Business Environment

Organization’s profitability is not determined by what the products

look like, or whether it embodies high or low technology; it is rather
determined by the environment within which it operates. If an
organization is to remain successful and prosperous, it must
regularly adapt to its environment, which is uncertain and
changing.

Failure to adequately adapt to the environment may be a major

cause of organization’s failure. However, organizations also
affect the environment.

Therefore environmental scanning should be done regularly as

changes are always occurring and it exposes the firm’s strengths
and weaknesses which in turn affects strategy. What is
environmental scanning?

Characteristics of a business environment

The environmental factors are mutually related

Increasing instability

Uncerftanity

complexity

Environmental Scanning

 It can be a broad ranging effort to monitor and interpret

social, political, economic, technological and global events in
an effort to spot budding trends and conditions that could
eventually impact the industry.
 It can also be the monitoring, evaluation and dissemination
of information from the external and internal environment to
keep people within the organisation informed.

 According to Hunger and Wheeler the purpose for

environmental scanning is to raise consciousness of
managers about potential developments that would have
important input on industry conditions and pose new
opportunities and threats.

Importance of environmental scanning

 To match the organization’s distinctive competence to

opportunities in the environment.

 To hedge the firm’s valuable position against environmental

threats.

 Helps an organization capitalize on opportunities rather than

leave these to competitors.

 It provides an early signal of an impending problem which

can be diffused if recognized well in advance.

 Provides a base of objective qualitative information about the

environment and the strategies that we can utilize. It helps
the firms to analyse the competitors’ strategies and
formulate their own strategies accordingly.

 Continuous learning – environmental analysis makes the

task of managers easier in dealing with business challenges.
The managers are motivated to continuously update their
 knowledge, understanding and skills to meet the predicted
changes in realm of business.

 SWOT analysis should be done (Strengths, Weaknesses,

Opportunities, Threats)
Potential resource strengths and competitive capabilities
 A powerful strategy
 A product that is strongly differentiated
 Strong financial condition
 An attractive customer base
 Economies of scale or learning and experience curve
advantages over rivals
 Superior technology
 Superior intellectual capital
 Good supply chain management capabilities
 Wide geographic coverage
 Alliances/ joint ventures with other firms that provide access
to valuable technology, competencies and /or attractive
geographic markets
Potential competitive weaknesses
 Lack of clear strategic direction
 Resources that are not well matched to industry key success
factors
 Lack of well developed or product innovation capabilities
 Too narrow a product line relative to rivals
 Weak brand image or reputation
 Diminishing market share
  Lack of management depth
 Inferior intellectual capital relative to rivals
 Lots of internal operating problems and obsolete facilities
 Lack of financial resources to grow the business and pursue
promising opportunities
 Lots of underutilised plant capacity

Potential market opportunities

 Openings to win market share from rivals
 Sharply rising demand
 Expanding into new geographic markets
 Expanding the company’s product line to meet a broader
range of customer needs
 Integrating forward or backward
 Openings to exploit emerging new technologies

Potential external threats

 Increasing intensity of competition among industry rivals
resulting in squeezed profit margins
 Likely entry of potent new competitors
 Growing bargaining powers of customers or suppliers
 A shift in buyer needs and tastes
 Loss of sales to substitute products
 Vulnerability of industry driving forces
 Costly new regulatory requirements

Components of the business environment

The business environment is subdivided into 3 environments
which are:

 Micro/internal environment

 Market/ task environment

 Macro/ general environment

Micro/Internal Environment

The organisations internal environment includes factors that affect

its performance from within its boundaries. They are called
internal factors because they are within the organisation’s control,
as opposed to external factors that are outside the organisation’s
control. These internal environment factors include; mission,
organisational culture, resources, systems process, structure,
research and development (ability to innovate), financial policies
etc.

 Organisational culture – A system of shared values,

assumption, beliefs and norms uniting organisational
members. ‘The way we do things around. It is an
organisation’s personality, character, behaviour.
Managers with employees make the culture part of the
environment, so everyone knows what they should be doing
at work and how to do it. Good cultures do not happen by
accident.

 Manifestations of culture

• Symbols - Object, act, event or quality serving as a vehicle for

conveying meaning.
 • Stories - Narrative based on true events, which may be
embellished to highlight intended value.

• Rituals - Relatively elaborate, dramatic, planned set of

activities intended to convey cultural values to participants
and, usually, an audience.

• Heroes and role models

• Organisational Structure – it refers to the way in which an

organisation groups its resources to accomplish its mission.
An organisation is system structured into departments such
finance, marketing, hr and each of these affects the
organisation as a whole and each department is affected by
the other departments

 Mission – the organisation’s mission is its purpose or reason

for being. It provides an organisation’s identity by answering
questions, who are we as an organisation, what are our
competitors, what type of business are we in? Therefore the
mission should be relevant to all stakeholders, especially
employees. Stakeholders are those people whose interests
are affected by organisational behaviour e.g. employees,
shareholders, customers, suppliers, government etc.

 Resources – organisational resources include human, financial,

physical and informational. For example at Msu, the Human
resources are responsible for achieving the organisation’s
mission and objectives with the help of other resources.
Therefore, their skills, morale, commitment; attitude could
contribute to the strength and weakness of the organisation.
 Physical include classrooms, buses, financial resources are
necessary to purchase and maintain the physical resources and
pay employees, informational resources include the computer
systems where u can access e-learning, e-books.

 Labour force or employees

The employees of an organisation have a direct effect on its

performance. There’s need for organisations to employee the
correct employees and the staff motivated. Training and
development may play a pivotal role in achieving a
competitive edge.

 Mckinsey 7s - strategy, structure, systems (hard systems),

shared values, skills, style, staff

Market/ Task Environment

Represents the immediate environment outside the enterprise also

called the task environment as it represents the most active and
most competitive environment of the firm. These include
customers, competition, suppliers, shareholders, publics etc.

Customers

A business exists only because of its customers. The justification

for the existence of a firm lies in the satisfaction of customer
needs. The purpose of any business is to create a customer.
Organisations which neglect the customer expectations and
aspirations would find the long-term survival very difficult.
Customers’ tastes and preferences are not static, but keep on
changing. Organizations which are adept (skilful) in identifying the
changes in the customers’ attitudes and preferences or which can
comfortably respond to the changes would survive and those which
fail to take cognizance of changes would ultimately fall on the way
side.
. A company may have different categories of customers like
individuals, households, industries and other commercial
establishment and govt. and other institution

Competition

Many policies of the organization are influenced by the

competitors. A firm’s competitors include not only other firms
which market the same products or services but also all those
who compete for the discretionary (optional) income of the
consumers. They create competition for business because
they are rivals for the same customers, they may attract new
customers or tempt existing customers. In a competitive
environment, the market place is characterized by moves and
countermoves. As a result, many firms are forced to wake up from
their slumber. They are forced to unlearn many of the practices
and attitudes of traditional era.
Competitors’ changing strategic moves affect the performance
of the organisation, for example, when a competitor changes
prices, organisations tend to match prices to keep up with
customers.

Suppliers

Organisations buy resources (raw materials) from suppliers. It is

essential that businesses have suppliers that can provide raw
materials or goods of the right quality, in the right quantity at the
right price, at the right time. Therefore, it is important to develop
close working relationships between organisation and suppliers as
it presents the forces in the environment that directly influence the
operations of a firm. If an organization is unable to obtain these
essential inputs of right quality, quantity and at the right
price, it cannot possibly achieve the objectives.

Laws
Virtually every aspect of the business is influenced by the laws of
the land. The form of organization, the management and the way
how a firm conducts itself in the society are very much influenced
by the various provisions of the laws. For instance, The Companies
Act, the labour Act, just to name a few, affects the functioning of
the business. As a responsible corporate citizen, an enterprise has
to comply itself with the provisions of these acts.
Shareholders – these are owners of the organisation and they
influence management. Most shareholders of the organisations are
not generally involved in the day to day operation of the business
but they do vote for the directors of the corporation, who hire and
fire top management.

According to Porter M. E (1985) the strategies of firms in a given

industry (market) and the attractiveness of the said industry are
governed by five major forces namely;

 Threat from new entrants – the threat of new entrants will

depend on the extent to which there are barriers to entry;
- Economies of scale (minimum size requirements for profitable
operations),
High initial investments and fixed costs,
Cost advantages of existing players due to experience curve
effects of operation with fully depreciated assets,
Brand loyalty of customers
Protected intellectual property like patents, licenses etc,
Scarcity of important resources, e.g. qualified expert staff
Access to raw materials is controlled by existing players,
Distribution channels are controlled by existing players,
Existing players have close customer relations, e.g. from
long-term service contracts,
High switching costs for customers
Legislation and government action
pdt differentiation

Threat of strong and aggressive response by existing firms

 Threat from substitutes

A threat from substitutes exists if there are alternative

products with lower prices of better performance parameters
for the same purpose. They could potentially attract a
significant proportion of market volume and hence reduce the
potential sales volume for existing players. This category also
relates to complementary products.

 Similarly to the threat of new entrants, the threat of

substitutes is determined by factors like

 Brand loyalty of customers,

 Close customer relationships,
 Switching costs for customers,
  The relative price for performance of substitutes,
 Current trends.

 Bargaining power of suppliers - Can threaten firms by

raising input prices or compromising on their quality which
reduces profitability of the industry. Suppliers are powerful
if;

 There is one large dominant supplier / lack of competition.

 The product supplied is unique (differentiated)

 Switching costs are high perhaps, due to differentiation.

 There is threat of forward integration.

 The industry poses little threat of backward integration.

Bargaining power of buyers - Can force down prices, demand

higher quality and can play off competitors against each other
which costs the industry profits. They buy large quantities of
industry output.

 Products bought are undifferentiated.

 If the purchases contribute significantly to the buyers

production cost, hence will purchase selectively to reduce
cost.

Rivalry among existing firms

This force describes the intensity of competition between existing

players (companies) in an industry. High competitive pressure
results in pressure on prices, margins, and hence, on profitability
for every single company in the industry.

Competition between existing players is likely to be high when

There are many players of about the same size,

Players have similar strategies
There is not much differentiation between players and their
products, hence, there is much price competition
Low market growth rates (growth of a particular company is
possible only at the expense of a competitor),
Barriers for exit are high (e.g. expensive and highly
specialized equipment).
Low switching costs

 There is easy imitation of the products

Macro/ General environment/ external environment

The organisation’s general environment includes the factors

outside its boundaries that affect its performance. The
management have limited or no control over what happens outside
the organisation. Managers should predict these factors and
continually align their internal environment with the changes in
the external environment, which can result in changing the
mission and organisational culture and shifting goals.
Political / Legal environment
It refers to the influence exerted by the three political institutions
namely, legislature executive and the judiciary in shaping,
directing, developing and controlling business activities. A stable
and dynamic political environment is indispensable for business
growth. The performance, growth and survival of business in
general, to a larger extent, depend on the attitude of the
government towards business. Since government is fully
empowered to monitor and control the various institutions of
the society, the policies pursued by the government affects
the business in a significant way. Consists of laws, government
agencies and pressure groups that influence the activities of the
firm. These include;
-Black empowerment issues
-Monopolies and mergers commission
-Pressure groups AAG, Upfumi Kuvadiki etc
-Watchdogs e.g. CCZ, ZNCC, CZI,CFU
- indigenization

Economic Environment
Managers must also assess how changes in general economic
conditions will affect the operations. The fluctuations in economic
activities of a nation as measured by the various parameters like
the gross domestic product (GDP), price level, employment,
aggregate demand, consumer’s incomes etc. have far reaching
impact on the prosperity of the business. These factors affect the
cost of the inputs and the ability of customers to buy the goods
and services.

Further, it is important to note that a given change in

economic environment may have a positive effect on some
organizations and a negative effect on others. Therefore, a
manager must be able to clearly assess the impact of changes
in economic conditions on the industry in general and his firm
in particular.

Technological environment

Technology, in the organizational context, influences the ways of

doing things. Important technological developments that have
profoundly affected the organizations and society in the last two
decades are the computer, cell phone technology, laser,
xerography, integrated circuits, television, satellite
communication, nuclear power, synthetic fuels and foods, etc. All
these innovations have thoroughly changed the face of the society.
Therefore, today’s organizations need to keep abreast of
technological changes that affect their operations and products so
as to remain competitive. Failure of the management to clearly
gauge the technological changes would cost the business dearly. It
endangers the very survival of the organization. In some
industries where technology is stabilized, the changes are less
frequent and less turbulent. One the other hand in some
industries like information technology, telecommunication
systems, polymers, etc. changes are frequent. The strategist
should watch the following technological trends;

-Technological change - affect the efficiency with which products

are manufactured and sold, when a product will become obsolete,
how information can be gathered and processed, and what
customers expect from the organization’s products.

- Innovation opportunities
- Research and development

Demographic (social) Environment

The following demographic trends are of concern to managers;

-Population growth

-Population age mix

-Ethnic composition

-Education

-Household patterns

Global or international Environment Thanks to liberalization,

Indian companies are forces to view business issues from a global
perspective. Business responses and managerial practices must be
fine-tuned to survive in the global environment.