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Dr. C. P. Gupta

Business Environment

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Concept of Business Environment

Business Environment consists of all those factorsthat have a bearing on the Business.

Business Environment can be understood as thecombination of two words: Business andEnvironment.

Business represents the organised effort of enterprise to supply consumers with goods andservice and to make profit in the process.

And environment represents the surroundings inwhich the business activity takes place or whichaffects the functioning of the business.

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The environment includes the factors outside the firmwhich can lead to opportunities or threats to the firm.

Business decisions are conditioned by the two broadsets of factors, viz., the internal environment andexternal environment .

The internal factors are generally regarded ascontrollable factors because the company has controlover these factors; it can alter or modify such factors asits HR, physical resources, marketing mix etc., to suitthe environment.

On the on the other hand the external factors are, byand large beyond the control of a company.

The external factors such as the economic factors, sociocultural factors, government and legal factors,demographic factors etc, are therefore generallyre arded as uncontrollable factors.

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Internal Enviro nm ent Value System Mission and Objectives Management Structure and Nature Internal Power Relationship Human Resource Company Image and Brand Equity

Miscellaneous Factors: There are a number of other internalfactors which contribute to the business success or failure or influence the decision making.Physical assets and facilities like the production capacity,technology and efficiency of the productive apparatus,distribution logistics etc.R & D and technological capabilities determine the companys

ability to innovate and compete.Marketing resources like the organization of marketingactivities, quality of marketing manager, brand equity anddistribution network have direct bearing on marketingefficiency.Financial factors like financial policies, position and capitalstructure are other factors affecting business operations and 10/1/2013

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External Envi ronm ent The external environment consists of a micro and macroenvironment.

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A GL IMPSE OF B USINESS ENVIRONMENT

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Micro Envi ronm ent :

The micro environment is also known as the taskenvironment and operating environment because themicro environmental forces have a direct bearing on theoperations of the firm.The micro environment consists of the actors in thecompanys immediate environment that affects theperformance of the company. The micro forces need notnecessarily affect all the firms in a particular industry in thesame way. The micro environment consists of the

following: Suppliers Customers Competitors Marketing Information

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Macro Environm ent

It is also known as general and remote environment. Acompany and the forces in its micro environment operate in alarger macro environment of forces that shape opportunitiesand pose threats to the company.

The macro forces are generally more uncontrollable. Thesuccess of a company depends on its adaptability to theenvironment.

Political and Government Environment Natural/ Technological Environment Demographic Environment Cultural Environment

Global Environment 10/1/20139


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The capitalist system is also known as Free EnterpriseEconomy and Market Economy. The system is havingprivate ownership of the means of production. It ischaracterized by the use of individual decision-making andthe use of market mechanism to carry out the businessfunction.

Facto rs/Features of Capi tal ism : Private Ownership Free Enterprise Consumer Sovereignty Freedom of Choice of Occupation Freedom to save and invest Free Competition Absence of a central Plan

Limited Role of Government Market System

Basic Ph i loso phy of Capi tal i sm

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Evaluat ion o f Capi tal ism : Generally in capitalism, investment are made in thoseareas where profitability is high, therefore sufficientinvestment are not made in areas where profitability islow.

The right of property and freedom of enterprise are likelyto lead to the concentration of income and wealth in thehands of few people which cause income disparities.

Due to capitalism large firms holds the major portion of the market and creates monopoly position and exploitsthe consumers.

The modern capitalist economies which are indeedmixed economy regulated by the state are therefore

Basic Ph i loso phy of Capi tal i sm

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Evaluat ion o f Capi tal ism :

It is very difficult to clearly define the socialist system because of avariety of system in socialism. On one hand there are communistcountries characterized by the state capitalism on the other handthere are democratic socialist nations with a dominant privatesector.Socialism is generally understood as an economic system wherethe means of production are either owned or controlled by the stateand where the resource allocation, investment patterns,consumption, income distribution etc are directed and regulated bystate.

Factors/Features of SocialismGovernment Ownership and Control

Central Authority

Restriction on Consumption

Fixation of Wages and Prices

Restriction on Occupation

Basic Ph i losop hy of Socia l ism

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Evaluat ion of Social ism : Socialism although is a very appealing and flexible system but itsuffers from a number of drawbacks. Some of the importantdrawbacks are as follows:

There is no consumer sovereignty in socialism. Thestate decides what and how much should be producedand consumed.People may lack incentive to work hard in the absenceof private authority.The absence of freedom of choice of occupation isundemocratic.

As private enterprises are not allowed to speak insocialism the talents of the nation are not fully utilized.The central planning authority commands the resourceallocation, investment and development pattern. Butthe views of the authority need not be right.

Because of these drawbacks now so many socialist countries are

Basic Ph i losophy of Soc ia li sm

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Signi f icance of Bus iness Envi ron m ent : Environmental analysis has three basic goals.

First , the analysis should provider an understanding of currentand potential changes taking place in the environment.Second , environment analysis should provide inputs for strategic decision making.Third , environment analysis should facilitate and foster strategic

thinking in any organization. It should challenge the currentwisdom by bringing fresh viewpoints into the organization. To b e speci f ic the benef i t s o f s tudy ing B us iness Envi ron m ent a re:

Development of broad strategies and long-term policies of the firm.Development of action plans to deal with technologicaladvancement.To foresee the impact of socio-economic changes at thenational and international levels on the firms stability.

Analysis of competitors strategies and formulation of effective counter measures.

To keep oneself dynamic.

Bus iness Env i ronmen t

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Environm ent Scanning Environment scanning related to strategic planningwhereby managers try to determine the best fit betweenan organization and its external environment.The environment scanning is aimed at continuousimprovement of the company, its policies and programs.The scanning process leads to search of preliminaryinformation which is needed to select those priority issuesfor which specific business plans will be deployed.

Object ives of Environ m ent Scann ing: To determine the important economic, social, environmental,health, technological and political trends, situations andevents.To identify the potential opportunities and threats for the

business and trade.To understand the stren th and weakness of the or anization.


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Compo nen ts o f Env i ronm ent Scann ing :

Summary and analysis of economic, social,environmental, health, technological and politicaldata.

Information collected from external public andprivate organizations and agencies on issuesinvolved.

Information from existing and potential stakeholders.

Assessment of current programmes, future direction,


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Scann ing Process Inv olves : Monitoring the environment on a continuous basis.Screening the Information: i.e., finding the relevantinformation for the organization.Researching Issues: i.e., once the relevant information hasbeen identified, one should make further research and

analysis so that their implications are highlighted.Develop Plans: To improve managers decisions. The resultsof environment scanning must be transmitted to the managerson a timely basis and in understandable and usable form.

Purpos e o f Scanning is to assess and monitor the environment,look for changes and other factors that can influence the organizationas a whole of partially. The impact can be positive or negative. If planners and decision makers have early awareness of potentiallysignificant developments, the planning process becomes proactiverather than reactive. Environmental scanning is an ongoing process


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Basically environmental scanning is done to assess theexternal conditions faced by the organization both

presently and in the future, to get a better idea of how theorganization should prepare to answer emerging trendsand issues.

Environment scanning is an integral process toorganizational effectiveness. An environmental scanningprocess that is comprehensive and inter-connectedbetween all units is an integral component for effectivenessand success.

Lim itat ions o f Envi ron m enta l An alys is : Environmental analysis does not fore tell the future, nor doesit eliminate the uncertainty for any organization. It however,should reduce the frequency and extent of surprises that mayconfront a company.


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Concept of Mixed Economy: The mixed economy shares certain features of capitalism and certainfeatures of socialism. It is characterized by the co-existence of public andprivate sector and overall control of Government on the economy.

In mixed economy government works as a middlemen between theconsumers and manufacturer or supplier and also plays entrepreneurial rolewhenever and wherever required. The government also guides the directionof the economy by imposing restrictions and by granting privileges to the

private sector.

Public and Private Sector: In mixed economy system, the elements of private capitalism and public socialism are combined together in theform of co-existence of private and public sectors.

Under this system many public enterprises are set up in those areas inwhich private entrepreneurs were not interested either due to un-profitability or due to delayed profit. In India, government made anattempt to combine both the sectors in the form of business.

The ultimate aim is to utilize government resources with the efficiency

of private management. The major motive is to provide requiredproduct and services for the welfare of the people as well as for the


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Structure of Indian Economy At the time of independence Indian economy waspredominantly rural and agricultural. The below table showsthe different sectors, there shares and anticipated future sharein Indian economy:


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Year

Sector

1950-1951 1999-2000 2020

Primary Sector (Agriculture, Forestry &

Fishing etc)

54-56% 27.87% 6%

Secondary Sector (Production etc.) 16.11% 25.98% 34%

Tertiary Sector (Service) 29% 46% 60%


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Competitive Structure of Industries

Overview of the Five Forces Model: Porter identified five factors that

act together to determine the nature of competition within anindustry. These are the: Threat of new entrants to a marketBargaining power of suppliersBargaining power of customers (buyers) Threat of substitute productsDegree of competitive rivalry


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Threat of new entrants to an industry

If new entrants move into an industry they will gainmarket share & rivalry will intensify.The position of existing firms is stronger if there arebarriers to entering the market.

If barriers to entry are low then the threat of newentrants will be high, and vice versa.Barriers to entry are, therefore, very important indetermining the threat of new entrants. An industry can

have one or more barriers. The following are commonexamples of successful barriers:


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Barrier Notes

Investment cost High cost will deter entry. High capital requirements might meanthat only large businesses can compete

Economies of scale available toexisting firms

Lower unit costs make it difficult for smaller newcomers to breakinto the market and compete effectively.

Regulatory and legal restrictions Each restriction can act as a barrier to entry,

e.g., patents provide the patent holder with protection, at least inthe short run.

Product differentiation(including branding)

Existing products with strong USPs and/or brand increasecustomer loyalty and make it difficult for newcomers to gainmarket share.

Access to suppliers anddistribution channels

A lack of access will make it difficult for newcomers to enter themarket.

Retaliation by establishedproducts

E.g. the threat of price war will act to discourage new entrants.But note that competition law outlaws actions like predatorypricing.


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What makes an industry easy or difficult to enter? Thefollowing table helps summarize the issues you should

consider


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Easy to Enter Difficult to Enter

Common technologyAccess to distribution channelsLow capital requirementsNo need to have high capacity and outputAbsence of strong brands and customer loyalty

Patented or proprietary know-howWell-established brandsRestricted distribution channelsHigh capital requirementsNeed to achieve economies of scale foracceptable unit costs


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Bargaining power of suppliers: If a firms suppliers havebargaining power they will:

Exercise that power Sell their products at a higher priceSqueeze industry profits

Suppliers find themselves in a powerful position when:There are only a few large suppliers

The resource they supply is scarceThe cost of switching to an alternative supplier ishighThe product is easy to distinguish and loyalcustomers are reluctant to switchThe supplier can threaten to integrate verticallyThe customer is small and unimportantThere are no or few substitute resources available


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Just how much power the supplier has is determinedby factors such as:


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Factor Note

Uniqueness of the inputsupplied

If the resource is essential to the buying firm and noclose substitutes are available, suppliers are in apowerful position

Number and size of firms

supplying the resources

A few large suppliers can exert more power over market

prices that many smaller suppliers each with a smallmarket share

Competition for the inputfrom other industries

If there is great competition, the supplier will be in astronger position

Cost of switching toalternative sources

A business may be locked in to using inputs fromparticular suppliers e.g. if certain components or raw

materials are designed into their productionprocesses. To change the supplier may mean changinga significant part of production


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Bargaining Power of Customers: Powerfulcustomers are able to exert pressure to drive downprices, or increase the required quality for the sameprice, and therefore reduce profits in an industry.Several factors determine the bargaining power of customers, including:


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Factor Note

Number of customers The smaller the number of customers, the greatertheir power

Their size of their orders The larger the volume, the greater the bargainingpower of customers

Number of firms supplyingthe product

The smaller the number of alternative suppliers, theless opportunity customers have for shoppingaround

The threat of integratingbackwards If customers pose a threat of integrating backwardsthey will enjoy increased power

The cost of switching Customers that are tied into using a suppliers products (e.g. key components) are less likely toswitch because there would be costs involved


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Threat of substitute products: A substitute product canbe regarded as something that meets the same needSubstitute products are produced in a different industry but crucially satisfy the same customer need. If there aremany credible substitutes to a firms product, they will limitthe price that can be charged and will reduce industryprofits. As an example, consider the many substitutes thatconsumers now have to bu ying a newspaper for their news. The extent of the threat depends upon:

The extent to which the price and performance of thesubstitute can match the industrys productThe willingness of customers to switch

Customer loyalty and switching costsIf there is a threat from a rival product the firm willhave to improve the performance of their products byreducing costs and therefore prices and bydifferentiation.


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Degree of competitive rivalry: If there is intense rivalry in an industry, it willencourage businesses to engage in:

Price wars (competitive price reductions),Investment in innovation & new productsIntensive promotion (sales promotion and higher spending onadvertising)

All these activities are likely to increase costs and lower profits. Severalfactors determine the degree of competitive rivalry; the main ones are:

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Factor Note

Number of competitors in the

market

Competitive rivalry will be higher in an industry with many current

and potential competitorsMarket size and growth prospects Competition is always most intense in stagnating markets

Product differentiation and brandloyalty

The greater the customer loyalty the less intense the competitionThe lower the degree of product differentiation the greater theintensity of price competition

The power of buyers and theavailability of substitutes

If buyers are strong and/or if close substitutes are available, therewill be more intense competitive rivalry

Capacity Utilization The existence of spare capacity will increase the intensity of competition

The cost structure of the industry Where fixed costs are a high percentage of costs then profits will bevery dependent on volumeAs a result there will be intense competition over market shares

Exit Barriers If it is difficult or expensive to exit an industry, firms will remain thusadding to the intensity of competition


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Competitor Analysis and Strategic Management:Competitor array: One common and useful technique

is to construct a competitor array. The steps include: Define your industry - scope and nature of theindustryDetermine who your competitors are

Determine who your customers are and whatbenefits they expectDetermine what the key success factors are in your industry

Rank the key success factors by giving each one aweighting - The sum of all the weightings must addup to one.Rate each competitor on each of the key successfactors 10/1/201333


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Competitor Analysis and Strategic Management:This can best be displayed on a two dimensional matrix - competitorsalong the top and key success factors down the side. An example of acompetitor array follows:

In this example competitor #1 is rated higher than competitor #2 onproduct innovation ability (7 out of 10, compared to 4 out of 10) anddistribution networks (6 out of 10), but competitor #2 is rated higher oncustomer focus (5 out of 10). Overall, competitor #1 is rated slightlyhigher than competitor #2 (20 out of 40 compared to 15 out of 40).When the success factors are weighted according to their importance,competitor #1 gets a far better rating (4.9 compared to 3.7). 10/1/201334

Key Industry

Success Factors Weighting

Competitor

#1 rating

Competitor

#1 weighted

Competitor

#2 rating

Competitor

#2 weighted

1 - Extensive

distribution.4 6 2.4 3 1.2

2 - Customer

focus.3 4 1.2 5 1.5

3 - Economies of

scale.2 3 .6 3 .6

4 - Product

innovation.1 7 .7 4 .4

Totals 1.0 20 4.9 15 3.7


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Competitor Analysis and Strategic Management:Competitor Profiling: The strategic rationale of competitor profiling ispowerfully simple. Superior knowledge of rivals offers a legitimatesource of competitive advantage.

The raw material of competitive advantage consists of offering superior customer value in the firms chosen market. Customer value is definedrelative to rival offerings making competitor knowledge an intrinsiccomponent of corporate strategy.

Profiling facilitates this strategic objective in three important ways.

First, profiling can reveal strategic weaknesses in rivals that the firmmay exploit.

Second , the proactive stance of competitor profiling will allow the firmto anticipate the strategic response of their rivals to the firms plannedstrategies, the strategies of other competing firms, and changes in theenvironment.

Third, this proactive knowledge will give the firms strategic agility.Offensive strategy can be implemented more quickly in order to exploitopportunities and capitalize on strengths. Similarly, defensive strategy 10/1/201335


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Competitor Analysis and Strategic Management:Clearly, those firms practicing systematic and advancedcompetitor profiling have a significant advantage. As such,a comprehensive profiling capability is rapidly becoming acore competence required for successful competition.

An appropriate analogy is to consider this advantage asakin to having a good idea of the next move that your opponent in a chess match will make.By staying one move ahead, checkmate is one step closer.Indeed, as in chess, a good offense is the best defense inthe game of business as well.

A common technique is to create detailed profiles on eachof your major competitors.

These profiles give an in-depth description of thecompetitor's background, finances, products, markets,facilities, personnel, and strategies. This involves:

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Competitor Analysis and Strategic Management:Background

location of offices, plants, and online presences

history - key personalities, dates, events, and trendsownership, corporate governance, and organizationalstructure

FinancialsP-E ratios, dividend policy, and profitabilityvarious financial ratios, liquidity, and cash flowprofit growth profile; method of growth (organic or acquisitive)

Productsproducts offered, depth and breadth of product line, and

product portfolio balancenew products developed, new product success rate, and R&Dstrengthsbrands, strength of brand portfolio, brand loyalty and brandawareness

patents and licenses 10/1/201337


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Competitor Analysis and Strategic Management:Marketing

segments served, market shares, customer base, growth rate, andcustomer loyalty

promotional mix, promotional budgets, advertising themes, adagency used, sales force success rate, online promotional strategydistribution channels used (direct & indirect), exclusivity agreements,alliances, and geographical coveragepricing, discounts, and allowances

Facilitiesplant capacity, capacity utilization rate, age of plant, plant efficiency,capital investmentlocation, shipping logistics, and product mix by plant

Personnelnumber of employees, key employees, and skill sets

strength of management, and management stylecompensation, benefits, and employee morale & retention ratesCorporate and marketing strategies

objectives, mission statement, growth plans, acquisitions, anddivestituresmarketing strategies

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Competitor Analysis and Strategic Management:Media scanning: Scanning competitor's ads can reveal much aboutwhat that competitor believes about marketing and their target market.

Changes in a competitor's advertising message can reveal newproduct offerings, new production processes, a new branding strategy,a new positioning strategy, a new segmentation strategy, lineextensions and contractions, problems with previous positions, insightsfrom recent marketing or product research, a new strategic direction, anew source of sustainable competitive advantage, or value migrationswithin the industry.

It might also indicate a new pricing strategy such as penetration, pricediscrimination, price skimming, product bundling, joint product pricing,discounts, or loss leaders.

It may also indicate a new promotion strategy such as push, pull,balanced, short term sales generation, long term image creation,informational, comparative, affective, reminder, new creativeobjectives, new unique selling proposition, new creative concepts,appeals, tone, and themes, or a new advertising agency.

It might also indicate a new distribution strategy, new distributionpartners, more extensive distribution, more intensive distribution, a 10/1/201339


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Competitor Analysis and Strategic Management: A competitor's media strategy reveals budgetallocation, segmentation and targeting strategy, andselectivity and focus. From a tactical perspective, itcan also be used to help a manager implement hisown media plan.

By knowing the competitor's media buy, mediaselection, frequency, reach, continuity, schedules, andflights, the manager can arrange his own media planso that they do not coincide.

Other sources of corporate intelligence include tradeshows, patent filings, mutual customers, annual

reports, and trade associations. Some firms hire10/1/201340

C i A l i d S i M


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Competitor Analysis and Strategic Management:New competitors In addition to analyzing current competitors, itis necessary to estimate future competitive threats. The mostcommon sources of new competitors are:

Companies competing in a related product/marketCompanies using related technologiesCompanies already targeting your prime market segment butwith unrelated productsCompanies from other geographical areas and with similar

productsNew start-up companies organized by former employeesand/or managers of existing companies

The entrance of new competitors is likely when:There are high profit margins in the industry

There is unmet demand (insufficient supply) in the industryThere are no major barriers to entryThere is future growth potentialCompetitive rivalry is not intenseGaining a competitive advantage over existing firms is

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