BUSINESS ENVIRONMENT

“BUSINESS IS AN ECONOMIC ACTIVITY BECAUSE IT INCLUDES ALL THOSE

ACTIVITIES WHOSE PURPOSE IS TO EARN PROFIT BY

TRANSFER OR EXCHANGE OF GOODS & SERVICES.”

“Business may be defined as human activity directed towards producing or

acquiring wealth through buying or selling of goods.

-C.H.Haney

-ENVIRONMENT MEANS THE SURROUNDINGS OR CONDITIONS IN

WHICH A PERSON, ANIMAL, OR PLANT LIVES OR OPERATES.

-ENVIRONMENT MEANS THE SURROUNDINGS, EXTERNAL OBJECTS,

INFLUENCES OR CIRCUMSTANCES UNDER WHICH SOMEONE OR

SOMETHING EXISTS.

Business Environment is that group of factors which provide new opportunities for business or create new challenges for the

same.

“The environment includes factors outside the firm which can lead to opportunities for or threats

to firm. Although there are many factors, the most important of the sectors are social-

economic, technological, supplier, competitors, and government.”

-William F. Glueck and

Lawrence R. Jauch

FEATURES OF BUSINESS ENVIRONMENT Business environment is the sum total of

all factors external to the business firm and that greatly influence their functioning.

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

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

FEATURES OF BUSINESS ENVIRONMENT 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.

Business Environment differs from place to place, region to region and country to country. Political conditions in India differ from those in Pakistan. Taste and values cherished by people in India and China vary considerably.

IMPORTANCE OF BUSINESS ENVIRONMENT

Determining Opportunities and Threats Giving Direction for Growth Continuous Learning Image Building Meeting Competition Identifying Firm’s Strength and

Weakness

Business Environment

Internal Environment

External Environment

TYPES OF BUSINESS ENVIRONMENT

TYPES OF BUSINESS ENVIRONMENTBUSINESS ENVIRONMENT

Internal Environment

-Value System

-Mission and Objectives

-Management structure/ Nature

-Internal Power

-Company Image/Brand equity

-Human Resource

-Miscellaneous Factors

External Environment

Micro(Task/ Operating )Environment

-Suppliers

-Customers

-Competitors

-Marketing Intermediaries

-Publics

-Financiers

Macro (General/ Remote) Environment

-Economic Factors

-Social/culture Factors

-Demographic Factors

-Political/ Govt. Factors

-Natural Factors

-Technological Factors

-Global Factor

Internal Environment

INTERNAL ENVIRONMENT

The value system of the founders and those at the helm of affairs has important bearing on the choice of business, mission and objectives of the organization, business policies and practices.

The value system of the organization influence its portfolio strategy, HRM, marketing strategy and CSR.

What are the core values of your business? Examples of values like:

Timeliness, Reliability, Convenience , Driving internal efficiency, Customer satisfaction, Customer intimacy, Transparency, Accountability,

Brand and business reputation, Quality, Innovation, etc.

Value System

INTERNAL ENVIRONMENT

Example: After the EID Parry group was taken over by the murugappa group,

one of the most profitable (liquor) of the ailing parry group was sold off as the liquor business did not fit into the value system of the Murugappa group.

Value System

INTERNAL ENVIRONMENT

The business domain of the company, priorities, direction of development, business philosophy, business policy, etc. are guided by the mission and objective of the company.

Example: Ranbaxy’s thrust- “To become a research based international

pharmaceutical company”. Arvind Mills’ mission –“To achieve global dominance in select businesses

built around our core competencies through continuous product and technical innovation, customer orientation and focus on cost effectiveness”

Mission and objectives:

INTERNAL ENVIRONMENT

The organizational structure, the composition of the Board of Directors, extent of professionalization of management etc., are important factors influencing business decisions.

Some management structures and styles delay decision making while some other facilitate quick decision making.

For example: Flat organizational structure and tall organizational structure. Centralization and decentralization, etc.

Management Structure and Nature

INTERNAL ENVIRONMENT

Factors like the amount of support the top management enjoys from different levels of employees, shareholders and board of directors have important influence on the decisions and their implementation.

Example: -Issue of Hero Honda company.

Internal Power Relationship

INTERNAL ENVIRONMENT

The characteristics of the human resources like skill, quality, morale, commitment, attitude, etc., could contribute to the strength and weakness of the organizations.

Some organization find it difficult to carry out restructuring or modernization because of resistance by employees whereas they are smoothly done in some others.

Example: Employees of Tata group.

Human Resources

INTERNAL ENVIRONMENT

The image of the company matters while raising finance, forming joint venture, soliciting marketing intermediaries, entering purchase or sale contracts, launching new products etc.

Brand equity is also relevant in several of these cases.

Example: - scandal of Satyam company, - coke & pepsi( pesticide issue). - Lakme company

Company Image and Brand Equity

INTERNAL ENVIRONMENT

Physical Assets & Facilities R&D Technological Capabilities Marketing Resources Financial Factors

Miscellaneous Factors

EXTERNAL ENVIRONMENT

M ic r oE nvir o nm ent

M a c r oE nvir o nm e nt

E x te rn a l E n v iro n m e n t

MICRO ENVIRONMENT

“Micro or task environment is more specific and immediate environment in which an organization conducts its business.”

-Dunham & Pierce

1. SUPPLIER Those who supply the inputs like raw material and components to

the company. The importance of Reliable Source/Sources of supply to the smooth

functioning of the business is obvious. Uncertainty regarding the supply or other supply constraints compel

companies to maintain high inventories causing cost increases. Example: India and Japan Because of the sensitivity of the supply, many companies give high

importance to Vendor development. Vertical integration, where feasible, helps solve the supply problem.

For example, -Nirma company has always been a believer of the logic

that captive production plants for raw materials is the best way to production costs in check .In many cases, however, outsourcing is more beneficial.

- HATHI CEMENT Very risky to depend on a single supplier

2. CUSTOMER The major task of a business is to create and sustain customers. A business exits only because of its customers. Monitoring the customer sensitivity is, therefore, a

prerequisite for the business success. Different categories of consumers

Individuals Industries and other commercial establishments Government and other institutions. Example: the customers of tyre company-Individual automobile owners,automblie manufacturers, public sector transport

undertakings and other transport operators. Depending on single customer is too risky In Choosing the customer segments, a company should consider such factors as

Relative profitability dependability stability of demand extent of competition

3. COMPETITORS

A firm’s competitors include not only the other firms which market the same or similar product but also all those who compete for the income of the consumers.like

oDesire competitionoGeneric competitionoProduct form competitionoBrand competition

4. MARKET INTERMEDIATES

o Firms that aid the company in promoting, selling and distributing its goods to final buyers.

o Include o the middlemen and merchants who “help the company find customers

or close sales with them” such as o Physical distribution firms which “ assist the company in stocking and

moving goods from their origin to their destinations” such as ware houses and transportation firms, etc.

o Marketing service agencies which “assist the company in targeting and promoting its products to the right markets” such as marketing research firms, media firms and consulting firms, etc.

o Financial intermediaries which “finance marketing activities and insure business risks”

o They are vital links between the company and the final consumers.

5. FINANCIERS

Another important micro environmental factor is the financiers of the company. Besides the financing capabilities, their policies and strategies, attitudes (including attitude towards risk), ability to provide non-financial assistance etc. are very important.

6. PUBLIC A company may encounter certain publics in its

environment. “A public is any group that has an actual or potential interest in or impact on an organization's ability to achieve its interests.”

It includes: Media public, local publics, Government

publics, financial publics, general public , etc. Some companies are seriously affected by such publics. • For example, one of the leading companies in India was frequently

under attack by the media public, particularly by a leading daily which was allegedly bent on bringing down the share prices of the company by tarnishing its image.

Such exposures or campaigns by the media might even influence the government decisions affecting the company.

6. PUBLIC• Many companies are also affected by local publics.

• For example: Environmental pollutions is an issue often taken up by a number of local publics. Actions by local publics on this issue have caused some companies to suspend operations and/or take pollution abatement measures.

• Publics are not always threat to the business.

• Fruitful cooperation between a company and the local publics may be established for the mutual benefit.

• MACRO ENVIRONMENT means general environment of business. Macro factors are uncontrollable in comparison to the micro forces of environment. The growth and survival of business depend upon its adaptability to macro environment factor which include

MACRO ENVIRONMENT

MACRO ENVIRONMENT Economic Political Social-Cultural Technological Natural Demographic International

1. ECONOMIC ENVIRONMENTEconomic Conditions The economic conditions of a nation refer to a set of economic factors that have great influence on business organizations and their operations. These includes nature of the economy, the stage of development of the economy, economic resource, the level of income, National income, Per capita income, Distribution of income, etc. National Income: The total net value of all goods and services produced within a nation over a specified period of time, representing the sum of wages, profits, rents, interest, and pension payments to residents of the nation.

Economic System•Capitalist:

The economic system in which business units or factors of production are privately owned and governed is called capitalism. For example: US, England, etc.•Socialist:

Under socialism economic system, all the economic activities of the country are controlled and regulated by the Government in the interest of the public.

For example :Russia•Mixed Economy:

The economic system in which both public and private sectors co-exist is known as Mixed Economy. For example: India.

1. ECONOMIC ENVIRONMENTEconomic Policies

•Industrial Policy

Industrial policy of a country promotes and regulates the industrialization in the country. It is framed by government. The government from time to time issues principals and guidelines under the industrial policy of the country.

•Monetary Policy

The policy formulated by the central bank of a country to control the supply and the cost of money (rate of interest), in order to attain some specified objectives is known as Monetary Policy.

•Fiscal Policy

It may be termed as budgetary policy. It is related with the income and expenditure of a country. Fiscal Policy works as an instrument in economic and social growth of a country. It is framed by the government of a country and it deals with taxation, government expenditure, borrowings, deficit financing and management of public debts in an economy.

1. ECONOMIC ENVIRONMENTEconomic Policies

•Trade Policy

It also affects the different business units differently. E.g. if restrictive import policy has been adopted by the government then it will prevent the domestic business units from foreign competition and if the liberal import policy has been adopted by the government then it will affect the domestic products in other way.

•Foreign Investment

The policy related to the investment by the foreigners in a country is known as Foreign Investment Policy. If the government has adopted liberal investment policy then it will lead to more inflow of foreign capital in the country which ultimately results in more industrialization and growth in the country.

2. POLITICAL ENVIRONMENT

Political Ideology of Govt.

Political stability in the Economy.

Foreign Policy of Govt.

Defence & Military Policy.

Centre state relationship.

POLITICAL ENVIRONMENT

L eg is la tu re

E xecutive

Jud ic iary

P o lit ic a l S y ste m

Pream ble

Fundam enta l R igh ts

D irec tivesPrinc ip les o f S ta te Policy

C o nstitu t io nE nv ir o nm e nt

P o litca l E n v iro n m en t

3. SOCIO-CULTURAL ENVIRONMENT Major factors are:

the buying and consumption habits of people, their language beliefs and values, customs and traditions, tastes and preferences, (e.g.: Blue pepsi )

Strategy should be appropriate in the socio-cultural environment. Eg: Nestle brews a very large variety of instant

coffee to satisfy different national tastes. Companies have to change their product portfolio

because of cultural differences as McDonald and KFC did when they launched their restaurant chain in India.

3. SOCIO-CULTURAL ENVIRONMENT Even when people of different cultures use

the same product; the mode of consumption, conditions of use, purpose of use or the perceptions of the product attributes may vary so much so that the product attributes, method of presentation, positioning or method of promoting the product may have to be varied to suit the characteristics of different markets. E.g.: Vicks Vaporub, the popular pain balm is

used as mosquito repellent in some tropical countries

3. SOCIO-CULTURAL ENVIRONMENT Language difference pose a serious problem.

e.g. Pepsi: Not to be outdone by coke when

Pepsi started a marketing campaign in Taiwan, the translation of the Pepsi slogan.

In Japanese, General Motors’ “body by Fisher” means “Corpse by fisher”

General Motors: when GMs introduces the Chevy Nova in south America, it was apparently unaware that “no va” means “it won’t go.” After the company figured out why it wasn’t selling any cars, it renamed the car in its Spanish markets to the caribe.

3. SOCIO-CULTURAL ENVIRONMENT

Colour Blue: feminine and warm in Holland ; but

masculine and cold in Sweden Green: favourite in Muslim world; but represents

illness in Malaysia Red: popular in communist countries; but

represents disaster in Africa White: death and mourning in China and Korea;

but it expresses happiness in some countries. Also it is the colour of bridal dress.

4. NATURAL ENVIRONMENT Geological and ecological factors, such as natural resources endowments, weather

and climatic conditions, topographical factors, location aspects in the global context, port facilities etc., are relevant to business.

Differences in geographical conditions between markets may some times call for changes in the marketing mix.

Geographical and Ecological factors also influence the location of certain industries. E.g. industries with high material index tend to be located near the raw material sources.

Climate and weather conditions affect the location of certain industries like the cotton textile industry.

Topographical factors (physical feature of place) may affect the demand pattern. E.g.. In hilly areas with difficult terrain, jeeps may be in a greater demand than cars.

Ecological factors have recently assumed great importance. The depletion of natural resources, environmental pollution and the disturbance of ecological balance have caused great concern.

5. DEMOGRAPHIC ENVIRONMENT Factors include: Size, growth rate, age composition, sex

composition of population, family size, educational levels, economic stratification of the population, language, caste, religion, etc.

(a) Size & growth rate of populationGrowing population: boon

• Increase in productive forces• Bigger market for products Growing population: bane• Adverse impact on per capita income & standard of living• Adverse impact on savings: unfavorable impact on

capital formation• Adverse impact on employment situation• Increasing pressure on agriculture

6. DEMOGRAPHIC ENVIRONMENT E.g.:- Decline in birth rates in USA have affected the

demand for baby products. So Johnson &Johnson repositioned their products like baby shampoo and baby oil, to the adult segment, particularly to females.(b) age structure of populationIt determines:

Productivity level Demand pattern

Young population Elderly population

6. DEMOGRAPHIC ENVIRONMENT(c) urban- rural population

Proportion of urban rural population increasingReasonsPull factors:

Better employment opportunities in urban areas Better income Better education Better health facilities

Push factors: Low level of agriculture productivity Disguised unemployment Wide disparity between urban & rural levels of living

7. TECHNOLOGICAL ENVIRONMENT Business prospects depends also on the availability of certain physical

facilities E.g. demand for electrical appliances is affected by the extent of

electrification and the reliability of power supply. Demand for LPG stoves depend on rate of growth of gas

connections differing technological environment of different markets may call for

product modifications E.g. Many appliances are designed for 110 V in USA. They should

be converted for 240v in India Technological developments may increase or decrease the demand for

some existing products E.g. voltage stabilizers help increase in sale of electrical appliances

in markets characterised by frequent voltage fluctuations Introduction of TVs, Refrigerators, etc. with in-built stabilizers

adversely affects the demand for voltage stabilizers.

7. TECHNOLOGICAL ENVIRONMENTPositive effects of technology: Increased productivity Production of new & better goods of standardized quality with more

efficient use of raw materials Basis for fast growing urban & industrial system

Negative effects of technology: Displacement of labour Environmental pollution Switching over might be costly

8. INTERNATIONAL ENVIRONMENTGlobalizationOil Price hike International TerrorismCultural Exchange

Thank you