BUSINESS ENVIRONMENT

Environment means the surroundings, external objects, influences or circumstances under which someone or something exists. The environment of any organisation is the aggregate of all conditions, events & influences that surround & affect it.

SCOPE OF BUSINESS
Purchase decision: Automobile Supplier of raw materials Manufacturer Dealer Advertising agency Banker Insurance agent

BUSINESS: BASIC PROPOSITIONS

Business- economic activity Business firm- economic unit Business decision making- economic in nature Business achieve objectives by using resources optimally Decisions taken in the presence of environmental factors

BUSINESS ENVIRONMENT
Business firm is micro economic unit Business environment furnishes macro economic context for its operation Environment in which business operates Includes conditions, events, factors that influence the working of business

BUSINESS ENVIRONMENT
Classification: Time: past, present & future environment of business Space: local, regional, national , international environment of business Forces: forces of market like demand, supply Factors: economic & non-economic

The classification of relevant environment into components helps the organisation to cope with its complexity, comprehend the different influences operating & relating the environmental changes to its strategic management process. Business firms: adaptability & adoptability to environment Managers: capability & copability to deal with environment

INTERNAL ENVIRONMENT

BUSINESS DECISIONS

EXTERNAL ENVIRONMENT

Richman & Copen Environment factors or constraints are largely, if not totally, external and beyond the control of individual industrial enterprises & their managements. These are essentially the givers within which the firms & their managements must operate in a specific country & they vary often greatly from country to country.

LAYERS OF BUSINESS ENVIRONMENT

Business environment for a firm- multi layered structure. Layers: favourable/ adverse exhibit different characteristics affect adjoining layer over a period of time Closeness of interaction & interrelationship diff at diff levels

Example: changes in global business environment may effect the domestic growth environment significantly

CONTD

INTRNTNL ENVRNMT
DOMESTIC MACRO ECNMC ENVRNMNT

GRWTH ECNMC &DIST SYSTM GOVT CUST INTERNAL OMR ENVRNMNT RIVAL ECO ECMNC INPUT STBLTY FINANCIE POLICY PRVIDER RS EXTERNAL
SOCIAL DEMGRPHC CULTRL NON ECNMC MACRO ENVRNMNT INTRNTNL ENVRNMT

Change in environment presents opportunity to some & threat to others

Examples: General agreement on trade & services (GATS) implemented in India on Jan 1, 2005: opportunity for research based pharmaceutical cos like Ranbaxy but threat to smaller companies.
HUL took advantage of new takeover & merger codes: acquired Kissan from UB group, Lakme from Tata, Modern foods from government.

INTERNAL ENVIRONMENT
Regarded as controllable factors: companies have control over them Internal economy: some internal contribute increase in productivity factors

DETERMINANTS OF INTERNAL ENVIRONMENT OF AN ORGANISATION

Mission & vision of the organisation Management strategy Industrial relations Corporate culture & values Line & staff relations Quality control system Team spirit among employees Work culture Compensation system Career progression of employees

POLLUTANTS OF INTERNAL ENVIRONMENT

Conflict b/w different owner groups Conflicts b/w workers & managers Inter departmental conflicts Unhealthy competition & conflict among employees Office politics Discrimination at work place Absenteeism

EXTERNAL FACTORS
Regarded as uncontrollable factors: by and large beyond the control of company.
External economy: some external factors contribute to the growth of the company.

EXTERNAL ENVIRONMENT
Suppliers Customers Competitors Financiers Society

SYMBIOTIC RELATIONSHIP b/w BUSINESS & ITS ENVIRONMENT

POLITICAL LEGAL TECHNOLOGICAL

CULTURAL

BUSINESS

GLOBAL

NATURAL SOCIAL ECONOMIC

DOMESTIC MACRO ECONOMIC ENVIRONMENT

Economic system Growth & distribution environment Macro economic stability (price level, exchange rate, interest rate, money supply, aggregate demand, BOP, employment rate) Economic policy (monetary policy, fiscal policy, industrial policy, trade policy)

DOMESTIC MACRO NON ECONOMIC ENVIRONMENT

Political environment Social / cultural environment Demographic environment Technological environment Natural environment Historical environment

DETERMINANTS OF INTERNATIONAL ENVIRONMENT FOR BUSINESS

State of world economy International economic cooperation Role of multilateral economic institutions International economic laws, agreements, codes Political condition & system in different countries Cultural factors across countries Growth & spread of MNCs Technology growth & transfer International market structure & competition Barriers to international trade & investment

NON- ECONOMIC ENVIRONMENT OF BUSINESS

(I) POLITICAL ENVIRONMENT

Political stability- changes in the form & structure of government administration

Political organisation- ideology of ruling government; influence of premier groups; conflicting role of public & private sector

Example: Nehru: transformation of agrarian economy into industrialised economy Indira Gandhi: state became active in agriculture sector (subsidised fertilisers, expansion of institutional credit); tightening of state control over industrial finance, foreign investment, trade Since 1990-91, political environment changedeconomy increasingly being liberalised

Example: In 1977, Janata govt came to power: Coca cola, IBM had to leave country. All liquor cos had to close operations. 1991 new economic order presented new opportunities for business & also threat to inefficient organizations.

(II) REGULATORY & LEGAL ENVIRONMENT

Legal policies- formulation & implementation Economic legislations- facilitator and/ or restrictor Playa a vital role- dictating dos & donts of business Flexibility & adaptability of law- constitutional amendments Foreign policy- tariffs, custom unions etc

(III) SOCIO- CULTURAL ENVIRONMENT SOCIAL ENVIRONMENT Made up of attitude, desires, expectations, education, beliefs & customs of people Changes gradually To forecast a change is difficult

CULTURAL ENVIRONMENT Organisational culture is the customary or traditional ways on thinking & doing things, which are shared to a greater or lesser extent by all the members of the organisation, which new members must learn & at least partially accept in order to be accepted into the service of the firm.

A firm wanting to market its product in various regions with diversified cultures will have to carefully study the existing consumption pattern & scope for creating demand for new products & will have to adjust their marketing communication to cultural characteristics. If the society is multi- cultural, then the firm can not meet the demands of different groups with a uniform product. To be successful in a multi cultural society, the firm will have to carefully study the consumption behaviour of different groups.

Example:

Companies have to change their product portfolio because of cultural differences as McDonald and KFC did when they launched their restaurant chain in India.

(IV) DEMOGRAPHIC ENVIRONMENT (a) Size & growth rate of population Growing 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: unfavourable impact on capital formation Adverse impact on employment situation Increasing pressure on agriculture

(b) age structure of population It determines: Productivity level Demand pattern Young population: PTC high Elderly population: high savings

(c) urban- rural population Proportion of urban rural population increasing Reasons Pull 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

In India, urban population increased from 17.3% of total population in 1951 to 27.78% of total population in 2001 (Source: Economic Survey 2003-04)

Example: Demographic environment decides the marketing mix for an organisation. A one rupee sachet of shampoo or a five rupee icecream cone are some examples.

(V) TECHNOLOGICAL ENVIRONMENT

Refers to body of skills, knowledge & procedures for making, using & doing useful things Positive effects of technology: Increased productivity Spread effects Production of new & better goods of standardised 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

Example: FIAT was using old technology but MUL had no option than to go for superior technology.

(VI) NATURAL ENVIRONMENT Industrial activity not entirely independent of nature Industrial units using weight losing inputs to be set up at sources of these inputs Externalities

(VII) EDUCATIONAL ENVIRONMENT

Attitude towards education & acquisition of knowledge Types of education- formal or informal Literacy level Educational match with skill requirement

(VII) HISTORICAL ENVIRONMENT Historical events & ideologies have a strong impact on the current state of business Example: business environment in a number of newly independent nation states has been determined by the colonial status that these countries had.

NATURE OF BUSINESS ENVIRONMENT

Dynamic Uncertain Element of Risk Opportunities & threats Internal & external factors Economic & non-economic factors

SIGNIFICANCE OF BUSINESS ENVIRONMENT

Facilitates operations of the organisation Forms the basis of long term policies, plans, strategies of organisation Helps organisation in identifying & understanding its competitors Helps the firm to expand & grow

CORPORATE RESPONSE & ADJUSTMENT TO SPECIFIC CHANGES IN BUSINESS ENVIRONMENT

Competitive environment

Marketing strategy Developing new product Satisfying customers Measures for realisation of economies of scale & scope

Technological environment

R&D Foreign technical collaborations Choice of technology Capital labour ratio

Labour environment Productivity Employee motivation Employees turnover rate Working conditions Compensation

Legal environment

Procedures & documentation Ethical practices Intellectual property protection Credibility

Social environment

Social responsibility Welfare expenditure

And so on.

ANALYSIS: UB GROUP
Environmental changes:
Liberalisation era forced businessmen to think of core competencies Reckless diversifications made during pre liberalisation era became liabilities

ANALYSIS: UB GROUP
Strategic responses: Restructuring business Internationally to consolidate strength in brewing & distilling In India to focus on engineering, services, health care, brewing & distilling

Hiving of non core business like pharmaceuticals

ANALYSIS: UB GROUP
Consequences:
With the excess baggage being shed, UB group looks slim & vibrant

CONCLUSION
Firms that are able to make appropriate adjustment to business environment changes reduce risk & uncertainty & gain competitive edge over others. Failure in making timely adjustment may erode profitability, competitiveness & market share.

TYPES OF BUSINESS ENVIRONMENT RISK

Legal risk: arising from legal challenges or changes in laws Regulatory risk: arising from regulatory design & its changes

Political risk: arising from political changes

Social risk: originating from social attitudes, perceptions Natural risk: associated with natural calamities

INTERACTION MATRIX
Studies interaction, interdependence, interlocking of various environmental factors Economic environment is both- endogenous & exogenous- it is determined as well as determining

INTERACTION MATRIX I
Eco Envrnmt Non Eco Envrnmt Eco. Sys. Fnctng Eco. of the Stru Eco Eco. Eco Eco. Polici plng prgrm es Eco. contls & rgultio ns Eco. gwth & dvt

Sociolog ical Educatio nal Political Historica l

+ +

+ +

+ +

+ +

+ +

+ +

+ +

+ +

INTERACTION MATRIX II
PRESENT ENVRNMNT PRESENT ECO ENVRNMT (1) + + PRESENT NON- ECO ENVRNMT (2) + +

NON PRESENT ENVRNMT PAST

ECONOMIC (1) NON ECONOMIC (2)

FUTURE

ECONOMIC (3) NON ECONOMIC (4)

+ +

+ +

Wiliam & Lawrence.. Environmental analysis & diagnosis give strategists time to anticipate opportunities & to plan to take optional responses to these opportunities. Its also helps strategists to develop an early warning system to prevent threats & to develop strategies which can turn a threat to the firms advantage

PROCESS OF ENVIRONMENTAL ANALYSIS

Scanning: general surveillance of environmental factors & their interactions Monitoring: events tracking environmental trends,

Forecasting: developing plausible projections of direction, scope & intensity of environmental change
Assessment: identifying & evaluating how & why current & projected environmental changes will affect strategic management of organisation

ENVIRONMENT SCANNING
Strategic planning in which managers try to determine best fit b/w organisation & its external environment Important step towards corporate planning & business policy decisions Aimed at continuous improvement of the company, its policies & programs.

INTERNAL SCANNING: acquisition, analysis, use of information from within the organisation that will help the management in determining future course of action of business EXTERNAL SCANNING: acquisition, analysis, use of information about events & establishing the relationship of business with its external environmental variables

Corporate managers analyse the Strengths (S), Weakness (W), opportunity (O) & Threat (T) that exist for their organisation in the context of its environment. O & T are external to the firm. With S the firm can seize the O & captilise on it & because of its W it becomes the victim of T in the environment

LINKAGES AMONG STAGES

MONITORING

SCANNING

FORECASTING

ASSESSMENT

ROLE OF BUSINESS ECONOMIST

To provide economic logic & perspective for managerial decision making Integrating economic theory with practical business situations

Monitoring, scanning, careful analysis & interpretations of business environment

Forecasting, future panning & formulating future business strategy