BUSINESS ENVIRONMENT

• Dr Monika Jain
 BUSINESS
ENVIRONMENT
Dr Monika Jain
 Meaning of Business Environment
• Business Environment consists of all those
factors that have a bearing on the business,
such as the strengths, weaknesses, internal
power relationships and orientations of the
organization; government policies and
regulations; nature of the economy and
economic conditions; socio-cultural factors;
demographic trends; natural factors; and,
global trends and cross-border
developments.
 FEATURES OF BUSINESS
ENVIRONMENT

• Business environment is the sum

total of all factors external to the
business firm and that greatly
influence their functioning.
• It covers factors and forces like
customers, competitors, suppliers,
government, and the social, cultural,
political, technological and legal
conditions.
 FEATURES OF BUSINESS
ENVIRONMENT

• The business environment is dynamic in nature,

that means, it keeps on changing.
• The changes in business environment are
unpredictable. It is very difficult to predict the
exact nature of future happenings.
• Business Environment differs from place to
place, region to region and country to country.
Political conditions in India differ from those in
Pakistan.
IMPORTANCE OF BUSINESS
ENVIRONMENT

• Determining Opportunities and Threats: The

interaction between the business and its environment
would identify opportunities for and threats to the
business. It helps the business enterprises for meeting
the challenges successfully.
• Giving Direction for Growth: The interaction with
the environment leads to opening up new frontiers of
growth for the business firms. It enables the business
to identify the areas for growth and expansion of their
activities.
IMPORTANCE OF BUSINESS
ENVIRONMENT

• 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.
• Image Building: Environmental understanding helps
the business organizations in improving their image
by showing their sensitivity to the environment
within which they are working.
IMPORTANCE OF BUSINESS
ENVIRONMENT

.
• Meeting Competition: It helps the firms to
analyse the competitors’ strategies and
formulate their own strategies accordingly.
• Identifying Firm’s Strength and Weakness:
Business environment helps to identify the
individual strengths and weaknesses in view of
the technological and global developments.
Factors Influencing Business Decision
 Business Environment

• Internal Environment
• External Environment
 Internal Environment
• Promoter’s/Shareholder’s values
• Mission/Objectives
• Management Structure
• Internal Power Relationship
• Company image/Brand equity
• Physical assets/facilities
• R& D and Technological capabilities
• Human Resources
• Marketing Capabilities
 External Environment

• A Micro Environment Macro Environment

•Customers •Economic factor
•Suppliers •Non economic factors
•Competitors i) Social Environment
•Publics (ii) Political Environment
•Financiers (iii) Legal Environment
(iv) Technological
•Marketing Environment
Intermediaries (v) Demographic
Environment
(vi) Natural Environment
 Business Environment
Elements
• Supplier – supply materials, machine,
service and information used to produce
its products and services
• Financial institution – the capital
resources that available for the firm
• Customers – targets for the firm to
market its products and services
• Competitor - all of the entities that
compete with the firm in marketplace
 Business Environment
Elements
• Stockholders/owners – persons who
are invest money in the firm and
represent the high level of management
Factors Influencing Business Decision
 TYPES OF BUSINESS
ENVIRONMENT
• Confining business environment to
uncontrollable external factors, it may be
classified as
• (a) Economic environment;
• (b) Non-economic environment.
• The economic environment includes
economic conditions, economic policies
and economic system of the country.
• Non-economic environment comprises
social, political, legal, technological,
demographic and natural environment.
 Types of Business
Environment

Economic environment
• Economic Conditions
• Economic Policies
• Economic System
 Economic Conditions
• The economic conditions of a nation
refer to a set of economic factors that
have great influence on business
organizations and their operations.
• Gross domestic product
• Per capita income
• Markets for goods and services
• Availability of capital
• Foreign exchange reserve
 Analysis of Environment

Economic segment
 Inflation/interest rates (hurdle costs)
 Trade deficits or surpluses
 Budget deficits or surpluses
 Consumption, savings, tax rates
 GDP, business cycles
 Economic Policies:
• Some of the important economic policies are:
• Industrial policy
• Fiscal policy:
• Monetary policy:
• Export–Import policy (Exim policy)
• Foreign investment policy
 Economic System
• Economic System: The world economy is
primarily governed by three types of
economic systems, viz.,
• (i) Capitalist economy;
• (ii) Socialist economy;
• (iii) Mixed economy.
 Non-economic environment.

• (i) Social Environment

• (ii) Political Environment
• (iii) Legal Environment
• (iv) Technological Environment
• (v) Demographic Environment
• (vi) Natural Environment
 Political Environment

• The government policies and attitude towards the

business community and the unionism.
• The stability of the government sends a signal of
strength, confidence to various interest groups and
investors.
• Further, ideology of the political party also influences
the business organisation and its operations. Coca-
Cola, had to wind up operations in India in seventies.
• Most of the labour unions in India are affiliated to
various political parties. Strikes, lockouts and labour
disputes etc. also adversely affect the business
operations.
 Legal Environment
• This refers to set of laws, regulations, which influence the
business organisations and their operations.
• i) Provisions of the Constitution:
• (ii) Judicial Decisions:
• The various judgments given by the court in different matters
relating to trade and industry also influence the business
activities.
 Social Environment

• The social environment of business includes social

factors like customs, traditions, values, beliefs, etc..
• For example, during festive seasons there is an increase
in the demand for new clothes, sweets, fruits, flower, etc.
• Due to change in family composition, more nuclear
families with single child concepts have come up. This
increases the demand for the different types of household
goods. It may be noted that the consumption patterns, the
dressing and living styles of people belonging to
different social structures and culture vary significantly.
 Technological Environment

• Technological environment include the methods,

techniques and approaches adopted for production of
goods and services and its distribution
• Scientific research for improvement and innovation in
products and services is a regular activity in most of
the big industrial organisations.
• Now a days infact, no firm can afford to persist with
the outdated technologies.
 Demographic Environment

• This refers to the size, density, distribution and

growth rate of population. All these factors have a
direct bearing on the demand for various goods and
services.
• For example a country where population rate is high
and children constitute a large section of population,
then there is more demand for baby products.
• Similarly the demand of the people of cities and
towns are different than the people of rural areas.
• The high rise of population indicates the easy
availability of labour. These encourage the business
enterprises to use labour intensive techniques of
production.
 Natural Environment

• The availability of natural resources

• Weather and climatic condition
• location aspect, topographical factors, etc.
• Business is greatly influenced by the nature
of natural environment. For example, sugar
factories are set up only at those places
where sugarcane can be grown. It is always
considered better to establish
manufacturing unit near the sources of
input.
 Porter's five forces
• Porter's five forces is a framework for the
industry analysis and business strategy
development formed by Michael E. Porter of
Harvard Business School in 1979. It derives five
forces that determine the competitive intensity
and therefore attractiveness of a market.
Attractiveness in this context refers to the overall
industry profitability. An "unattractive" industry is
one in which the combination of these five forces
acts to drive down overall profitability. A very
unattractive industry would be one approaching
"pure competition", in which available profits for
all firms are driven down to zero.
 Five Forces Model of
Competition
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A i r m at
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Five Forces of
ea t o

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Competition
f Su

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Supp
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Bar g
ute

Bargaining Power of
Buyers
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
 Threat of New Entrants
Economies of Scale

Barriers to Product Differentiation

Entry Capital Requirements
Switching Costs
Access to Distribution Channels

Cost Disadvantages Independent

of Scale
Government Policy

Expected Retaliation
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining
Power of
Suppliers
 Bargaining Power of Suppliers
Suppliers are likely to be powerful if:

Supplier industry is dominated by a

Suppliers exert power
in the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
few firms
Suppliers’ products have few substitutes
Buyer is not an important customer to
supplier
Suppliers’ product is an important
input to buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high
switching costs
Supplier poses credible threat of
forward integration
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers
 Bargaining Power of Buyers
Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases

are large relative to seller’s sales Buyers compete
Purchase accounts for a significant with the supplying
fraction of supplier’s sales industry by:

Products are undifferentiated * Bargaining down prices

Buyers face few switching costs * Forcing higher quality

* Playing firms off of
Buyers’ industry earns low profits
each other
Buyer presents a credible threat of
backward integration
Product unimportant to quality
Buyer has full information
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Threat of
Substitute
Products
 Threat of Substitute Products
Keys to evaluate substitute products:

Products Products with improving

with similar price/performance tradeoffs
function relative to present industry
limit the products
prices firms
can charge Example:
Electronic security systems in
place of security guards
Fax machines in place of
overnight mail delivery
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Threat of
Substitute
Products
 Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but
may be costly to smaller competitors
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
Rivalry Among Existing Competitors
High exit barriers are economic, strategic and
emotional factors which cause companies to remain
in an industry even when future profitability is
questionable.

Specialized assets
Fixed cost of exit (e.g., labor agreements)
Strategic interrelationships
Emotional barriers
Government and social restrictions