Business Environment u1

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BUSINESS ENVIRONMENT


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What is a business?The activity of buying and selling goods and

services to earn money.

A commercial or industrial enterprise and

people who constitute it.

What is Environment?

The condition that we live in and the way

they influence us.Business Environment consists of all those

factors that have a bearing on the business.


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Just as the survival and success of an individual

depend on:

I. Innate capability (psychological and physiological factors)II. Conduciveness of environment*

Similarly, the survival and success of a business

firm depend on:I. Its innate strength (resources, skills, organization)

II. Favorableness of the environment*

Thus, the 1st

is called the internal factors the internalenvironment and

2nd is called external factors the external environment.

SIMULATION EXERCISE:*


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The external environment has, broadly, two

components:I. Business opportunities

II. Threats to business

Similarly, the organizational environment has

two components:I. Strengths

II. Weakness

INTERNAL

ENVIRONMENT

EXTERNAL

ENVIRONMENT

BUSINESS

DECISION


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Business dynamics to a large extent, is a dependent

factor it depends on, inter alia, the environmental

dynamics.

TYPES OF ENVIRONMENT:

We generally consider the business environment at

three levels:

1. Internal environment2. Micro / Task / Operating environment

3. Macro / General / Remote environment

Although BE consists of both the internal and external

environments, they generally confine the term to

the external environment of business.


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INTERNAL ENVIRONMENT The key internal factors which have a bearing on

the strategy and other decisions are:

1. Value System*

2. Mission and Objectives

3. Management Structure and Nature

4. Internal Power Relationship

5. Human Resources

6. Company Image and Brand Equity

7. Miscellaneous Factorsi. Physical assets and facilities

ii. R & D and Technological Capabilities

iii. Marketing Resources & Financial Factors


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EXTERNAL ENVIRONMENT MICRO ENVIRONMENT:

1. Suppliers

2. Customers

3. Competitors

4. Marketing intermediaries

5. Financiers6. Publics

MACRO ENVIRONMENT:

1. Political Environment

2. Legal Environment3. Global Environment

4. Demographic Environment

5. Socio-cultural Environment

6. Technological Environment


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COMPETITIVE STRUCTURE OF INDUSTRIES

Identification of forces affecting competitive

dynamics of an industry is very useful informulating strategies.

According to Michael Porters model ofstructural analysis of industries, the state ofcompetition in an industry depends on:

1. Rivalry among existing firms

2. Threat of new entrants

3. Threats of substitutes

4. Bargaining power of suppliers

5. Bargaining power of buyers


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1. Threat of entry: The following are some of the

important common entry barriers:I. Government policy: Industry licensing, import

restrictions, deposits etc.

II. Economies of scaleIII. Cost disadvantages independent of scale:

Propriety product technology, experiencecurve, favorable location etc.

IV. Product differentiation

V. Monopoly elements

VI. Capital requirements


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2. Rivalry among existing firms: As because the firmsin an industry are mutually dependent,

competitive moves of a firm usually affects others. Common competitive actions include price

changes, promotional measures, customerservice, warranties, product improvements, new

product introduction etc. The following factors influence the intensity of

rivalry:

I. Number of firms and their relative market share,

strengths etc.II. State of growth of industry

III. Fixed or storage cost

IV. Indivisibility of capacity augmentation


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V. Product standardization and switching costs:

VI. Strategic stakeVII.Exit barrier

VIII.Diverse competitors

IX. Expected retaliation3. Threat of substitutes: Power of substitutes is

an important force of competition.

Substitutes limit the potential returns in anindustry by placing a lid on the price.

Threats of competition can be posed fromthose marketing close or distant substitutes.


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4. Bargaining power of buyers: For severalindustries buyers are potential competitors they may integrate backward.

Besides, they have different degrees ofbargaining power.

Important determinants of the buyer power,explained by Porter are:

I. The volume of purchase relative to total sales

II. Importance of the product in terms of total costIII. The extent of standardization or differentiation

of a product

IV. Switching cost


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V. Profitability of the buyer

VI. Potential for backward integration

VII.Quality expectations

VIII.Extent ofbuyers information

5. Bargaining power of suppliers:

The important determinants of supplier power are

the following:

I. Extent of concentration and domination in the

supplier industry

II. Importance of the product to the buyer


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III. Importance of the buyer to the supplier

IV. Extent of substitutability of the productV. Switching costs

VI. Potential for forward integration by suppliers

Porters analysis thus shows that:

a. Knowledge of the competitive forces highlightsthe critical strengths and weaknesses of thecompany.

b. Animates its positioning in its industry

c. Clarifies the areas requiring strategic changes

d. Highlights the areas of opportunities and

strengths.


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MACRO ENVIRONMENTGLOBAL BUSINESS ENVIRONMENT:

What is Globalization?

Globalization refers to the process of integration ofthe world into one huge market.

Such unification calls for the removal of trade

barriers among countries. Even political and geographical barriers become

irrelevant.

Global business environment can be defined as theenvironment in different sovereign countries, withfactors exogenous to the home environment of theorganization, influencing decision making onresource use and capabilities.


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MACRO ENVIRONMENTECONOMIC ENVIRONMENT AN OVERVIEW

The Economic Environment includes the stature

and nature of the economy, its stage ofdevelopment, economic resources, the level ofincome, the distribution of income and assets,

global economic linkages, economic policies etc.NATURE OF THE ECONOMY:

The general level of development of the economyhas lot of implications for business (LPG).

Countries, and even different regions within acountry, show great differences in the level andpattern of economic development.


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MACRO ENVIRONMENTA widely used method of classification of the

economies is on the basis of per capita income.

Accordingly, countries are broadly classified as low

income, middle income and high income

economies.

1. Low income economies: are economies with

very low level of per capita income.

All economies with per capita GNP of $755 or

less in 2000 are regarded as low income

economies.

There were 63 low income economies in 2000.


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MACRO ENVIRONMENT2. High Income Economies: are countries with very

rich per capita income.

Those with a per capita GNP of $9266 or above in2000 fall in this category.

There were 53 HIEs in 2000.

There are mainly two categories of HIEs, namely,

Industrial economies and oil exporters.3. Middle Income Economies: are subdivided into

lower middle income and upper middle income.

Those with a per capita GNP between $756 and

$2995 in 2000 fall in lower middle income. Those with a per capita GNP between $2996 and

$9265 in 2000 fall in lower middle income.

There were 54 lower middle income and 38 upper

middle income economies in 2000.


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MACRO ENVIRONMENTThe low income economies are sometimes referred

to as the third worldeconomies.

The high income and middle income economies

representing thefirstand secondworlds.

However, the point worth noting is that the

differences in income levels between countries

fail to reflect true purchasing power or living

standards of people. Why?

- Purchasing power of national currencies vary.

- Further, exchange rate often give misleading

picture of the economic position of the country.

O O


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MACRO ENVIRONMENTDeveloping and Developed Economies is an often

used classification of countries.

Low income and middle income economies aredeveloping economies.

The use of the term underdevelopedto refer to thedeveloping countries is also common.

In developing economies, the distribution of incomeis very high resulting into rife abject poverty.

They are characterized by high birth and population

growth rates. Death rates are also higher than in developed

countries.

Prevalence of rudimentary and traditional methodsand obsolete technology is dominant.

MACRO ENVIRONMENT


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MACRO ENVIRONMENTThe Developed Economies as a group are sometimes

referred to as the North.

In the group of the high income economies,the industrial

economies are developed economies; all the oil exportersare not developed economies.

Developed economies are characterized by:

o widespread use of modern and sophisticated technology.

o Continuous innovationso Fast diffusion of new ideas and technology

o Low share of the primary sector (mainly agriculture) anddominance of tertiary and secondary sector in the income

and employment generation.o Market friendly economic policies.

o Comparatively open trade and investment policies.

o Democratic rights

o Competition and consumer choice etc.

MACRO ENVIRONMENT


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MACRO ENVIRONMENTECONOMIC POLICIES:

There are several economic policies which can have

a great impact on business.

Important economic policies are:

1. Industrial Policy

2. Trade Policy

3. Foreign Exchange policy

4. Foreign Investment and Technology Policy5. Fiscal Policy

6. Monetary Policy

MACRO ENVIRONMENT


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MACRO ENVIRONMENTPOLITICAL AND GOVERNMENT ENVIRONMENT:

The fact that it is often politics that determines

economic and business policies highlights the

critical importance of the political environment.

Major economic policy decisions often have

political underpinnings.

Adoption of socialist pattern of society by the

congress party was mainly responsible for public

sector dominated development strategy.

Impact of political environment of USSR and East

European countries spawned economic reforms

in India.

MACRO ENVIRONMENT


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MACRO ENVIRONMENTClassification of Functions of State:

Functions of the state varies from basic minimum

requirements to active participation in several othersectors.

The basic functions include the pure public goods suchas the provision of property rights, macroeconomic

stability, control of infectious diseases, safe water,roads and protection of the destitute.

The intermediary functions include management ofexternalities, regulation of monopolies, and theprovision of social insurance.

The activist functions include coordinating privateactivity (fostering markets, cluster initiatives) and

redistribution.

MACRO ENVIRONMENT


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MACRO ENVIRONMENTEconomic roles of government:Government normally plays four important roles in an economy,

viz., regulation, promotion, entrepreneurship and planning:

Regulatory role:

Reservation of industries to small scale, public and co-operative sectors, licensing system etc. regulate the entry.

Regulation of product mix, promotional activities etc.

Regulation of business operations by measures such asceilings on profit margins, dividend etc.

The state may also regulate the relationship betweenenterprises.

Government regulates the economy through direct andindirect controls.

Indirect controls are exercised through fiscal and monetaryincentives, disincentives and penalty.

The direct administrative or physical controls are more drasticin their effect. E.g. trend of deregulation.

MACRO ENVIRONMENT


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MACRO ENVIRONMENTPromotional role:

To build up and strengthen the necessary

infrastructure, power, transport, finance,marketing, institutions for training and guidanceetc.

Entrepreneurial role: Establishing and operating business enterprises

and bearing the risks.

Planning role:

Importance of planning to a less developedeconomy was often emphasized by JawaharlalNehru, the chief architect of development

planning in India.

MACRO ENVIRONMENT


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MACRO ENVIRONMENTNatural and Technological Environment:

To some extent the ecology and technology are

interdependent.

NATURAL ENVIRONMENT:

The natural environment ultimately is the sourceand support of everything used by businesses

every raw material, every energy source, every

life sustaining factor, even waste disposal site.

Resource availability is the fundamental factor in

the development of business in societies.

Climatic and weather conditions affect the location

of industries and demand for roduct.

MACRO ENVIRONMENT


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MACRO ENVIRONMENTTECHNOLOGICAL ENVIRONMENT:

Technology includes the tools both hard and soft

available to solve problems and promote

progress among societies.

MNCs are often in a particularly advantageous

position with regard to soft technology.

The 1999 Global competitiveness report of the

world economic forum emphasized sharply on

the usage of information technology.

The three aspects i.e. e-mails, internet and e-

commerce have been liberally extolled.

MACRO ENVIRONMENT


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MACRO ENVIRONMENTINNOVATION:

Innovation is a very important factor that provides

competitive advantage and consequently

determines success.

Innovation may take place in any of the following

form:

Introduction of a new product

Use of a new method of production

Opening of a new market

Conquest of a new source of raw material supply

Reorientation of an industry

MACRO ENVIRONMENT


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Innovations can be classified into the following types:

1. Radical innovation

2. Incremental innovation

3. Next-generation technology innovation

TECHNOLOGICAL LEADERSHIP & FOLLOWERSHIP:

According to technological leadership, a firm seeks to

be the first to introduce technological changes that

support its generic strategy.

Technological followership refers to a conscious and

active strategy in which a firm explicitly chooses not

be first on innovations.

MACRO ENVIRONMENT


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According to porter, technological change by a firm

will lead to sustainable competitive advantageunder the following circumstances:

The technological change itself lowers cost or

enhances differentiation. The technological change shifts costs or

uniqueness drivers in favor of a firm.

Pioneering the technological change translatesinto first mover advantages besides thoseinherent in the technology itself.

The technological change improves overall

industry structure.

MACRO ENVIRONMENT


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MACRO ENVIRONMENTSOURCES OF TECHNOLOGICAL DYNAMICS

1. Innovative drive of the company

2. Customer needs/expectations

3. Demand conditions

4. Suppliers offerings5. Competitive dynamics

6. Substitutes

7. Social forces8. Research organizations/Technical facilities

9. Government policy

MACRO ENVIRONMENT


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MACRO ENVIRONMENTInformation and Communication Technology:

ICT has been significantly transforming the distributionsystem. Effective use of ICT in distribution can helpcompanies:

Reduce inventories

Reduce delivery time Respond faster to market changes

Reduce rush orders

Cut down overproduction Reduce unnecessary movement

Reduce paper-work and wasteful processing

Plan production better

MACRO ENVIRONMENT


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MACRO ENVIRONMENT

FROM TO

Fragmented ConsolidatedLocal Global

Low technology use High technology use

Owner-operated Systems-driven

Traders Retail brand managers

Mass marketing Individualized relationship customization

Market place Market space

Retail Revolution

Transfer of Technology:

TT is the process by which commercial technology is disseminated.There are four levels of TT:

Operational level

Duplicative level

Adaptive level

Innovative level

MACRO ENVIRONMENT


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MACRO ENVIRONMENTChannels of Technology flow:

The most important channels for the flow oftechnology are:

o Foreign Investment

o Technology license agreements and joint ventures

Methods of Technology Transfer:

1. Training or Employment of technical expert

2. Contracts for supply of machinery and equipment3. Licensing agreements

4. Trunkey contracts

Documents

Business Environment u1