BUSINESS ENVIRONMENT

SYLLABUS
1. Module I -

Business definition, characteristics, objectives, classification, Business environment: Nature, concept and significance of internal environment External environment nature and significance, elements, environmental analysis.

2. Module II - Globalization strategies, World Trade Organization implications, Public Sector in India role in economic development, Privatisation, Intellectual Property Rights (IPR) and related issues. 3. Module III - Nature and progress of economic reforms, Monetary and fiscal policies, Export Import Policies, Competition Act 2002, Foreign Exchange Management Act, Regulatory bodies.

Module IV - Industrial policy of India, reforms since 1990s on issues of industrial policy, Balanced regional development Micro, small and medium enterprises in India, Multi national companies benefits and problems. Module V - Environmental Management Fundamentals, sustainable development, consumerism in India, Consumer Protection Act, social responsibility of business, impact of technology on business.

Meaning
Business may be understood as the organised efforts of enterprises to supply consumers with goods and services for a profit. Purpose of Business All businesses share the same purpose: TO EARN PROFITS

But other purposes are:

Supplying goods and services to the society; creating job opportunities; offer of better quality of life; contributing to the economic growth of the country. Scope Activities starting from bringing raw materials to the factory and selling the products at the market

Old concept of Business

In earlier days, profit maximization was the main objectives of Business, social responsibilities of the business towards customers, society and employees were totally ignored.

According to L.H.Haney Business may be defined as human activity directed towards producing or acquiring wealth through buying or selling.

According to Thomas Business is an occupation of which money gain is the principal object and money loss is the main risk.

Modern concept of Business

In modern times the goal of profit maximisation is achieved through customer satisfaction Peter F.Drucker points out that there is only one definition of business, to create the customer and expand the market share.

Characteristics of Contemporary Business

1. Business in Transition: A typical business person is
sandwiched between the compulsions of the new business environment and the old practices of doing business.

2. Pressure of Competition: Indian businesses are facing

competition, both from within and from foreign business. Competition though unwelcome to managers, is a boon to customers.

3. Immense Opportunities: Indian business has plenty of

opportunities.

4. Globalisation: Modern business necessitates globalisation.

Internationalisation or globalisation is fast becoming imperative for modern business due to technological innovations; crumbling trade barriers; global flow of capital and technology; information explosion; intensity of market competition; changing life styles & the demand for new products.

5. Technology: Business is characterised by increasing use of technology. The impact of technology on business is pervasive. 6. Information: Another characteristic of contemporary business is the recognition of and the need for information. The whole area of retrieving & extending information, including data processing, information systems analysis & preparation of effective records & reports, has achieved a major status.

Business objectives
Before we describe business objectives, it is desirable to be clear about related concepts, viz.,

Vision Mission &

Objectives

VISION: A Vision is a broad explanation of why the firm exists and where it is trying to lead. A vision gives the organisation a sense of purpose and a set of values that unite employees in a common destiny.

Business Vision

Creating the Vision

Establishing Goals

Visioning

One of the most important things to do in the preparation stage is to VISUALIZE things in your mind.
Mayor

Rudolph Giuliani

Visioning vs. Planning

Visioning

Planning

proactive plan for the future.

process that provides specific direction and meaning to the day-today activities. strategic planning places the strategic vision into motion.

It is a view of the future that everyone can believe in.

A Vision Statement

Says what you want out of Business. Details principles and beliefs. Gives you the power to create and design your business around your values.

Mission
A Mission statement outlines the fundamental purpose of the organisation.
A Mission statement incorporates four elements:
1. 2.

Customer needs, or what is being satisfied. Customer groups, or who is being satisfied.

3. The companys activities, technologies, and competencies, or how the firm goes about creating and delivering value to customers and satisfying their needs. 4. The companys concern for survival, its philosophy, its self-concept and its concern for public image.

Our Mission

Growth has no limit at Reliance. I keep revising my vision. Only when you can dream it, you can do it.
Dhirubhai H. Ambani

Founder Chairman Reliance Group December 28, 1932 - July 6, 2002

Objectives
Objectives render mission statements more concrete.

Mission statements seek to make a vision more specific and Objectives are attempts to make mission statements more concrete. Objectives therefore, represent the operational side of an organisation.

1. Profit: Profit is the main incentive, motivator, strong sustainer, judicious allocator of resources, objective indicator of productivity and a solid basis for growth, expansion and survival.

Profits enables a businessman to realise his other objectives too.

2. Growth: Business should grow in all directions over a period of time. The strategies adopted to achieve growth are: (a) add more products/markets; (b) diversify into new areas; (c) increase market share;

3. Power: Business houses have vast resources at its

command. These resources confer enormous economic and political power on owners and managers of business ventures.

4.

Employee satisfaction & Development:

Concern for employees continues to be an important aspect of management.

5. Quality products & services:

Those who insisted on and persisted in quality survived competition and stayed ahead of others in the market. Persistent quality of products earns brand loyalty, a vital ingredient of success.

6. Market Leadership: To earn market leadership,

innovation is the key factor. Innovation may be in product, advertising, distribution, finance or in any other field.

7. Challenging: Business offers vast scope and poses formidable challenges. 8. Joy of creation: It is through business strategies
new ideas and innovations are given a shape and are converted into useful products and services for the benefit of customers.

9. Service to society: Business is a part of society

and has several obligations towards it.

10. Good Corporate citizenship: It implies that the

business unit complies with the rules of the land, pays taxes to the government regularly, discharges its obligations to society and cares for its employees and customers.

Meaning of Environment
Environment Literally means the surroundings, external objects, influences or circumstances under which someone or something exist

Environment of a Firm
1.

Technological Environment

2.
3. 4. 5.

Economic Environment
Political Environment Global Environment Social and Cultural Environment

Business Environment
Business environment refers to all those internal and external factors that have a bearing on the business.

Keith Davis defines business environment as the aggregate of all conditions, events and influences that surround and influence it. Business environment is the climate or set of conditions economic, social, political or institutional in which business operations are conducted. Arthur M.Welmer
Business environment is the total of all things external to business firms and industries which affect their organisation and operations. Bayard O. Wheeler

Business Environment:
There are two factors Internal and external which influence the business policy of an organisation Internal Environment: controllable factor organisational resources, research and development and technological capabilities, financial capability, marketing capability, operation capability Micro Environment Macro Environment

INTERNAL ENVIRONMENT
The important internal factors which have a bearing on the strategy and other decisions are: 1. Value system 2. Mission & Objectives 3. Management Structure & Nature 4. Internal Power relationship 5. Human resources

6. Company image & Brand equity

MICRO ENVIRONMENT
The micro environment consists of the actors in the companys immediate environment that affect the performance of the company. Suppliers: Suppliers are the important force in the task environment of a business. Multiple sources of supply often help to reduce risks. Customers: To succeed in capturing customers, a business must try its best to know what people want and will buy.

Labour: The labour force is organised in the form of trade unions. The trade unions interact with the management & pressurise the management for the fulfilment of their demands.

Competitors: Competitors play a vital role in running the business enterprise. There are various types of competitions: Desire competition: Under this type of competition the primary task is to influence the basic desire of the customer.

Generic competition: The competition among alternatives which satisfy a particular category of desire is called generic competition. Product form competition: In this type of competition, the consumer has to choose between different forms of the product.

Brand competition: The competition between different brands of the same product. Taking into consideration these different factors every marketer should strive to create primary and relative demand for his product. Regulating agencies: The regulators include government departments and other organizations which monitor the activities of business.

MACRO ENVIRONMENT
The macro forces are, generally, more uncontrollable than the micro forces. It includes factors that create opportunities and threats to business units. Following are the elements of Macro Environment:
Important macro environment factors includes: Economic environment Political and Regulatory environment Social/Cultural environment

Demographic environment
Technological environment

Natural & Global environment

ECONOMIC ENVIRONMENT
The survival & success of a business enterprise is finally decided by the economic environment & various market conditions. The important external factors that affect the economic environment of a business are as follows:

Economic conditions
Economic system Economic policies Other Economic Factors: Infrastructural Facilities, Banking, Insurance companies, money markets, capital markets etc.

Non economic environment

Political Environment:

Socio-Cultural Environment:
Technological Environment: Natural Environment: Demographic Environment : International Environment:

POLITICAL & LEGAL ENVIRONMENT

Political environment refers to the influence exerted by the three political institutions:

Legislature
Executive Judiciary

It provides a framework within which the business is to function & its existence depends on the success with which it can face the various challenges constructed out of political & legal framework.

SOCIO-CULTURAL ENVIRONMENT
It is very comprehensive because it may include the total social factors within which an organisation operates. Socio-cultural environment may include expectations of the society from business, attitudes of society towards business & its management, views towards achievement of work, views towards structure, responsibility & organisational positions, views towards customs, & labour mobility & level of education. Attitude of people to work, family system, caste system, religion, education, marriage etc.

NATURAL ENVIRONMENT
It includes geographical & ecological factors. Almost every aspect of business depends upon natural environment. Manufacturing depends on physical inputs. Mining depends on nature Agriculture depends on nature. Trade between two regions depends on geographical factors (climate, location, resources).

Topographical factors (Configuration of land surface, Altitude, Slope, Aspect and exposure) may affect the demand pattern.

DEMOGRAPHIC ENVIRONMENT
It includes:

Size, growth rate, age composition, sex composition etc., of population

Family size

Caste, religion,
Educational level...etc

TECHNOLOGICAL ENVIRONMENT
Business has to adopt technological changes from time to time. Every business enterprise has two basic functions i.e., Marketing & Innovation.

Technological environnment also includes research base decisions. The fast changes in technology also create problems for enterprises as these render plants and products obsolete quickly.

Risk
Security risk- India has several geographically discrete security concerns. A number of anti-Indian, Islamic, and Kashmiri militant groups operates in the disputed state of kashmir and India has two wars with Pakistan over the territory, Political stability risk: in the general election of 2004, the congress party came up as the ruling party. But to attain the majority in the parliament, they had to take support of CPI, CPI (M), RJD and so on Govt effectiveness risk legal and regulatory risk: Indian legal system is relatively impartial, free and fair. Its also notoriously slow, disputes often takes a year to resolve

 Macro economic risk : The economy was forecast to grow by 7.9% Foreign trade and payment risk

Tax policy risk: Indian tax system is heavily reliant on excise and customs duties, the tax system is complex with numerous allowances and surcharges. The government hope to consolidate all the state sale taxes in to single VAT,
labour market risk: Financial risk: Banking sector crisis, currency

Infrastructure risk: Port facilities, Road, rail

Country risk: cross border lending, monetary policy, fiscal policy,

Environmental Analysis
Environmental analysis is the process by` which strategist monitors the Environmental sectors to determine opportunities for threats to their firms.

Conducting Environmental Analysis

Identifying threats and opportunities Gathering of information about competitors intelligence Forecasting future direction of environmental changes

NEED FOR ENVIRONMENTAL ANALYSIS

Increases managerial awareness of environmental changes. Increases understanding of the context in which industries and markets functions. Increases understanding of multilateral settings;

Improves resource allocation decisions;

Facilitates risk management; Focuses attention on the primary influences on strategic changes; Acts as an early warning system to anticipate opportunities and threats and devise appropriate strategies. This analysis is a valuable mechanism for increasing strategic awareness of managers.

SWOT Analysis of Indian Economy

Weaknesses Strengths
Huge pool of labor force High percentage of cultivable land Diversified nature of the economy Availability of skilled manpower Extensive higher education system High growth rate of economy Rapid growth of IT / ITes Sector Abundance of natural resources High percentage of workforce involved in agriculture Approx a quarter of population below the poverty line High unemployment rate Inequality in prevailing socio economic conditions, rural urban divide Low productivity Huge population leading to scarcity of resources Low level of mechanization Red tapism, Bureaucracy Low literacy rates

Opportunities

Threats
High fiscal deficit Threat of government intervention in some states Growing import bill Population explosion, rate of growth of population Agriculture excessively dependent on monsoon

Scope for entry of private firms in various sectors of business Inflow of FDI Huge foreign exchange prospects in IT / ITeS Investment in R & D Area of infrastructure Huge domestic market : Opportunity for MNCs Huge agricultural resources

The Process of Environmental analysis

Environmental analysis is a challenging, time consuming and expensive affair. The analysis consists of four sequential steps:
1.

Scanning: it involves surveillance of all environmental factors and their interactions in order to - identify early signals of possible environmental change, detect environmental change already underway

2.

Monitoring: it involves tracking the environmental trends, sequences of events, or streams of activities, it frequently involves following signals or indicators unearthed during environmental scanning

3. Forecasting : is concerned with developing plausible projections of the direction, scope and intensity of environmental change 4. Assessment: it tries to answer the questions such as what are the key issues presented by the environment and what are the implications of such issues for the organisation

stages of environmental analysis

15/07/10

PORTERs FIVE FORCEs MODEL

INTRODUCTION
The Five Forces model of Porter is an outside-in business unit strategy tool that is used to make an analysis of the attractiveness (value...) of an industry structure. It captures the key elements of industry competition.

PORTERs FIVE FORCEs MODEL

Potential entrants
Threat of new entrants
Bargaining power Industry competitors of suppliers

Suppliers
Rivalry among existing firms

Buyers
Bargaining power of buyers

Threat of substitutes

Substitute products

PORTERs FIVE FORCEs MODEL

Threat of Threat of New New Entrants Entrants

Threat of New Entrants

Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements Customer Switching Costs Access to Distribution Channels Government Policy Expected Retaliation

PORTERs FIVE FORCEs MODEL

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers are likely to be powerful if:

Supplier industry is dominated by a few firms Suppliers products have few substitutes Buyer is not an important customer to supplier Suppliers product is an important input to buyers product Suppliers products are differentiated Suppliers products have high switching costs

PORTERs FIVE FORCEs MODEL

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Bargaining Power of Buyers

Buyer groups are likely to be powerful if:
Buyers are concentrated Purchase accounts for a significant fraction of suppliers sales Products are undifferentiated Buyers face few switching costs Buyer presents a credible threat of backward integration Buyer has full information Buyers compete with the supplying industry by:

* Bargaining down prices * Forcing higher quality * Playing firms off of each other

PORTERs FIVE FORCEs MODEL

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

Threat of Substitute Products

Keys to evaluate substitute products:
Products with improving price/performance tradeoffs relative to present industry products

Products with similar function limit the prices firms can charge

Example:
Electronic security systems in place of security guards Fax machines in place of overnight mail delivery

PORTERs FIVE FORCEs MODEL

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:
Using price competition
Staging advertising battles Increasing consumer warranties or service Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors

Coca-cola
Traditional competition:
Prices of Pepsi, local brands Market share Promotional actions of competition

New entrants:
New look-a-like manufacturers

Substitute products:
Fashionable new drinks, milk drinks, coffee, beer, ...

Coca-cola
Suppliers:
Price and availability of ingredients on world market Quality speed safety, traceability, flexibility of supply chain

Buyers/consumers:
High as a result of intense competition both among branded and unbranded products. Combined purchase power of shops, bars, supermarkets

Analysis
5 Forces
Rivalry among the competitor

Analysis
Reliance Retail, Aditya Birla Group , Vishal Retails, Bharti and Walmart, etc
FDI

Threat of entrants

policy not favorable for international players. Domestic conglomerates looking to start retail chains. International players looking to foray India. The bargaining power of suppliers varies depending upon the target segment. The unorganised sector has a dominant position. There are few players who have a slight edge over others on account of being established players and enjoying brand distinction. Consumers are price sensitive.. Availability of more choice. Unorganized retail

Bargaining power of supplier

Bargaining power of buyers

Threat of substitutes

Competitive Advantage
The Competitive Advantage model of Porter learns that competitive strategy is about taking offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces.

Companies can combat the pressure of the five forces and create competitive advantages.
There are 2 basics types of Competitive Advantage :
Cost leadership (low cost) Differentiation

Strengths of five forces model:

The model is strong tool for competitive analysis at industry level. It provides useful input for performing a SWOT analysis.

Limitations
Inside-out strategy is ignored (core competence) It does not cope with synergies and interdependencies within the portfolio of large corporations (parenting advantage) The environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation (disruptive innovation) Sometimes it may be possible to create completely new markets instead of selecting from existing ones (blue ocean strategy)