BE-107

Unit-1

Business Environment

Nature & Concept of Internal Environment

“Business is a conflict for money and it is a method of co-

operation for social justice”
- Prof. John M. Clarke

Concept of Business

Old Concept New Concept

Trade Trade

Sub-
Sub-
Activities
Activities

Cyber Cafe
 Definition

“Business is the human activity of converting resources into

goods and services for the purpose of bringing the result in
profit to the organization.”

- Buffa & Plitcher

“Business can be defined as all profit-directed economic and

commercial activities that provide goods and services necessary
to a nation’s standard of living.”

- Boon and Kurtz

Conclusion

“Business is a creation of goods and services of economic utility

through managerial and Technical Knowledge.”
 Modern Characteristics of Business

1. Business is an activity done by a social human being.

2. It is for gaining the wealth from production and distribution of

goods and services.

3. It is an economic, legal, social & cultured activity which fulfils the

needs of society, state and the nation.

4. The base of the business is the mutual understanding and

satisfaction of buyer and seller in a regular or in continuation in
dealings.

5. It has future risks of uncertainty due to change in demand and

supply and under the fluctuations.

6. It provides form utility, place utility & time utility.

7. It is a pluralistic organization where unified efforts of various

categories of people like investors, promoters, board of directors,
employees, government and public also.

8. Business has different type of ownership i.e. Public sector, Private

sector, Co-operative sector, Government sector and multinationals
also.

9. It pays much attention for opportunities of employment to the

unemployed persons, not only the maximization of profits.

10. Business is a combination of the principles of “Art” and

“Science”.
 Classification of Business

1. Commerce
• Trade
• Auxiliaries to trade
2. Industrial Activities

Commerce

1. Trade – It means buying or selling commodities which can be

divided into two categories as following.
A. Internal Trade –Within the purview of a nation.
B. Foreign Trade - Beyond the national territory.

2. Industrial Activities – All such activities by which creation of

utility is incurred through natural resources to fulfill the needs of
society.
 Industrial Activities

1. Genetic Industries – Engaged in reproducing & multiplying

certain species of animals & plants to gain profit.
2. Analytical Industries – Products are manufactured by analyzing
and separating different substances from the same material. E.g.
Crude Oil.
3. Manufacturing Industries – Transformation of raw material is
engaged into finished or semi-finished products.

Manufacturing Industries

a) Construction Industries – Which are of the nature that their

products are not being taken to the markets for selling or buying.
E.g. Bridges, roads etc.
b) Synthetic Industries – This industry is a combination of various
ingredients to manufacture the products. E.g. Cement
(concrete+gypsum+coal etc)
c) Processing Industries – Wherein the raw-material used in process
of production, through different stages to get the final products.
E.g. Sugar (From Cane)
d) Assembling Industries – Various parts are assembled to get a new
& usable product. E.g. Television.
 Foreign Trade

a) Import Trade – Procurement of foreign goods.

b) Export Trade – Transferred to another country.
c) Re-Export or Entrepot Trade – Foreign Producers & Foreign
Consumers.

The Environment

1. Internal Environment – It consists of conditions and forces within the

organization.

2. Task Environment– It consists of specific organizations or the groups of

the persons that are likely to influence an organization.

3. External Environment– The factors related to this are not controllable by

the business but they affect the “business-direction” and its progress by
creating many hurdles and obstacles. Hence the organization needs to
be prepared.
 Significance Of BE

1. First Mover Advantage – Awareness of environment helps an

enterprise to take advantage of early opportunities instead of losing
them to competitors. E.g. Maruti Udyog became the leader in small car
market because it was the first to recognize the need for small car on
account of rising petroleum prices and a large middle class.

2. Early Warning Signal – It makes a firm aware of the impeding threat

or crisis so that the firm can take timely action to minimize the adverse
effects. E.g. When new firms entered in the mid segment cars (threat),
Maruti Udyog increased the production of its Esteem threefold.

3. Customer Focus – BE understanding makes the management sensitive

to the changing needs and expectations of consumers. E.g. HUL &
several other FMCG companies launched small sachets of shampoo and
other products realizing the wishes of customers.

4. Strategy Formulation – Environment monitoring provides relevant

information about the business environment. Such information serves
as the basis for strategy making. E.g. ITC realized that there is a vast
scope for growth in the travel and tourism industry in India and the
Govt. is keen to promote this industry. With the help of this knowledge,
ITC planned new hotels both in India & Abroad.

5. Change Agent – Business leaders act as agents of change. They create

a drive for change at the grass root level. In order to decide the
direction and nature of change, the leaders need to understand the
 aspirations of people and other environmental forces through
environmental scanning. E.g. contemporary environment requires
prompt decision-making and power to people. Therefore, business
leaders are increasingly delegating authority to empower their staff and
to eliminate procedural delays.

6. Public Image – A business firm can improve its image by showing that
it is sensitive to its environment and responsive to the aspirations of
public. E.g. Hero Honda (Desh ki Dhadkan), in the last 2-3 decades.

7. Continuous Learning – Environmental analysis serves as broadbased

and ongoing education for business executives. It keeps them in touch
with the changing scenario. With the help of environmental learning
managers can react in an appropriate manner and thereby increase the
success of their organizations.

Internal Environment

a) Board of Directors – These persons are elected by the shareholders

and are charged with overseeing the overall management.

b) Employees/Workers – They are the creators of products of the

organization.

c) The culture of the Organization – It means the values, language,

attitudes, beliefs and reactions to the environment that denotes to the
organization's process.

“Resource is an asset, Competency, process, skill or knowledge

controlled by the corporation or organization. A resource is strength for
any organization if it provides a company with a competitive
advantage. It is something the firm does or has the potential to do
particularly well relative to the abilities of existing or potential
competitors.”

Developing Effective Internal Organizational

Environment

1. Environmental Scanning – This means the process of analyzing

the environment for identifying the factors which may influence the
business. Its purpose is to identify the emerging trends or early
warning signals.E.g. Managerial Philosophy, age, size, power,
geographic dimension, type of business of the organization influence
the selection of relevant environmental factors.

2. Environmental Monitoring – Information from the relevant

environment is collected. Once the relevant factors in the
environment are identified, adequate data about these factors are
gathered so as to ascertain their emerging pattern and trends.
Company records, publications, spying and verbal talks with the
employees, customers, dealers, suppliers and competitors are the
main sources of data.

3. Environmental forecasting – Forecasting is the process of

estimating the relevant events of future based on the analysis of
their past and present behavior.

4. Diagnosis – Environmental factors are assessed in terms of their

impact on the organization. Some factors in the environment may entail
an opportunity while others may pose a threat to the organization. The
degree of impact may also vary from one factor to another. SWOT
analysis, ETOP and other such techniques are used for environmental
diagnosis.
 Management of organizational resources

“It depends on first of all the evaluation of the key resources &
thereafter the procedure of using the resources for effective results”

4 Questions to evaluate firm’s Key Resources

1. Value – Does it provide to organization competitive advantage.

2. Rareness – Do other competitors possess it.

3. Imitability – Whether it is a costly affair for others to imitate.

4. Organization – Is the firm organized to exploit the resources.

How To Use Resources

1. Identify & Classify each firm’s resource in terms of strength &

weakness.
2. Combine all firms strength and categories into specific
capabilities(Core Competency)
3. Appraise the profit potential of these resources and capabilities
according to their potential for sustainable competitive advantage.
4. Choose the business strategy that best exploit the firm’s resources and
capabilities with respect to external opportunity.
5. Identify resource gap and make sure that the new investment are in the
correct zone by the organization.
 Sustainability of Organization

Four characteristics of organization, this will help in analyzing

why companies behave differently although they face the same
situation:-

1. Defenders
2. Prospectors
3. Analysers
4. Reactors

Degree of Sustainability

High Level of Resource Low

(Hard to Imitate) (Sustainability) (Easy to Imitate)

Slow Cycle Standard Cycle Fast Cycle

Resources Resources Resources

Strong Shielded Standardized Mass Easily Duplicated

Production

Patent Brand Idea Driven

Name Complicated Processes

Gillette Chrysler Minivan Sony Walkman

 Introducing Organizational Change

There are some reasons which are responsible for introducing changes in
organization:

1. Technological innovation.
2. Basic resources have progressively become more expensive.
3. Competition has sharply increased.
4. Communication network reduced the time needed to take decision.
5. Consumer interest groups have become highly influential.
6. LPG Policy of Govt.

Emerging Principles of Management in changing

Environment

1. Principle of Management by perception

2. Principle of social responsibility
3. Principle of organization restructuring development
4. Principle of optimum utilization of Information, human resource
& infrastructure.
5. Principle of time management.
 Steps For Introducing Change

1. Identify the areas where changes are necessary through research or

any other analysis technique.
2. Make judgment if you want to introduce change, the people will
accept or not.
3. Ensure that the processing change is fully analysed according to
SWOT analysis.
4. Prepare team for handling change.
5. Implement the change.
6. Evaluate the effect of change.

Balancing Organizational Change for effective

environment

1. Buffering – Buffering techniques are used to soften the impact of

environment on the organization. Stocking materials, preventive
maintenance, employee training, building inventory are examples of
buffering. These precautionary measures enable the organization to
avoid damage due to changes in environment. E.g. by maintaining a
supply of raw materials, the company can operate at full capacity even
if there are problems in obtaining fresh supply for a specified period.

2. Levelling – Whereas buffering absorbs environmental fluctuations,

levelling or smoothing attempts to reduce fluctuations in the
environment. E.g. Retails firms faced with seasonal fluctuations offer
price cuts in order to spread sales more evenly throughout the year.
Special air fares for night flights are another example of leveling.
3. Anticipating – It means acquiring information about probable
changes in the environment. E.g. a manufacturing firm tries to
anticipate demand for its product before deciding production schedules
and related matters. Other areas in where organizations frequently
anticipate changes are customer needs, competition, technology &
availability of human resources.

4. Rationing – It involves allocating organizational resources according

to a system of priorities. Rationing is resorted to when an organization
is unable to meet all the demand. E.g. when the demand exceeds
supply, the manufacturer may ration supplies to dealers.

5. Dominating – The organization attempts to control events in the

environment & reduce its dependence on them. By developing several
suppliers, a firm can reduce dependence on one or two suppliers. An
enterprise may collaborate with others and may enter into contracts.
Advertising, public relations and lobbying are also examples of
dominating.

6. Changing – An organization may change itself, its operations and

output. For example, it may change its product line to meet changes in
customers’ preferences. Changing is a more difficult coping strategy,
while taking action in response to changes in environment
interrelationships b/w various elements of environment and their likely
impact should be understood.