Business Environment

Business Environment Dr. Mrutyunjay Dash

Meaning and Definition:  Environment literally means the surroundings, external objects, influences, or circumstances under which someone or something exists. In the words of Davis” the aggregate of all conditions, events and influences that surround and affect it”. 

Business policy of an organisation is influenced by two set of factors.  External and internal  The internal factors are known as controllable factors for example a committed labour force.  The organisation has control over these factors.  It can modify or alter such factors to suit the environment.

External factors are known as uncontrollable: such factors are largely beyond the control of the individual enterprise for example the ecological environment represents the external environment. While the internal environment reveals an organisation’s strengths and weakness, the external environment reflects the opportunities available to the organisation and the threat it faces.

Important Internal Factors:      

Organisational resources Research and development Technological capabilities Financial capabilities Marketing capabilities Operations capabilities

However the term “business environment” generally refers to the external environment and includes factors outside the firm which can lead to opportunities for or threats to the firm. Although there are many external factors, the most important factors are economic, governmental, legal, technological, geographic, and social.

Major pollutants of internal environment:       

Conflict bt. Managers & workers Inter-departmental conflicts and mistrust Unhealthy competition bt. employees Office politics and discrimination at workplace Corruption Nepotism and misuse of office position Disloyalty and espionage for outsiders.

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Every company’s policy is in many ways affected by its environment, because the accomplishment of its objective depends largely on the degree of interaction of the enterprise with its environment. The environment imposes several constraints on the enterprise has considerable impact and influence on the scope and direction of its activities. 

Business environment enables the corporate policy maker in the following important ways.

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Perform the critical function of making the needs of the society and the capacity of the goods and services to satisfy the needs of the people. Adapt the organisation itself to the dynamic conditions of the society. Match the organisational policies and resources with the social needs. Contribute to the social responsibility of business. Executives are able to adjust to the prevailing conditions and thus influence the environment in order to make it congenial for business.

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Environmental factors: 

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Many factors can be included in the environmental factors: social, economic, cultural, geographical, technological, political, legal and ecological factors, in addition to govt. policies, labour factors, competitive market conditions and so on. Some of the most important factors: Social Factors: Every business organisation has a social responsibility. It operates within the norms of the society and strives to satisfy the needs and wants of the society. 

There are many social factors which affect the policy and strategy of corporate management. Culture, values, tastes and preferences,social integration happen to be a part of the agenda of every business organisation. Davis and Blomstrom” a business is a social institution performing a social mission and having a broad influence on the way people live and work together.”

Economic Factors: The economic factors that influence a business environment are per capita income, national income, infrastructure development, capital formation, resource mobilisation, exploitation of natural resources. Growth and Distribution environment: GDP: Personal consumption expenditure Gross pvt. Domestic investment Govt. expenditure on consumption and investment Net exports [X-M]

Economic System: Decision on three basic questions: What products should be produced and in what quantities?  How should the products be produced?  For whom should the products be produced? Market Economy: It is an economic system in which the basic economic decisions are left to the market mechanisms for solutions. Decisions by firms: product, targeting customers, pricing and profits. Command Economy: Productive assets owned & operated by govt. Govt: Important decisions about production and distribution Owning and operating enterprises. Mixed Economy: Important roles by public and private sector Role of govt. both developmental and regulatory 

Allocation of GDP: Labour: wages and salaries Capital owners: Interest Land owners: Rent Entrepreneurs: Profits Govt: Taxes A country with a high level of national income signifies good market potential in aggregate terms. [Facilitates International trade and investment] Major factors affecting growth:

Availability & quality of raw materials Quantum and quality of capital stock Entrepreneurship Innovation and human skills Availability of quality infrastructure Social development & standard of Governance and administration

Cultural Factors: Managers and policy makers in a global business cannot disregard cultural variables like social and religious practices, education, knowledge, rural community norms and beliefs. India: Social stratification plays a vital role in rural societies while cultural differences are unthinkable for any international manager or even an urban Indian manager. Geographic Factors: In a global business environment, geographic location, seasonal variations, climatic conditions, and so on considerably affect the tastes and preferences of customers and prospects as well as the labour force. The industrial location policies of the govt. are considerably influenced by the pace of development in various geographic locations.

Technological Factors: The technological factors consist of those factors which relate to knowledge applied and the materials and machines used in the production of goods and services that have an impact on the business of an organisation. Important Factors: 

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Sources of technology like company sources, external sources and foreign sources, cost of technology acquisition, collaboration in and transfer of technology. Technological development, stages of development change and rate of change of technology and research and development. Impact of technology on human beings, the man-machines system and the environmental effects of technology. Communication and infrastructural technology and technology in management.

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Petrol Prices: Automobile Industry Allopathic Drugs: Procter &Gamble Ltd. Along with Richardson Hindustan Ltd. /Herbal solution to common chronic ailments.

Marketing Factors: Marketing capability relate to the pricing, promotion and distribution of products or services and all the allied aspects that have a bearing on an organisation’s capacity and ability to implement its strategies.

Important Factors:  Product related factors Variety, Differentiation Mixed quality Packaging, etc.  Price-related factors like pricing policies, changes and consequent repercussion  Promotion related factors like sales promotion, advertising.

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Real life Illustrations:

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Weakness transferred to strength: Procter & Gamble/1981-81/boycott from chemists’ association for higher trade margins/reclassification of its products as aurvedic/now products could be sold by the non-chemists also.

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Operations Factors: These factors relate to the production of the products or services,use of material resources and all allied aspects that have a bearing on an organisation’s capacity and ability to implement its strategies.

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Key Factors: Factors related to the production system like capacity, location, layout, product or service design, work system, degree of automation. Factors related to the operation and control system like aggregate production planning, material supply, Inventory, cost and quality control, etc.

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Factors related to the R & D system like personal facilities, product development, patient right ,level of technology, technical collaboration and support. Real life illustration: Cadila Laboratories, part of the Cadila group of companies /third largest drugs company in India/It claims to have developed the knowhow for fifteen drugs and has signed a protocol with the Soviet Institute of Immunology for a joint scientific research forum. Personal Factors: These relate to the existence and use of human resources and skills and all allied aspects that have a bearing on an organisation’s capacity. Important Factors Manpower planning, selection, development, compensation, communication and appraisal.

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Factors like corporate image, quality of managers, staff and workers, perception about and image of the organisation as an employer, availability of developmental opportunities for employees. Factors related to industrial relations like union-management relationship, employee satisfaction and morale.

Real life situation:

The growth of Apollo Tyres got seriously affected due to industrial relation problems. Location : Kerala:a highly militant, literate and unionised work force Drastic change in its Personnel Selection Policy: >28yrs Finanacially needy, married and settled people Three years agreement 

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Political Environment:

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Political environment consists of factors related to the management of public affairs and their impact on the business of an organisation. Link between political environment and economic system Govt. specification on matters related to advertising, marketing. India: cig: Statutory warning Milk:…for infant Business decisions based on political considerations: Real life Situation:

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Janata Govt. after 1977: followed a socialist approach/Coca Cola & IBM were forced to leave. Comparison with the present Govt.

Political Environment Political environment has a risk level to which corporate managers adjust inv. decisions. Types of Political Risk: Confiscation: Forcible possession of ownership of a property without compensation by the Govt. [Country Reports on Human Rights Practices-2 005 Released by the Bureau of Democracy, Human Rights, and Labor March 8, 2006]

Expropriation: Forcible possession of ownership of a property with some compensation by the Govt. [may not equal market value of property] Nationalisation: A compulsive process of transfer of ownership and operation of a property from pvt. to pub. Hand. [Nat. of com. Banks in 1969]

Domestication: A process of transferring of ownership and operation of Foreign company partly or fully to nationals. FERA: 40% sell of shares to Indian nationals. General Instability Risk: Uncertainty of existence with regard to the viability of the existing political system. Transfer Risk: It arises from the possibility of any future act of the govt. by which it restricts transactions or transfer of funds or profits between the subsidiaries of a firm or from a subsidiary to the parent company. [When location of operation is outside the country]

Legal Environment Legal System: Decisions on investment and operations A sense of security and safety Codes & procedures for various types of business Infringement law: Bribery Product counterfeiting Black marketers Consumer deception Tax evasion

Apart from the general legal system there exists specific pieces of business legislation which together guide, control and regulate Business activity. Industrial development and regulation: Licensing Registration of industries Location of industries Takeovers of industries Foreign exchange management: Transactions in foreign currency, foreign exchange realisation, foreign trade and investment transactions. Consumer protection: Consumer rights, consumer disputes complaints and grievance redressal.

Weights, measures and packaging: Covering standard units, packaging norms and declaration and inspection. Copyrights: Covering ownership and licenses of copyright, infringement. Labour policy: Employees’ insurance, payment of gratuity, bonus, employees provident fund, compensation and disciplinary matters. Professionally managed companies adhere to legal conformity while running their business operations to protect their goodwill assets.

 Regulatory

Environment:

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It relates to planning and regulation of economic activities by the Govt. which have long standing impact on the business of an organisation.

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Constitutional Framework Directive principles Fundamental rights Policies related to licensing monopolies Policies related to Foreign investment Policies related to imports and exports Policies related to public-sector and small-scale industries.

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Demographic Environment: Size & growth of population: Supply of human resources Demand for it : salary & wage structure [India & China] Attraction for MNCs: Cheap labour Markets with high population growth: Incentives for firms [LOW MARKETING COST] Age & sex ratio: Product mix

Improper balance bt eco. Growth & pop. growth

Discourages Pvt. investment

Adversely affects size of market

Poverty, malnutrition,

Overall det. Quality of life

Michael Porter’s International Competitiveness Model The conditions based on which companies created, organized and managed

Firm Strategy, structure & Rivalry

Factor Endowment

Factor Endowments: Skilled labour, capital, technology or infrastructure

Demand Condition: Home demand for industry’s products & services

Local Demand Condition

Relating and Supporting Industries Presence & absence of supplier and related industries in a nation

Michael Porter’s Five forces Model

Threat of Substitutes

Bargain Power of Supplier

Threat of Competitor

Threat of New Entrants

Bargain Power of Buyer

Threat of Competitors: The rivalry among sellers in the industry. Threat of New Entrants: The potential entry of new competitors Threat of substitutes: Market attempts of companies in other industries to win customers over to their own substitute products. Bargaining power of Suppliers: The competitive pressure stemming from the supplier-seller collaboration and resultant bargaining. Bargaining Power of Buyers: The competitive pressure stemming Seller-buyer bargaining.

Rivalry: Tactical Tools:  Lower prices  Snazzier features  Expanded customer service  Longer warranties  Special promotional offers  Introduction of new products When does rivalry become stronger? Growing demand for a product Dissatisfaction over market share of one or more competitors When does rivalry become weaker? Satisfaction over market share of most competitors

Threat of new Entrants: Life is not that easy instead a challenge on thrilling fronts: Economies of scale Factors independent of scale: Patents, favourable access to raw materials, favourable location, lower borrowing cost, govt. subsidies Learning & Experience Switching costs: [Physical, psychological and financial] resist to switch over Access to Distribution: Reluctance to deal with a product new to the market. Sol: Product differentiation Capital Inensive

Threat of Substitutes: I.Availability of attractively priced substitutes II.Quality, performance and other attributes III.Easy switch over to substitutes. Bargaiang power of suppliers: Higher is the number of suppliers………… High B. Power: Advanced technology, expertise in making innovation Bargaining power of Buyers: What happens when many sellers, few buyers Pdn. Capacity exceeds demand ? Andrew Grove ,CEO OF Intel/SIXTH FORCE Force of Complementary

Strategic Group: These are conceptually defined as clusters of competitors that share similar strategies and therefore compete more directly with one another than with other firms in the same industry. Do they form formal group? No, but only conceptual clusters Core areas: Extent of product diversity Extent of geographic coverage Number of market segment Distribution channel Extent of branding Pricing

Critical Success Factors:

FIRMS

CSFs

FMCG

Distribution Network

Pharmaceuticals

R&D

Steel, Aluminium

Cost

Food chain firms, McDonalds

Logistic &supply Chain Management

Industry Life Cycle Analysis: Embryonic Stage Initial Stage: High Cost—High Price PC-US/1976 & India-1980 Voltas & Puff Technology Growth Stage: Economies of Scale—Fall in prices, high growth and high profits New entrants- stiff comp 1990: Telcom in India. Message:? If venturing into Growth industry? Industry Shakeout: Saturation of Demand & COMPETITION AMONG FEW Mature Industry: Saturated demand [restricted to replacement] Growth is ZERO Bottom line of operation is very thin Is pdt. differentiation at this stage possible? Sol: Promotional Campaign & reduced price

Declining Industry: Growth becomes negative [technological Substitution] CDs-------? Social changes: Greater health consciousness Demographic: declining birth rate—Toys Industry International competition : A threat

ENVIRONMENTAL ANALYSIS: Verbal or wriiten Corporate Intelligence: “as a technique of adopting industry/research expertise to analyse the information available on competition from public sources and to draw conclusion based on this data.” Collection, analysis and utilisation of business related data of competitors. Companies: Microsoft, Motorola, P&G, HP,IBM. Corporate Espionage: Spying on business competitors Product design Research Projects Marketing Plan Trade Secret Intellectual property

GM & Volkswagen P&G and LEVERS Brothers[1943]

Environmental Evolution: Type of change Forces driving change Type of future evolution Systematic and discontinuous change Gradual changes, changes in a phased manner, or those that are predictable: systematic change A change in the ratio of youth in population of India Rise in the income of middle class Unpredictable or sudden changes: Twin tower terror Driving change: Packaged food Rising purchasing power of the middle class More working women More awareness among the youth via mass media

Environmental Analysis: Scanning the environment to detect warning signals Monitoring specific environmental trends Forecasting the direction of future environmental change Assessing current and future environmental changes for their

organisational implications Scanning: It draws attention to possible changes and events well before their occurrence. Monitoring: Movement from imprecise & unbounded to specific and focused Forecasting: Development of plausible projections of directions, scope, speed and intensity of environment change, and to lay out the evolutionary path of anticipatory change. Assessment: Identifying and evaluating how & why