable: Environment study enables businessmen to expand the business and also make it acceptable to different social groups with their products and social contributions. Business organizations can make positive contribution for maintaining ecological balance by studying social environment.

(10) Ensures Optimum Utilization of Resources: The study of business environment is needed as it ensures optimum use of resources available. For this, the study of economic and technological environment is useful. Such study enables organization to take full benefit of government policies, concessions provided, and technological developments and so on.

(11) Ensures Survival and Growth: Business environment inform about suitable changes to be affected in business policies. This helps the business organizations to grow & prosper. (12) Maintaining adaptability to changes: Business environment guides the business organization about socio-economic changes & the organization must accordingly adapt these change. This enables the business organization to survive for a longer period