Business I Environment I Society

Issue

# 1

Business Environment

Business Environment

Definition:The combination of internal and external factors that influence a company's operating situation. The business environment can include factors such as: clients and suppliers; its competition and owners; improvements in technology; laws and government activities; and market, social and economic trends.

Why Business Environment?

Understanding the environment within which the business has to operate is very important for running a business unit successfully at any place.

Its because, the environmental factors influence almost every aspect of business, be it its nature, its location, the prices of products, the distribution system, or the personnel policies.

Hence it is important to learn about the various components of the business environment, which consists of the economic aspect, the socio-cultural aspects, the political framework, the legal aspects and finally the technological aspects etc.

Why Business Environment? Contd…

The success of every business depends on adapting itself to the environment within which it functions. For example, when there is a change in the government policies, the business has to make the necessary changes to adapt itself to the new policies.

Similarly, a change in the technology may render the existing products obsolete, as we have seen that the introduction of computer has replaced the typewriters; the colour television has made the black and white television out of fashion, the use floppy disks replaced by DVDs, now the Blue Ray Discs / External HDDs/SSDs.

Why Business Environment? Contd… Again a change in the fashion or customers’ taste may shift the demand in the market for a particular product, e.g., the demand for Jeans reduced the sale of other traditional wear. All these aspects are external factors that are beyond the control of the business.

So, the business units must have to adapt themselves to these changes in order to survive and succeed in business. Hence, it is very necessary to have a clear understanding of the concept of business environment and the nature of its various components.

Features of Business Environment

On the basis of the earlier discussion the features of business environment can be summarized as follows…

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

2. It covers factors and forces like customers, competitors, suppliers, government, and the social, cultural, political, technological and legal conditions.

3. The business environment is dynamic in nature, that means, it keeps on changing.

Features of Business Environment contd…

4. The changes in business environment are unpredictable. It is very difficult to predict the exact nature of future happenings and the changes in economic and social environment. 5. Business Environment differs from place to place, region to region and country to country.

Importance of Business Environment

There is a close and continuous interaction between the business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively.

To be more specific, proper understanding of the social, political, legal and economic environment helps the business in the following ways…

1. Identifying Firm’s Strength and Weakness: Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments

Importance of Business Environment

2. 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.

3. 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

4. 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.5. Image Building: Environmental understanding helps the business organizations in improving their image by showing their sensitivity to the environment within which they are working.6. Meeting Competition: It helps the firms to analyze the competitors’ strategies and formulate their own strategies accordingly.

Types of Business Environment

• External environment Mega environment Micro environmentRelevant environment • Internal environment

ment

Firm

Mega Environment

Micro Environment

Internal Environment

Relevant Environment

Constituents of Mega Environment

Legal Political Economic Technological Socio-cultural

The Mega Environment

The business environment (the external forces) acting on the business consists of a large number of forces. These are…

1. Economic Forces These forces, can be divided into two categories, i.e. Demand

Force and Competitive Force. For a business firm to survive and thrive, it should have adequate demand for its products. At the same time, the firm has to complete with the rival firm producing similar products or substitute products.

Economic forces affecting demand:For customers to buy the commodity of the firm, they should have the ability to buy and willingness to buy. The ability to buy a commodity depends on the income of the customer, to be very precise, the disposable income of the customer.

Out of the total income, the individual has to pay taxes due to the government and the disposable income will be less if the taxes are high. Secondly, if the individual wants to save more, the amount for spending will be less. Thus, the ability to buy a commodity depends on the a) Total income earned out of the employment of the individual b) The taxes of the government and c) The savings of the individual.

An increase in tax will reduce the demand for the commodity. The attitude of the individual towards ‘Saving’ will affect the demand.

A change in ‘Price’ of the commodity will affect the demand. Expectation of a further change in price or change in taxes will also affect the demand…like…

Competitive forces: The competitive tools are price cutting, advertisement, product differentiation, marketing strategies and consumer service. Price cutting: Price cutting or price reduction is a method which has to be adopted very cautiously, as it may ultimately lead to price-war between firms competing, resulting in reduction of profits.

Advertisement: Advertisements in modern days have become a very powerful tool in persuading the consumers of a product to a particular brand. In monopolistic competition, a large share of the market is entrenched by firms making effective and aggressive advertisement.

Product differentiation: A firm tries to get competitive strength by differentiating its product from those of its rivals. By having special design, colour, packing and features, the firm tries to get competitive edges.

Marketing strategies and Consumer Service: Modern firm adopt various types of marketing strategies to create market for their products. Installment system, credit system, hire-purchase, etc., are the prominent ways by which firms try to cut through the poor segments of the society and convert them their customers.

Besides customer service like, free door delivery, quick service, after sales service, guarantee from defects up to a certain period are adopted to have more and more demand for their commodities.

Some important variables under Economic forces are:GDP trends, Interest rates, Money supply, Inflation rates, Unemployment rates, Wage/ Price controls, Devaluation/Revaluation, Energy availability & cost, Disposable discretionary income etc.

2. Political & Government Forces:This includes the political system, the government policies and attitude towards the business community and the unionism. All these aspects have a bearing on the strategies adopted by the business firms.

The stability of the government also influences business and related activities to a great extent. It 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. You may be aware that Coca-Cola, a cold drink widely used even now, had to wind up operations in India in late seventies.

• Again the trade union activities also influence the operation of business enterprises. 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.

• However, with the competitive business environment, trade unions are now showing great maturity and started contributing positively to the success of the business organisation and its operations through workers participation in management.

3. Legal Forces:• This refers to set of laws, regulations, which influence the

business organisations and their operations. Every business organisation has to obey, and work within the framework of the law.

The important legislations that concern the business enterprises include: (i) Companies Act, 1956 (ii) Foreign Exchange Management Act, 1999 (iii) The Factories Act, 1948 (iv) Industrial Disputes Act, 1972 (v) Payment of Gratuity Act, 1972 (vi) Industries (Development and Regulation) Act, 1951

Legal Forces (contd…):(vii) Prevention of Food Adulteration Act, 1954(viii) Essential Commodities Act, 2002 (ix) The Standards of Weights and Measures Act, 1956 (x) Monopolies and Restrictive Trade Practices Act, 1969 (xi) Trade Marks Act, 1999 (xii) Bureau of Indian Standards Act, 1986 (xiii) Consumer Protection Act, 1986 (xiv) Environment Protection Act (xv) Competition Act, 2002

Some important variables under Political & Legal forces are

• Anti-trust litigation• Environment Protection Law• Tax Laws• Special incentives• Foreign Trade Regulations• Attitude towards Foreign Companies• Recruitment Laws• Stability of Govt.

4. Technological Forces:Technological environment include the methods, techniques and approaches adopted for production of goods and services and its distribution. The varying technological environments of different countries affect the designing of products. For example, in USA and many other countries electrical appliances are designed for 110 volts. But when these are made for India, they have to be of 220 volts. In the modern competitive age, the pace of technological changes is very fast. Hence, in order to survive and grow in the market, a business has to adopt the technological changes from time to time. It may be noted that scientific research for improvement and innovation in products and services is a regular activity in most of the big industrial organisations. Now a days in fact, no firm can afford to persist with the outdated technologies.

• Some important variables under Technological forces are:• Spending by Govt. for R & D• Total industry spending for R&D• Focus of technology • Patent protection• New products• Commercialization & Transfer from lab to market place• Productivity improvements

5. Socio-cultural Forces:• The social environment of business includes social factors like

customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a society cherishes have a considerable influence on the functioning of business firms. For example, during festive seasons there is an increase in the demand for new clothes, sweets, fruits, flower, etc.

Likewise due to increase in literacy rate the consumers are becoming more conscious of the quality of the products. 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.

6. Demographic Forces: • 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.

Some important variables under Socio-cultural & Demographic forces are:

• Lifestyle changes• Career expectations• Consumer activism• Growth rate of population• Age distribution of population• Gender• Regional shift in population• Life expectations• Birth rates• Income• Educational level• Family size

The high rise of population indicates the easy availability of labour. These encourage the business enterprises to use labour intensive techniques of production.

Moreover, availability of skill labour in certain areas motivates the firms to set up their units in such area. For example, the business units from America, Canada, Australia, Germany, UK, are coming to India due to easy availability of skilled manpower.

Thus, a firm that keeps a watch on the changes on the demographic front and reads them accurately will find opportunities knocking at its doorsteps.

The Micro Environment

The Micro Environment

Marketing intermediaries

Markets: Types & Demand Competition

E-commerce

Skill level of workforce

Industrial relations climate

Regulatory provisions

Financial institutions

Suppliers

Important Aspects of an Organization’s Internal Environment

• Organizational aspects• Marketing aspects• Financial aspects• Personnel aspects• Production aspects• Managerial aspects

Organizational aspects

• Structure• Communication network• Record of success• Hierarchy of objectives• Policies, procedures and rules• Ability of management teams

Marketing aspects

• Market segmentation• Product strategy• Pricing strategy• Promotion strategy• Distribution strategy

Financial aspects

• Liquidity • Profitability• Activity• Investment opportunity

Personnel aspects

• Labour relations• Recruitment practices• Training programmes• Performance appraisal system• Incentive systems• Turnover and absenteeism

Production aspects

• Plant facility layout• Research and development• Use of technology• Purchasing of raw materials• Inventory control• Use of subcontracting

Managerial aspects

• Management style• Management competence• Managerial values and norms

Techniques for environment analysis

Environmental analysis is a strategic tool. It is a process to identify all the external and internal elements, which can affect the organization’s performance. The analysis entails assessing the level of threat or opportunity the factors might present. These evaluations are later translated into the decision-making process. The analysis helps align strategies with the firm’s environment.• PESTELD Analysis• SWOT Analysis• ETOP (Environment Threat & Opportunity Profile)• SAP (Strategic Advantage Profile)

PESTLED analysis• PESTLED analysis consists of various factors that affect the business

environment. Each letter in the acronym signifies a set of factors. These factors can affect every industry directly or indirectly.

• The acronym for PESTLED are:• Political factors• Economic factors• Social factors• Technological factors• Legal factors• Environmental factor• Demographic factors

SWOT Analysis

• SWOT, which stands for strengths, weaknesses, opportunities and threats, is an analytical framework that can help your company face its greatest challenges and find its most promising new markets. The result of PESTLED provides the input for SWOT analysis.

SWOT Analysis

• Strengths: Internal capabilities of a firm which can be used to gain competitive advantage over its rivals

• Weaknesses: Limitations or constraints which tend to decrease the competencies of the firm particularly in comparison to its rivals.

• Opportunities: Major favourable conditions in a firm’s environment which help a firm strengthen its position.

• Threats: Major unfavourable conditions in a firm’s environment which may pose a risk or damage the firm’s position in comparison to its rivals.

ETOP (Environment Threat & Opportunity Profile)

• The preparation of an ETOP provides a clear picture to the strategists about which sectors and the different factors in each sector have a favorable impact on the organization. By the means of an ETOP, the organization knows where it stands with respect to its environment. Obviously, such an understanding can be of a great help to an organization in formulating appropriate strategies to take advantage of the opportunities and counter the threats in its environment.

• A matrix of comparison is drawn where one item or factor is compared with other items after which the scores arrived at are added and ranked for each factor and total weight age score calculated for prioritizing each of the factors.

Environmental Sectors Impact of each sector

Social (↑)Customer preference for motorbike, which are fashionable, easy to ride and durable.

Political (→) No significant factor.

Economic (↑)Growing affluence among urban consumers; Exports potential high.

Regulatory (↑)Two Wheeler industry a thrust area for exports.

Market (↑)

Industry growth rate is 10 to 12 percent per year, For motorbike growth rate is 40 percent, largely Unsaturated demand.

ETOP for a Motor Bike company

SAP

• strategic advantage profile is a summary statement which provides an overview of the advantages and disadvantages in key areas likely to affect future operations of a firm. it is a total for making systematic evaluation of strategic advantage factors which are significant for the company in its environment. it involves functional areas like marketing, production, finance, accounting, personnel, human resource and R & D.

Thank You!