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BUSINESS ENVIRONMENT

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

ENVRONMENT
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.

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

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

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

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 in 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

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 ENVIRONMENT
Suppliers
Customers
Competitors
Financiers
Society

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

PESTLE Analysis: Business Environmental


Analysis
It ascertains for the managers and strategy builders as to
where their market currently stands and where it will head
off in the future.
PESTLE analysis consists of components that influence
the business environment.
Each letter in the acronym denotes a set of factors that
directly or indirectly affect every industry.

P -Political factors
Political stability- changes in the form & structure of
government administration
Political organisation- ideology of ruling government;
conflicting role of public & private sector; influence of
premier groups
Business managers must understand the political
system and realities of the country in which they operate
(including the state level political environment) and also
the international political relations.

Example:
Transformation of agrarian economy into industrialised
economy during Nehruji era.
State became active in agriculture sector (subsidised
fertilisers, expansion of institutional credit); tightening of
state control over industrial finance, foreign investment,
trade when Smt. Indira Gandhi was in power.
In 1977, Janata govt came to power: Coca cola, IBM
had to leave country. All liquor cos had to close
operations.
Since 1990-91, political environment
economy increasingly being liberalised.

changed-

New economic order presented new opportunities for


business & also threat to inefficient organizations.

In an ET Opinion Poll of 50 CEOs of India Inc.,


Modi government faired well on account of:
Improved business and economic sentiment.
Improved handling of business and economic
environment.
Economic growth in the range of 6-8% in next 3
years and BSE Sensex closing higher in next 16
months (25-30k).
Raised confidence in raising capital for new
projects at reasonable cost.

E - Economic factors
Economic factors include all the determinants of an economy
and its condition.
The inflation rate, the interest rates, the monetary or fiscal
policies, the foreign exchange rates that affect imports and
exports, all these determine the direction in which an
economy might move.
Therefore businesses analyze this factor based on their
environment so as to build strategies that fall in line with all
the changes that are about to occur.

Unemployment
Unemployment is an economic factor that affects
business activity by influencing the amount of
disposable income that consumers have available, and
also by affecting wage scales.
Because unemployed people subsist on less than a full
income, they spend less money than if they were fully
employed. A high unemployment rate slows business
activity by cutting into consumer spending.
In addition, a high unemployment rate creates market
conditions where the supply of labor is greater than the
demand of businesses for labor, enabling businesses to
pay lower wages.

Interest Rates
Interest rates determine the cost of borrowing money. It
costs more to borrow at a high interest rate than at a
lower one.
Because most businesses borrow money in order to
expand, and even to finance day-to-day business
activities, high interest rates can slow the growth of
business activity. But low interest rates can increase the
risk of inflation by making capital so easily available that
it isn't worth as much.
Shrewd monetary policy involves keeping interest rates
low when it is more important to stimulate economic
growth, and raising them when there is danger of
inflation.

S- SOCIO- CULTURAL ENVIRONMENT


Made up of attitude, desires, expectations, education, beliefs &
customs of people.
Every country is different and every country has a unique
mindset. These mindsets cast an impact on the businesses
and the sales of their products and services.
The cultural implications, the gender and connected
demographics, the social lifestyles, the domestic structures; all
of these are studied by companies to understand the market
and the consumer better.

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:
Nike was subject to activist accusations
regarding the ethics of its operations in Vietnam.
Subsequently, NGOs put a lot of energy in
mobilizing consumer boycotts against Nike.
Companies have to change their product portfolio
because of cultural differences as McDonald and
KFC did when they launched their restaurant
chain in India.

T- TECHNOLOGICAL FACTORS
Refers to body of skills, knowledge & procedures for
making, using & doing useful things.
Technology changes every minute and therefore
companies need to stay connected along the way and
integrate as and when needed.
Also, these factors are analyzed to understand how the
consumers react to technological trends and how they
utilize them for their benefit.

Example:
Retailing has been transformed by the web:
Established retailers such as Walmart and
Tesco are now among the most successful
Internet companies, because they added a new
distribution channel to their traditional business
model.
FIAT was using old technology but MUL had no
option than to go for superior technology.

L- LEGAL FACTORS
Legal policies- formulation & implementation
Legislative changes occur from time to time and many of
them affect the business environment. Therefore
businesses also analyze the legal developments
happening in their environment.
Economic legislations- facilitator and/ or restrictor
Play a vital role- dictating dos & donts of business

Example:
Taxes on gas or SUVs may shift consumer demand to new
and innovative vehicles, such as hybrids or even solar
energy cars. This may even lead to an increase in the use of
the public transportation system.
The introduction of new privacy laws can make some
business models that extensively rely on customer
information without the customer's explicit accordance
illegal. Anti-spamming laws may (hopefully) wipe-out
business models based on sending out large trunks of
unsolicited mails. Regulating advertisement over mobile
phones may limit the range of possible business models in
m-commerce.

E- Environmental factors
The location of countries influence on the trades that
businesses do.
Adding to that, many climatic changes alter the trade of
industries and the way consumers react towards a certain
offering that is launched in the market.
The environmental factors include geographical location,
the climate, weather and other such factors that are not just
limited to climatic conditions. These in particular affect the
agri-businesses, farming sectors etc.

DEMOGRAPHIC ENVIRONMENT
(a) Size & growth rate of population
determines supply of human resources.
Creates demand.
Affects salary and wage structure.

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: PTS high

(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

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.

5 FORCES ACTING UPON BUSINESS


Technological change
Social environment
Legal environment
Competitive forces
Customer demand

CONCLUSION
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.
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.

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