Introduction to Business Environment. Unit I

Business and Environment

Meaning of Business and Environment. According to Prof. Owen, “ A business is an enterprise engaged in production and distribution of goods for sale in market or rendering of services for a price.” In simpler words, it is the act of making oneself busy or the state of being busy for the purpose of making money. Environment is the sum total of all the surroundings, conditions , situations or events in which all the related parties react to or are affected by its changes. Any business operates in two contexts or worlds: Internal and external.

Internal factors External Environment Organizational structure Human resources Departments/ Divisions within Work systems/ culture External Environment Political Environment Socio-Cultural Environment Economic Environment Technological Environment Environmental Factors Legal Environment Basically known as PESTEL or PEST or STEEPL or SLEPT The 6 environments that effect business are ‘not things We can change’ These are the things you react to

Meaning of Business Environment “the aggregate of all conditions, events and influences that surround and affect a business.” Keith Davis “The environment that includes factors outside the firm which can lead to opportunities or threats to firm.” (Is it enough ??) William F. Glueck and Lawrence R. Jauch

Business System and its Environment (Input-Conversion-Output) Technological Input: Materials Land Labor Capital Management Information Output Goods (tangible) Services (intangible) Process Political/ Legal Socio-Cultural Feedback Actual vs. Desired. Economical

Classification/Components of Business Environment Internal Business Environment External Business Environment General Environment , Macroenvironment or Remote Environment Operating environment , Microenvironment or Task Environment Global or International Business Environment

Internal Business Environment of Business Environment Employees Organizational Structure Corporate Culture Shareholders Unions

Classification of Business Environment External Business Environment General Environment , Macro-environment , Remote Environment or Contextual Environment political, economic, socio-cultural, technical, legal, environmental Consists of broad forces in a business environmental surroundings. Influences organizational activities by posing opportunities and threats. Operating environment , Microenvironment , Task Environment or Immediate Environment customers, suppliers, distributors, government, special interest groups, financial institutions, media, competitors They are immediately relevant for the achievement of goals. Can be controlled to some extent by business.

Global/International business environment. Business Environment International laws and treaties Oil and energy prices/supply Banking system Recession Sanctions Dollar Price

Environmental Variables

Environmental Analysis Environment Analysis involves in identifying the present and future opportunities and threats to and from the firm’s principal constituents (stakeholders) along the dimensions of the firm’s economic, political, legal, technological social , geographical and competitive environments. “Environmental analysis is the process by which strategists monitor the economic, legal, competitive, geographic, technical and social settings to determine opportunities and threats to their firms.” William F. Glueck “The process of assessing the emerging trends.” Philip Kotler

Environmental Analysis: Process Identifying Environmental Factors Brainstorming among members help to identify environmental factors. Common trends and current changes in environment help to identify environmental factors. Selecting Relevant Factors Finding out the most relevant factors which influence the operation of the environment. Assess the threats and opportunities brought by such factors. Developing Strategic Position Assumptions are made considering those selected factors. Short term and long term plans are formulated to cope with the changes.

Techniques of Environmental Analysis Environmental Scanning Technique of acquiring information and analyzing the trends. Acquired information are from both the environments: internal and external. These information are brought to the top management and these information are discussed among the member which follows a process for further analysis. On the basis of such information both long term and short term strategies are formulated to cope the environmental changes that probably may create a difficult situation or threats or bring opportunity to the organization.

External Environment Political Economical Socio-cultural Technological Internal Environment Organization culture Human resources Physical assets Interpersonal relations Observed through Journals Media Professionals Meetings Members Observed through Report Conference Committees Employees Members Top Management Responses to Data Understand Interpret Correlate Extrapolate Decide Fig: Steps for Environmental Scanning. Corporate Strategy

Scanning Methods Extrapolation Method information from the past to explore the future Historical Analogy trend is studied by establishing historical parallels Intuitive Analogy rational intuition by the scanner Scenario Building constructing a time-ordered sequences of events that have a logical cause and effect relationship Delphi Technique collection of expert opinion on a issue and asking for the decision from such experts.

SWOT Analysis Acronym for Strength, Weakness, Opportunity and Threats. Planning tool for environmental scanning so as to formulate corporate strategy developed by Albert Humphrey in 1960’s and 1970’s. This tool is used as an framework to organize the data provided.

Strength Characteristics that gives an advantage over others usually explains the internal capabilities which are distinct to others. Positive tangible and intangible attributes internal to an organization this gives an competitive advantage over others. Examples: abundant financial resources, well-known brand name, economies of scale, lower costs, best management skills.

Weakness Characteristics that place a firm at disadvantageous position than others. Detract the organizations to achieve its goal and influence its existence. Factors which do not meet the standards which we feel they should meet. Examples: limited financial resources, incompetent sales team, poor decision making.

Opportunity External attractive factors from which organizations can groom and prosper, Organizations should recognize the opportunity and grab them which should always be matched with the strength. Example: rapid market growth, economic boom, government deregulation, sales decline of substitute products.

Threats Factors that cause trouble for the business which are beyond organizational control and could risk the goal or mission. Arise when conditions in the environment are vulnerable to the existence. ! Example: entry of foreign competitors, changing customer needs, product life cycle decline, recession etc.

SWOT Analysis

Tools for Environmental Analysis STEPE: social, technological, economic, political and environmental PESTLE: political, economic, social, technological, legal and ethical STEEPLE: social, technological, economic, environmental, political, legal and ecological PEST: political, economic, social and technological

PEST Analysis

Other methods of Environmental Analysis Monitoring Continuously track down the changes in the environment. Now identify how these changes will impact the firm’s way of doing business. Market and Business Intelligence System There is a system developed which automatically collects and disseminates information from the environment. These information is provided to support the key strategic decisions.

Business Forecasting and Risk Assessment Factors like sales, products, markets etc. can be forecasted so as to decrease risk in future. Such forecasting help to cope up the uncertainties firm might experience. Benchmarking Continuously comparing activities of the organization against the best organization. This comparison provides information on how good they are at doing things than others and what are the ways they can do better things. Scenario Development managers develop scenarios with the alternatives provided so that they can look after the changes. Both best-case and worst-case scenarios are developed and get prepared for both the situations.

& its use in Business Environment. Strategic Management & its use in Business Environment.

Concept of Strategic Management Pears and Robinson “ the set of decisions and actions that result in the formulation and implementation of plans designed to achieve a company’s objectives. “ Strategic management is the continuous planning, monitoring, analysis and assessment of all that is necessary for an organization to meet its goals and objectives.

Use of Environmental Analysis in Strategic Management. Continuously update the changes in external environment to find out opportunities and threats. This will help to build competitive advantage over the others by enhancing their strength and overcome their weakness. After analyzing the external environmental changes this will help to formulate strategies so that future uncertainties are eliminated. The three principal ways to increase manager’s capability to manage the environment are: Reduce the impact of environmental forces. (level of managers act to reduce the impact of such external environmental forces) Creating a system and add it in the organizational structure. Boundary spanning roles. (interact people outside for information)

Porter’s Five Forces Model: A tool for Environmental Analysis

Developed by Micheal E. Porter in 1979. A company's success or failure is directly affected more by the intensity of the competition within an industry. Industry environment: threat of new entrants, power of suppliers and buyers, substitutes and competition rivalry.

Threat of new entrants: new entrants can threaten the market share of existing companies The likelihood of new entrants depends on barriers to entry as well as retaliation (a form of revenge) expected from current players. Barriers can be things like product differentiation, market size and economies of scale, capital requirements, access to distribution channels, government policy.

2. Bargaining power of suppliers when supply is controlled by a few, when substitutes are not available and the materials are crucial to the firm. these suppliers can reduce quality of the materials or increase price.

3.Bargaining Power of Buyers Depends on how large they buy your product. Bargaining power of buyers are weak if the substitute of the product is available elsewhere. consumers are increasing their power as access to information is giving them more alternatives.

4. Threat of Substitute products. firms face a major challenge when substitute products and services are increasingly made available specially when price is lowered while performance capability is similar.

5. Intensity of rivalry among competitors Firms operating within the industry are directly related. One’s action will always affect the other’s way of doing business. They compete each other to acquire the resources which are available and limited.

Thank You So Much.