Introduction to Business Environment in Word

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Introduction to Business environment

Business environment

The business environment refers to all t

hose factors t

hat can influence t

he functioning of an

organization. This outcome can be positive or negative. It is very essential for the organizations

to analyze the environmental influences which will, therefore, assist them in evaluating the

market conditions. The business environment can be further segregated into -

Internal Environment

External environment

Internal environment

The internal environment consists of all those factors that associated very closely to thebusiness activities and are, by and large, controlled by the actions of top management. It has to

be noted that although these internal environment factors are very much in control of the

company but sill a lot of attention has to be devoted for their appropriate management since

they can have an impact on the profitability of the company.

Brand ImageThe image that is associated with the brand, to a large extent, is in the hands of the company

itself. For instance, Infosys, a big name in the aura of IT, is well known for its ethical standards

whereas Satyam computers a company in the same sector has lost the faith of the customers

through its deceptive actions. The love, trust, faith and loyalty of the customers, more or less, are

shaped through the actions, policies and procedures of the company. Even in the matters of

financing of a project or going public by raising of funds through IPOs, companys brand image plays

a vital role

EmployeesThe employees or the human resource of an organization are an asset. A precise selection of an

efficient workforce can be a decisive factor in the overall profitability of a company. A high morale,

skills, quality, attitude and commitment of the employees towards the organization can act as

strength. By providing a good work culture, the morale of the work force can be boosted which in

turn can lead to a positive environment inside the organizations.

Production facilities & qualityThe establishment of production plants, technology, supply chain network, production capacity

etc have a major influence on the quality of the product. A customer buys a product when he feels

that it is a bundle of utilities for him. A high quality can lead to a satisfaction and a poor quality can

lead to frustrations amongst the consumers. Therefore, it is the ethical and moral responsibility of

an organization to provide standardized products to its customers which can enhance loyalty and

increase satisfaction.


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R & DIn a high tech era that is characterized by an intense competition, it becomes imperative for any

firm to innovate and transform according to the changing environment. The R & D department of a

firm is not only responsible for innovating new ideas and concept but also transforming these ideas

into new products with appropriate quality. An efficient R & D department can act as a sustainable

competitive advantage for an organization.

External Environment

The external environment of a business is further divided into The Micro environment The Macro environmentMicro Environment Factors

These are the factors close to the company that have a direct impact on theorganizations strategy. These factors includes

Customers Organizations survive on the basis of meeting the needs, wants and providing benefits for their

customers. Failure to do so will result in a failed business strategy. The customers contribute

very heavily towards the profitability of a company.

Employees

Employing the correct staff and keeping these staff motivated is an essential part of thestrategic planning process of an organization. Training and development plays an essential role

particular in service sector marketing in-order to gain a competitive edge. This is clearlyapparent in the all the industries.

Suppliers

Increase in raw material prices will have a knock on affect on the marketing mix strategy of anorganisation. Prices may be forced up as a result. Closer supplier relationships is one way of

ensuring competitive and quality products for an organisation. At the same time, the timely

supply of the raw materials is very essential for an organisation.

Shareholders

As organisation require greater inward investment for growth they face increasing pressure tomove from private ownership to public. However this movement unleashes the forces of

shareholder pressure on the strategy of organisations. Satisfying shareholder needs may result

in a change in tactics employed by an organisation. Many internet companies who share prices

rocketed in 1999 and early 2000 have seen the share price tumble as they face pressures from

shareholders to turn in a profit. In a market whichhas very quickly become overcrowded many

have failed.


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Media

Positive or adverse media attention on an organisations product or service can in some casesmake or break an organisation.. Consumer programmes with a wider and more direct audience

can also have a very powerful and positive impact, inforcing organisations to change their

tactics.

Competitors

The name of the game in marketing is differentiation. What benefit can the organisation offerwhich is better then their competitors. Can they sustain this differentiation over a period of time

from their competitors?. Competitor anlaysis and monitoring is crucial if an organisation is to

maintain its position within the market.

Macro Environment

There are many factors in the macro-environment that will effect the decisions of the managers of any

organisation. Tax changes, new laws, trade barriers, demographic change and government policy

changes are all examples of macro change. To help analyse these factors managers can categorise themusing the PEST model. This classification distinguishes between:

By using the PEST framework we can analyse the many different factors in a firm's macro

environment. In some cases particular issues may fit in several categories. For example, the

creation of the Monetary Policy Committee by the government in 1997 as a body that was

independent of government but had the ability to set interest rates was a political decision but

has economic consequences; meanwhile government economic policy can influence investment

in technology via taxes and tax credits. If a factor can appear in several categories managers

simply make a decision of where they think it best belongs

However, it is important not to just list PEST factors because this does not in itself tell managersvery much. What managers need to do is to think about which factors are most likely to changeand which ones will have the greatest impact on them i.e. each firm must identify the key

factors in their own environment. For some such as pharmaceutical companies government

regulation may be critical; for others, perhaps firms that have borrowed heavily, interest rate

changes may be a huge issue. Managers must decide on the relative importance of various

factors and one way of doing this is to rank or score the likelihood of a change occurring and

also rate the impact if it did. The higher the likelihood of a change occurring and the greater the

impact of any change the more significant this factor will be to the firm's planning.

It is also important when using PEST analysis to consider the level at which it is applied. When analysing

companies such as Sony, Coca Cola, BP and Disney it is important to remember that they have many

different parts to their overall business - they include many different divisions and in some cases many

different brands. Whilst it may be useful to consider the whole business when using PEST in that it may

highlight some important factors, managers may want to narrow it down to a particular part of the

business (e.g. a specific division of Sony); this may be more useful because it will focus on the factors

relevant to that part of the business. They may also want to differentiate between factors which are

very local, other which are national and those which are global.


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Political Factors

These refer to government policy such as the degree of intervention in the economy. Whatgoods and services does a government want to provide? To what extent does it believe in

subsidising firms? What are its priorities in terms of business support? Political decisions can

impact on many vital areas for business such as the education of the workforce, the health of

the nation and the quality of the infrastructure of the economy such as the road and rail system.

For instance:

consumer laws; these are designed to protect customers against unfair practices such asmisleading descriptions of the product

competition laws; these are aimed at protecting small firms against bullying by larger firms andensuring customers are not exploited by firms with monopoly power

employment laws; these cover areas such as redundancy, dismissal, working hours andminimum wages. They aim to protect employees against the abuse of power by managers

health and safety legislation; these laws are aimed at ensuring the workplace is as safe as isreasonably practical. They cover issues such as training, reporting accidents and the appropriate

provision of safety equipment

The political environment includes

Stability of the political scenario Type of government How the government laws and regulations influences the business. Governments policy on economy FDI policy of the government Consumer protection act Labour laws The government policies The government laws such as the competititon laws, contract laws,

environmental laws, provisions on Licensing and Franchising, Laws on recycling & Packaging

materials, product safety laws, Warranties and guarantees, Sales tax, Restriction on pricing

policies, minimum price laws, price discrimination, Restriction on lease agreements etc. can also

influence the decisions.

Economic Factors

These include interest rates, taxation changes, economic growth, inflation and exchange rates. As you

will see throughout the "Foundations of Economics" book economic change can have a major impact on

a firm's behaviour.


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For example: - higher interest rates may deter investment because it costs more to borrow

- a strong currency may make exporting more difficult because it may raise the price in terms of foreign

currency - inflation may provoke higher wage demands from employees and raise costs

- higher national income growth may boost demand for a firm's products

The economic environment includes

GDP of the country Rate of interest Inflation rate Past economic growth Future prospect of growth Monetary and Fiscal policy Level of taxes imposed Purchasing power The World Bank has categorized the economies into Low income (LIC), lower middle income

(LMC), upper middle income (UMC), high income OECD and other high income countries. The

LIC, LMC and UMC countries comes under the developing countries and the other rests under

the developed countries.

Developing nations The following are the characteristics of a developing nation.

Widespread poverty High unemployment Lower productivity Disparity between urban and rural level of living Dependence on overseas technology

Developed nations The following are the characteristics of a developed nation.

High level of industrialization Supreme quality of life Sophisticated technology Good standard of living Excellent educational and health care facilities

Depending on kind of economy, the fluctuations in the inflation rates, the living standards of the

people, the GDP, per capita income of the people etc. have an impact on the retail business.


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Social and cultural Facotrs

Changes in social trends can impact on the demand for a firm's products and the availability andwillingness of individuals to work. In the UK, for example, the population has been ageing. This

has increased the costs for firms who are committed to pension payments for their employees

because their staff are living longer. It also means some firms such as Asda have started to

recruit older employees to tap into this growing labour pool. The ageing population also has

impact on demand: for example, demand for sheltered accommodation and medicines has

increased whereas demand for toys is falling.

Culture is the set of values and attitudes that are acknowledged by a group of people and transferred

from one generation to another.

Characteristics ofculture Culture is learned Transferred from one generation to another Different culture forms different perceptions about the same thing Culture is socially shared It is flexible and changes with the changing times. For instance, In 1980s the culture did not

allowed the females to wear skirts. However, with changing times, today wearing skirts among

girls is a fashion and is extensively accepted in the urban areas.

The cultural factors mould the consumption patterns, dressing styles, eating habits andpurchasing decisions of a country. They have to be analyzed very carefully for being competitive.

For instance, in 1996, the Indian markets were flooded with a large number of fast food retailers

like McDonalds from other countries. However, it was very surprising for them to know that a

majority of the Indian people are vegetarian.

Technological Factors

new technologies create new products and new processes. MP3 players, computer games, online

gambling and high definition TVs are all new markets created by technological advances. Online

shopping, bar coding and computer aided design are all improvements to the way we do business as a

result of better technology. Technology can reduce costs, improve quality and lead to innovation. These

developments can benefit consumers as well as the organisations providing the products.

The contribution of technology is enormous in building a dynamic society. Today the peoplewant advanced products with superior quality which are safe to use. For instance, when mobile

phones were launched in India, they were mainly used as a medium of communication. But with

the technological advancements, it is also used as a medium of entertainment. With MP3 & MP4

players, Quality cameras, Video recording, MMS and Games, a cell phone is a live example of

technology.

In most of the areas, technology has replaced human beings and the work is done in a lessertime with more accuracy.


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Technology has also positively affected the economic status of several countries. It is generallyobserved that the countries employing a high level technology is a well advanced nation. It has

increased productivity and has contributed enormously in producing more quantity with quality.

Some benefits of technology in production process are

Reducing the inventory wastage Less waiting time Decreased over production Reduced shrinkage level Reduce costs on documentation Assists in production planning Reduces unnecessary movements of employees Reduce stock outs and ensures product availability

The impact of technology is on all fields including education. The use of laptops, electronicsharing of notes and the popularity of multimedia boards etc. has provided a new direction to

the field of education.

The increased utilization of e-commerce has transformed the world in a small market. Todaypeople from different countries can trade with each other by a click of the mouse.

Technology has played a vital role in developing the transportation system. The jet aircrafts andsuper freights have enabled transportation without any obstacle.

An organisationh

as to answer th

e following questions to verify th

e viability of tech

nology.

What is the level of technology? What are the prospects of producing innovative products through sophisticated technology? What is the impact of technology on the distribution channel? How technology can improvise the process of product standardization?

Environmental factors

environmental factors include the weather and climate change. Changes in temperature can impact on

many industries including farming, tourism and insurance. With major climate changes occurring due toglobal warming and with greater environmental awareness this external factor is becoming a significant

issue for firms to consider. The growing desire to protect the environment is having an impact on many

industries such as the travel and transportation industries (for example, more taxes being placed on air

travel and the success of hybrid cars) and the general move towards more environmentally friendly

products and processes is affecting demand patterns and creating business opportunities.


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OBJECTIVES OF A BUSINESS


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Social Objectives


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Human Objectives


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National Objectives


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Corporate Social Responsibility

RESPONSIBILITYTOWARDS DIFFERENT SECTIONS

shareholders

-- employees

-- consumers

-- community


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Responsibility to Shareholders:

To protect the interests of the shareholders and employees and safeguard the capital of theshareholders.

To provide dividend, the company should earn sufficient profit. To innovate and growth the company should consolidate and improve its position and help

strengthen the share prices.

To improve and maintain the image of the company, such that the

Responsibility to Employees:

The payment of fair wages and appropriate salaries. The provision of labor welfare facilities to the extent possible and desirable. Arrangements for proper training and education of the workers. Proper recognition, appreciation and encouragement of special skills and capabilities of the

workers.

Responsibility to Consumers:

To improve the efficiency of the functioning of the business so as to (a) increase productivityand reduce prices, (b) improve quality, and (c) smoothen the distribution system to make goods

easily available.


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To do research and development, to improve quality and introduce better and new products atreasonable prices.

To take appropriate steps to improve the imperfections in the distribution system, including black-

marketing or profiteering by middlemen or anti-social elements

To Provide the required after sales services. To provide sufficient information about the products, including their adverse effects, risks, and

care to be taken while using the products.

To avoid misleading the customers by improper advertisements or otherwise. To provide an opportunity for being heard and to redress genuine grievances. To understand customer needs and to take necessary measures to satisfy these needs.

Responsibility to Community:

Taking appropriate steps to prevent environmental pollution and to preserve the ecologicalbalance.

Rehabilitating the population displaced by the operation of the business, if any. Development of backward areas. Promotion of ancillarisation and small-scale industries. Contributing to the national effort to build up a better society.

Arguments for Social Responsibility:

Changed Public Expectations of Business. Better Environment for Business. Public Image. Avoidance ofGovernment Regulations. Balance ofResponsibility with Power. Business has the Resources. Prevention is Better than Cure. Moral Responsibility. Citizenship Arguments. Duty ofGratitude.


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Arguments against Social Responsibility

ProfitMaximization. Society has to pay the Cost. L

ack ofSocial Skills.

Business has enoughPower. Social overhead Cost.

EconomicProblems make Indiaa developing country


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Critical Forces ofBusiness Environment

Components of International Business Environment

Global Environment - Foreign Environment -Domestic Environment -Micro Environment

Internal environment

External Environment

Micro Environment Macro Environment

Micro Environment: Actors in the firms immediate environment. Influence the firms decisions & operations directly. Do not affect all the firms in an industry in the same way.

Macro environment: Wider societal forces, whichaffect the firm and also the players in the firms

micro environment


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Macro Environment

Forces operate at home (domestic)country, host (foreign)country and global levels. Comprises of economicand non-economic environmental forces. Economic environment of business both national and global is of strategic importance.1. A firm is an economicunit.2. Business activities are economicactivities.3. Business decision making are economic in nature.Major Critical Economic Forces

Economic indicators (GNI, GNI PPP, GDP, GNI Per Capita, GDP GrowthRate etc) Economic system Economic plans and policies- Monetary, fiscal, trade and commerce.


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Economic problems and prospects

F SAARC nations together represents 5.7% of the world GNI, PPP.F Among the seven nations, India concentrates 80% of GNI, PPP of the total SAARC nations,

which is highest.

F Three countries: Nepal, Bhutan and Maldives have less than 1% of gross income (PPP) to totalSAARCGNI, PPP.

F Among the SAARC nations, while India represents the biggest in size and economicactivity,the case ofMaldives is the smallest.


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F ASEAN total represents 3.7% of the world GNI, PPP.F Among the ten countries, the share of Indonesia to total ASEAN GNI, PPP is about 33%, which

is the highest.

F Brunei though is ahigh income country, represents less than 1% of its national income to GNI,PPP ofASEAN.

F Among the ASEAN, Lao PDR size of economicactivity is limited and smallest.F Next to Indonesia, Thailand represents about 21% share of GNI, PPP ofASEAN.


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F Except Nepal, all the sixSAARC nations have their economic growth rates above the rate ofgrowth of the world as a whole.

F Except Maldives, among the six SAARC nations, India has the highest growth rate in 2006approaching to 10%.

F Maldives has the highest growth rate of double digit approached to 24%.F Keeping its size and growth, India is expected to be one of the leading economies and hot

markets in the world in future.


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F Among the ASEAN, the growth rate ofCambodia is the highest (10.8%).F Despite Cambodias limited market size, its high growth represents future expansion of

market and markets for the products of international business.

F All the economies ofASEAN have their economic growth rates above the world economicgrowth rate.


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F Among SAARC nations, Nepal shows the lowest GNI PCand PPP.F Four SAARC nations, India, Pakistan, Bangladesh, Nepal are the low income countries, as their

GNI PC is $ 905 or less.

F Countries, suchas Luxembourg, US, Norway etc. are among the richest, while large economylike India is poor.

F Despite its large number of poor people, Indiahas a fairly wealthy middle class around 300-400 million people which shows its attractiveness.


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F Among ten nations, Vietnam, Cambodia, Lao PDRand Myanmar are the low income countries.F Singapore and Brunei are the high income countries as their GNI PC is above $11,116.F Malaysia (upper middle income) now presents one of the attractive markets in the region.F Cambodia though a least developed country (LDC) provides an attractive destination for

foreign investors due to its economic growth.

F As estimated (Goldman, 2003)China economy will overtake Japan by 2015 and US by 2041.F Indias economy would be larger than France in 2020 and Japan 2032.F By 2050, China will be the largest economy in the world followed by USand India.


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Domestic Environment

All the uncontrollable forces originating in the home country that surrounds and influence thelife and development of the firm.


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Foreign Environment

Geographical factors

Economicconditions

Socio-Cultural environment

Political environment

Technological environment

Legal forces

Uncontrollable forces originating outside the

home country that surround and influence the firm.


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Global Environment

World EconomicConditions International Financial Systems

Working of WTO

, IM

F, WB

..

International Agreements & Treaties Regional Economic Groupings

European Union (EU)

NorthAmerican Free Trade Association (NAFTA)

Association ofSouth East Asian Nations ( ASEAN)

Association ofSouthAsian Regional Cooperation (SAARC)

Exerts influence over domesticas well as foreign Countries.


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Introduction to Business Environment in Word