1 introduction++to+business+environment

8/6/2019 1 Introduction++to+Business+Environment

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Dr. U.B. Raju

*Compiled from different published sources

*Strictly for academic purpose and for restricted private circulation

Economic Environment of Business

Credit: 1


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W hat is a Business?T ransformation of a set of inputs into aset of outputs thereby creating economicvalue.

Input(s)Transformation Output(s)


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Typology of Businesses

FORM based economic valuePLACE based economic valuePOSSESSION based economic valueST AT E based economic value


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T ransformation

Process Sources Resources Outputs Outcomes

Human

System

Eco System

Durability of products

Service intensity of Goods and Services

Lifecycle approach andevaluation of C-Bs.

Material intensity

Energy intensity

Use of renewablesources

3Rs

Reduce

Reuse

Recycle

ubrajuConcept of Extended-Business

Sink

wastes Seekers


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But now a days, business is viewed more as a profession oroccupation.

From the days of family owned business, we have reached astage of professionals and experts starting and runningbusiness.It could also be noted that business administration andbusiness management have emerged as the mostprospective field of study and occupation.

Unlike the olden days, a number of interests are involved inbusiness today, viz. owners, investors in business,

suppliers, customers, employees, government, stakeholders, administrators, managers, strategists, executives,and so many others.Hence, every business activity has to meet the goals oraims or objectives of these various groups of people. That in

fact, has made business a most complicated activity.


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B usiness is an economic activityA business organization is an economic unitB usiness decisions making is essentially an economic

processChanging concept of business


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BUSINESS ENVIRONMENT

Business involves activities, which links an organization with outsideworld.

Within an organization, a business is governed by the behaviour of itsemployees, management or decision makers.But externally a business is influenced by a score of factors, whichrange from customers to competitors and government. Therefore, abusiness cannot be independent of the influence of these externalfactors.It should also be noted that a business has absolute control over all theinternal factors, it has no control over the external factors. So often itbecomes necessary for business houses to modify their internaldecisions and policies, on the basis of the pressure from externalfactors This highlights the need to be ever-cognizant of changes and

influences of external factors so as to conduct business on healthy lines.It is in this context that business environment assumes all significance.Business environment therefore refers to the influences and pressuresexerted by external factors on the business. The following Figure wouldhelp to understand the various factors which constitute the businessenvironment.


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W hat Is Business Environment?

Meaning: - T he term Business Environment is composed of two wordsBusiness and Environment.

In simple terms, the state in which a person remains busy is known asBusiness. T he word Business in its economic sense means human

activities like production, extraction or purchase or sales of goods that are performed for earning profits.

On the other hand, the word Environment refers to the aspects of surroundings.

T herefore, Business Environment may be defined as a set of conditions Social, Legal, Economical, Political or Institutional that are uncontrollablein nature and affects the functioning of organization.


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BE-Classification Overview

T ime Space Market Forces Influencing Factors

Past Local Demand Economic

Present Regional Supply Non-economic

Future National

International

Macro/Meso/Micro

Internal/External


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Business Environment has two components:1. Internal Environment2. External Environment

Internal Environment: It includes 5 Ms i.e. man, material, money,machinery and management, usually within the control of business.Business can make changes in these factors according to the change inthe functioning of enterprise.

External Environment: T hose factors which are beyond the control of business enterprise are included in external environment. T hese factorsare:

Government and Legal factors, Geo-Physical Factors, Political Factors,Socio-Cultural Factors, Demo-Graphical factors etc.

It is of two T ypes:1. Micro/Operating Environment

2. Macro/General Environment


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Micro/Operating Environment: T he environment which is close to business andaffects its capacity to work is known as Micro or Operating Environment. It consists of Suppliers, Customers, Market Intermediaries, Competitors and Public.(1) Suppliers: T hey are the persons who supply raw material and required

components to the company. T hey must be reliable and business must have multiplesuppliers i.e. they should not depend upon only one supplier.(2) Customers: - Customers are regarded as the king of the market. Success of every

business depends upon the level of their customers satisfaction. T ypes of Customers:(i) Wholesalers(ii) Retailers(iii) Industries(iv) Government and Other Institutions(v) Foreigners(3) Market Intermediaries: - T hey work as a link between business and finalconsumers. T ypes:-

(i) Middleman(ii) Marketing Agencies (iii) Financial Intermediaries(iv) Physical Intermediaries(4) Competitors: - Every move of the competitors affects the business. Business has toadjust itself according to the strategies of the Competitors.(5) Public: - Any group who has actual interest in business enterprise is termed as

public e.g. media and local public. T hey may be the users or non-users of the product.


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Macro/General Environment: It includes factors that create opportunities andthreats to business units. Following are the elements of Macro Environment:

(1) Economic Environment: - It is very complex and dynamic in nature that keeps on

changing with the change in policies or political situations. It has three elements:(i) Economic Conditions of Public(ii) Economic Policies of the country(iii)Economic System(iv) Other Economic Factors: Infrastructural Facilities, Banking, Insurancecompanies, money markets, capital markets etc.

(2) Non-Economic Environment: - Following are included in non-economicenvironment:-(i) Political Environment: - It affects different business units extensively.Components:

(a) Political Belief of Government(b) Political Strength of the Country(c) Relation with other countries(d) Defense and Military Policies(e) Centre State Relationship in the Country(f) T hinking Opposition Parties towards Business Unit


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(iii) Technological Environment: - A systematic application of scientificknowledge to practical task is known as technology. Everyday there has

been vast changes in products, services, lifestyles and living conditions,these changes must be analysed by every business unit and should adaptthese changes.

(iv) Natural Environment: - It includes natural resources, weather,climatic conditions, port facilities, topographical factors such as soil, sea,rivers, rainfall etc. Every business unit must look for these factors beforechoosing the location for their business.

(v) Demographic Environment :- It is a study of perspective of population i.e. its size, standard of living, growth rate, age-sexcomposition, family size, income level (upper level, middle level andlower level), education level etc. Every business unit must see thesefeatures of population and recongnise their various need and produce

accordingly.


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(vi) International Environment: - It is particularly important for industries directly depending on import or exports.

T he factors that affect the business are: Globalisation, Liberalisation,foreign business policies, cultural exchange.

Characteristics:-1. Business environment is compound in nature.2. Business environment is constantly changing process.3. Business environment is different for different business units.4. It has both long term and short term impact.5. Unlimited influence of external environment factors.6. It is very uncertain.7. Inter-related components.8. It includes both internal and external environment.


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BusinessDecision

Internal Environment

Mission / Objectives

Management StructureInternal Power RelationshipPhysical Assets & facilities

Company imageHuman resourcesFinancial CapabilitiesTechnological CapabilitiesMarketing Capabilities

Financiers

SuppliersCustomersCompetitorsPublicMktg Intermediaries

Micro Environment

EconomicTechnologicalGlobalDemographicSocio-CulturalPolitical

Macro Environment

BUSINESS ENVIR ONMEN T


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Internal Environment

Any business has certain vision, mission and objectives and a strategyto achieve them. Formulation of strategy is defined as establishing a

proper firm-environment fit . Indeed the objectives should be based onan assessment of the external environment and the organizational

factors (internal environment).V isionMissionObjectivesManagement StructureHuman ResourcesFinancial FactorsCompany Image and Brand Equity


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T he macro environment consists of factors which are beyond the control of the business. T here is a symbiotic relationship between business and the environmentalfactors, environmental factors are dynamic and a particular business firm, by itself,may not be in a position to change its environment . Macro Environment includes :Political EnvironmentEconomic Environment

T echnological EnvironmentSocio-cultural EnvironmentGlobal Environment.

Macro Environment

Micro Environment

The M icro environment consists of different types of stakeholders -customers, employees, suppliers, marketing intermediaries, competitors. It isalso known as the Task Environment and Operating Environment and has adirect bearing on the operations of the firm. Changes in the microenvironment will directly affect and impinge on the firm's activities.


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PESTEL LoNGPESTEL Analysis

LOCAL NATIONAL GLOBAL

POLITICAL Provision of services by localcouncil Government policy onsubsidies World trade agreementse.g. free trade agreements

ECONOMIC Local income Interest rates Overseas economic growth

SOCIAL Local population growth Demographic change (e.g.ageing population)

Migration flows

TECHNO-LOGICAL Improvements in localtechnologies e.g. availabilityof Digital TV

Country-wide technology International technologicalbreakthroughs e.g. internet

ENVIRON-MENTAL Local waste issues Environmental Laws,weather

Global climate change

LEGAL Local licences/planningpermission

Changes in law International agreementson human rights/IPRs


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Technological Environment

T echnological is the systematic application of scientific or other organizedknowledge to practical tasks.T echnological environment hold new technological innovation, new products,the state of technology, the utilization of technology for maximum inputs andoutputs, the obsolescence of technology and the dynamic changes thatfrequently occur in technologies which enable firms to get a competitiveadvantageT echnology reaches people through businessHelps in increased productivityBusiness needs to spend on R & D and keep up with the technologicaladvances around themT echnology leads to introduction of new products and older products

becoming outdated and redundant.T echnological advances leads to high expectations of consumers in terms of qualityLeads to system complexityDemand for capital


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Political Environment

Political Environment refers to the influence exerted by the three politicalinstitutions ie. legislature, executive and judiciary in shaping,directing, developing and controlling business activities.

T he constitution of a country

Political OrganisationPolitical StabilityImage of the country and its leadersForeign PolicyLaws governing businessFlexibility and adaptability of laws

T he Judicial System


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A N ORG A NIZ A TIONS EN V IRONMENT

Industry SectorCompetitors

,Industry size andCharacteristics, Related

Industries

Raw Materials

SectorSuppliers,Manufacturers,Real Estate

HumanResourcesSector

Labor Market, EmploymentAgencies, Universities, T rainingSchools, Employees in Other Companies, Unionization

Financial Resources Sector

Stock Markets, Banks,Savings and Loans,Private Investors

MarketSector

Customers, Clients,Potential Users of Products and Services

TechnologySector

T echniques of Production, Science,Research Centers,Automation, NewMaterials

Economic

Conditions Sector

Recession, UnemploymentRate, Inflation rate, Rate of

Investment, Economics,Growth

Government Sector

City, State, Federal Laws andRegulations, T axes, Services,Court System, PoliticalProcesses

Socio-Cultural sector

Age, Values, Beliefs, Education,Religion, Work Ethic, Urban vs.

Rural, Birth Rate

ORG A NIZ A TION

DOM A IN

Task Environment

MacroEnvironment


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Economic Environment

Economic Environment refers to all forces which have an economicimpact on Business.The economic environment consists of the demand dynamics, supplysituation, pricing factors, degree of competitiveness, and impact of profitability. It includes the fiscal policy, monetary policy and the taxationpolicy, the FDI norms, the investment criterion and financing decisions.Economic environment includes:

Growth strategyIndustry

AgricultureInfrastructureMoney and Capital Markets

Per capita and national incomePopulationNew Economic Policy

.


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Global Environment :T he global environment refers to those factors which are relevant to business,

such as the W T O principles and agreements; other international conventions/

treaties / agreements / sentiments in other countries etc. For eg hike in crudeoil prices has a global impact etc.World is becoming one marketImproving qualityCompetition from MNCsCapital and technology transfersDeciding which markets to enter and what products to manufactureAdjusting the management process

Socio-Cultural Environment:Culture creates peopleCulture and globalization

Culture determines peoples attitude to business and work.Caste systemSpirit of collectivismEducationEthics in businessSocial responsibilitySocial auditCorporate governance


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Environmental Analysis and Strategic Management

Defining Business Mission and Objectives

SWOT AnalysisEnvironmental Analysis + Self Appraisal

Strategic Alternatives and Choice of Strategy

Implementation of Strategy

Evaluation and Control of Strategy


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P OSITIVE/ HEL PFU Lto achieving the goal

NEGATIVE/ HARM FU Lto achieving the goal

INTERNAL Originfacts/ factors of theorganization

StrengthsThings that are good

now, maintain them,build on them and

use as leverage

W eaknessesThings that are badnow, remedy, change

or stop them.

EXTERNAL Originfacts/ factors of theenvironment in which

the organizationoperates

OpportunitiesThings that are good for

the future, prioritizethem, capture them,

build on them and

optimize

ThreatsThings that are bad for

the future, put inplans to managethem or counter

them


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Strengths

Huge pool of skilled/labor force (Highly educated , skilled ,young, capable & dynamichuman resources - English speaking & analytical students -World class business-social-

spiritual political leader, Professor, Scientist, Manager-Doctor-Engineer-Civil servantsetcHigh percentage of cultivable land/abundance of natural resourcesDiversified nature of the economyExtensive higher education systemHigh growth rate of economyRapid growth of I T / IT es Sector

High savings/investment , forex reserves, broad based and growing entrepreneurialclass, market size, macro economic and financial stability, language, democracy and political system stability

Biodiversity & T raditional knowledge baseIdeas-Innovation-IntegrationPowerful spiritual strength (yoga-Ayurvada-Healing-therapy services)Geographical location (whole markets are shifting toward Asian nations)

India Strategic position at various platformsBig democracy, Big market & free mediaRange of emerging professional champions


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Weaknesses

High percentage of workforce involved in agricultureApprox a quarter of population below the poverty line

High unemployment rateInequality in prevailing socio economic conditions, rural urban divideLow productivityHuge population leading to scarcity of resourcesLow level of mechanizationRed-tapism, BureaucracyLow literacy rates

Physical infrastructure, human development indicators, agriculture, shortage of skilledmanpower Lack of trained & skill work forceSmall supply of specialize professionalLack of spirits of entrepreneurship, patriotism and leadership skillLack of effective & execution framework Lack of Indian management modelsLack of transparency- T rust-ResponsibilityLack of T eam work spiritFear of sharing knowledge & taking risk

T hinking Win-Lose, Lose-Win and Look-outside mentalitySlow absorption of Innovation & changeAbsence of greater technology impetus


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Opportunities

Scope for entry of private firms in various sectors of businessInflow of FDIHuge foreign exchange prospects in I T / IT eSInvestment in R & DArea of infrastructureHuge domestic market : Opportunity for MNCsHuge agricultural resourcesDemographic dividend, knowledge based growth , increased integration with world

economy, urbanisationBig potential market in education Sector & emerging new market Segment in

servicesGeneral Agreement of trade on ServicesResearch & Development capabilityGenerate intellectual propertyResource Building capacityCompetition- cost Quality serviceCollaboration : win-win thinkingHybrid solutionbalancing & blending

T ourism, health sector, food processingRural economy development & social transformation ( PURA model )Need modernization of infrastructure , Library and laboratory


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Threats

High fiscal deficitT hreat of government intervention in some states

Growing import billPopulation explosion, rate of growth of populationAgriculture excessively dependent on monsoonGlobal Uncertainty, fiscal deficit, climate change energy and food security, regional

and social inequalitiesA feeling of unstable governmentSelf centered political leadership

Slow & Dysfunctional judiciary and corrupt law enforcersRegulation, protection and restrictionMechanistic -stable-Layered-complex systemCorruption, Ignorance & ComplacencyHigh competitive & marketing forces

T o patent Indian intellectual property by outsider (unawareness about ownresearch/resources)

Fast change Internet-information technology& new Inventions- T echnology-InnovationsDiversity vs. Imbalance- clashesRegional-Religion-caste-culture conflictsMigration of all branches to software jobsJob seeking mind sets, not job creator Unnecessary social pressure on students


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5 Important Characteristics of

Current Business scenarioRadical, discontinuous and non-linear changeDoing Right T hings

New Business Models defying traditional boundaries, structures etc.Sustainable Organisational competence driven

by innovation and CreativityOrganisational stock of knowledge


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Environmental Turbulence

Environmental turbulence refers to the amount of

change and complexity in the environment of a company.

The greater the amount of change in environmentalfactors, such as technology and governmental

regulations, and/or the greater the number of environmental factors that must be considered, thehigher the level of environmental turbulence.

F or many reasons environmental volatility and instabilityhave been increasing for the past 100 years.

ENVIRONMENTAL TURBULENCE is characterized by thecomplexity and novelty of challenges in the business environment,as well as, the rapidity and visibility of upcoming changes.


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Responding to Levels of EnvironmentalT

urbulence

It has been claimed (Ansoff & McDonnell) that the degree of

aggressiveness and responsiveness of an organisation shouldmatch the level of turbulence of the organisationsenvironmentT he greater the level of turbulence, the stronger the forces arefor change


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Levels of Environmental T urbulenceLevel 1. Predictable . Stable markets. Pace of change is slow. Future will be like the past.

Level 2. Some complexity, but the environment isForecastable by extrapolation .Level 3. More complexity, but at least there are

predictable threats and opportunities .Level 4. Complexity is further increased by thewinds of global and social-political changes, butnonetheless there are partially predictableopportunities.Level 5. Unpredictable surprises. Unexpectedevents and situations occur more frequently that the

organisation can respond to them.

Amount of Agg ressiveness &responsivenessrequired

STRONG FORCESFOR CHANGE

WEAK FORCESFOR CHANGE


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Placid, Placid

Randomised Clustered

Disturbed T urbulent

Randomised Field


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T he environment of an organisation is ( Emery and T rist) classified in four differentcategories, where each category has an increased complexity.

T he first category is plac id and r andomised , which is the simplest form and where theorganisation can operate without having to adjust to its environment. T his categoryresembles a monopolistic situation.

T he second category is the plac id and clu stered group. In this the organisation needs toconsider its environment, but there are hardly any problems in forecasting what is goingto happen.

T hese first two categories describe environments that are non-dynamic, whereas thenext two categories characterise the environments as dynamic.

T he third category is the dist urbed and r andomised environment. T he organisation hasto recognise that there are other actors in its environment. T his category can becompared to the oligopolistic market and be exemplified by the early industrial society.T his environment is more complex and therefore requires a higher degree of flexibility.

T he fourth category is the t urb ul ent fie l d . T his field is characterised by high complexity

and rapid changes.


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UNCERT A INTY IN THE

EN V IRONMENT

Stable DynamicDEGREE OF CH A NGE

DEGREE OFHOMOGENEITY

Simple

Complex

Small number of external elements.Elements remain thesame or change slowly

Small number of external elements.Elements are incontinuous change

Large number of external elements.Element remain thesame or change slowly

Large number of external elements.Elements are incontinuous change.


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EN V IRONMENT



Simple

Complex

LE A STUNCERT A INTY

MODER A TEUNCERT A INTY

MODER A TEUNCERT A INTY

MOSTUNCERT A INTY


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EN V IRONMENT



Simple

Complex

Soft drink bottlers,beer distributors,container manuf.,local utilities

Personal computers,fashion clothing,music industry, toymanufacturers

Universities, hospitals,Insurance companies

A irlines,oil companies,electronic firms,aerospace firms


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" I t is not the strongest of the s pecies th at

survive, nor the most inte ll igent, b ut the onemost res ponsive to change ." - CharlesDarwin


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Basic Strategies to Cope withEnvironmental Changes

Inactive Strategy Do nothing

Reactive Strategy Environment changes first ant then organization

responds to it

Proactive Strategy Organization initiates changes and than

environment altered

Interactive Strategy Organization and environment are changing

simultaneously in the same direction


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1 introduction++to+business+environment

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