Buseness environment and ethics lesson 01

LESSON 7Business Environment: The Concept 1 BUSINESS ENVIRONMENT: THE CONCEPT CONTENTS 1.0 Aims and Objectives 1.1 Introduction 1.2 Characteristics of Environment 1.3 Types of Enviro

5 Business Environment: The Concept

UNIT I

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Business Environment and Ethics

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Business Environment and Ethics

LESSON 7

Business Environment: The Concept

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BUSINESS ENVIRONMENT: THE CONCEPT

CONTENTS

1.0 Aims and Objectives

1.1 Introduction

1.2 Characteristics of Environment

1.3 Types of Environment

1.3.1 Internal Environment

1.3.2 Macro Environment

1.3.3 Micro Environment

1.4 Environmental Analysis

1.4.1 Collection of Information

1.5 Let us Sum up

1.6 Lesson End Activities

1.7 Keywords

1.8 Questions for Discussion

1.9 Suggested Readings

1.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to:

z Understand the concept of business environment

z Know various types of business environment and its impact on business

z Know how to analyze the environment

z Know how does environment influenced the business decision-making

1.1 INTRODUCTION

Environment literally means the surroundings, external objects, influences or

circumstances under which someone or something exists The environment of

any organization is “the aggregate of all conditions, events and influences that

surround and affect it.” Davis K, The Challenge of Business, (New York: McGraw

Hill, 1975), P43

Environment refers to all external forces which have a bearing on the functioning of

business Jauch and Gluecke has define environment in following manner “The

environment includes factors outside the firm which can lead to opportunities or a

threat to the firm Although there are many factors the most important of the sectors

are socio- economic, technological, supplier, competitor and govt.”

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Business Environment and Ethics 1.2 CHARACTERISTICS OF ENVIRONMENT

1 Environment is complex: The environment consists of a number of factors,

events, conditions and influences arising from different sources All these interact with each other to create entirely new sets of influences

2 Environment is dynamic: The environment is constantly changing in nature Due

to many and varied influences operating there is dynamism in the environment causing it to change its shape and character continually

3 Environment is multi-faceted: The same environment trend can have different

effects on different industries As the GATS is an opportunity for some companies and threat for some companies

4 Environment has a far reaching impact: The environment has far reaching

impact on the organization The growth and profitability of an organization depends critically on the environment in which it exists

5 The impact of an environmental trend often differs significantly for different

firm with in the same industry: Any change in environment may have different

impacts on different firms operating in the same industry As in pharmaceuticals industry in India the Impact of new patent law will different on research based pharmacy companies as Ranbaxy and Dr Reddy's Lab and will be different on small pharmacy companies

6 The general environment usually holds both opportunities for, and threat to,

expansion: Development in general environment often provides opportunities for

expansion in terms of both products, and markets For example liberalization in

1991 opened lot of opportunities for companies and HLL took the advantage of opportunities and acquire many companies like Lakme, TOMCO, KISSAN etc Changes in environment also pose serious threat to entire industry As liberalization of poses serious threat of new entrants in the form of MNC to Indian firms

7 Development in the general environment change competitive battle line:

General environmental changes may alter the boundaries of an industry and change the nature of its competition This has been the case with deregulation in the telecom sector In India Where since the deregulation every second year new competitor emerges old foes become friends, M&A take place with every new regulation

8 Many developments in the general environment are difficult to predict with any

degree of accuracy, while others are readily predictable: Macroeconomic

development such as interest rate fluctuations, the rate of inflation, and exchange rate variations are extremely difficult to predict on a medium – or long-term basis

On the other hand some trends as on demographic, income level, age can be forecast

The process by which organization monitor their relevant environment to identify opportunities and threats affecting their business is known as environmental scanning Factors to be considered for environmental scanning: The external environment consists of variety of factors we can explain them as follows:

1 Events are important and specific occurrences taking place in different environment sector

9 Business Environment: The Concept

2 Trends are the general tendencies or courses of action along which events takes

places

3 Issues are the current concerns that arise in responses to events and trends

4 Expectations are the demands made by interested groups in the light of their

concern for issues

Check Your Progress 1

Define Environment

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………

1.3 TYPES OF ENVIRONMENT

Environment can be divided into three broad categories:

z Internal Environment

z Macro Environment (General Environment)

z Micro Environment (Relevant Environment, Competitive Environment)

1.3.1 Internal Environment

Internal environment is internal to the organization and it is controllable In brief

important internal factors are as follows:

1 Culture and Value System: Organizational culture can be viewed as a system of

shared values and believes that shape a company’ behavioral norms A value is an

enduring preference for a mode of conduct or an end – state The value systems of

founders have a great and lasting impact on the value system of organization

Value system not only influences the operations and behavior it also influences

the choice of business

2 Mission and Objectives: The business domain of the company The mission and

objectives of the company guide priorities, direction, of development, business

philosophy, and business policy

3 Management Structure and Nature: Structure is the way in which the tasks and

sub tasks are related Structure is about the hierarchical relationship, span of

management relationship between different functional areas Structure of top

management, pattern of share holding etc

4 Human Resource: It deals with factors like manpower planning, recruitment and

selection, and development, compensation, communication, and appraisal

Besides this internal environment includes corporate resources, production/ operation

of goods and services, finance and accounting system and methods, marketing and

distribution

1.3.2 Macro Environment

Macro/ General Environment consists of factors external to the industry that may have

significant impact on the firm’s strategies Here we will look at six broad dimensions:

Demographic, Socio-cultural, political/legal, technological, economic and global

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Business Environment and Ethics

Political/

Legal

Technological

Business

Figure 1.1: Dimensions in General Environment

1 Political Environment: It is the political environment of the country which

decides the fortune of the business in a country After 1917 revolution in USSR suddenly a political change transform the whole equation of business In Indian in

1977 Janta government came in power and because of this Coca Cola and IBM have to leave the country Because of Janta government all liquor company have

to close their operations After the change in the regime in the USSR in late 1980s and early 1990s the whole equation of business changed in Russia Recently when P.V Narsimha Rao came in power and new economic policy changed the whole definition of business in India on the one hand it gave a bulk of new opportunities for business on the other hand it also brought threat for inefficient organization Not only political philosophy but also political stability has a significance importance More stable will be the political environment of country the more conducive will be the environment for business Not only stableness but also the consensus among various political parties on key issues also have a significant importance

2 Regulatory and Legal Environment: Political environment decides the legal and

regulatory environment of country Regulatory environment plays a vital role by telling dos and don’ts to business Every country has its legal environment In India we have companies act which governs companies, MRTP act which restricts monopoly, there are various laws regarding shares, consumer protection act, environment laws and recent development in WTO and implementation of GATS which resulted in the implementation of international law regarding Patent, import export law, licensing etc has drastic impact on business and the future of organizations

Once an NRI, Lord Swaraj Paul, a British citizen, tried to takeover Escorts then Nandas approached govt to save their company then a new law came into force which restrict any NRI to purchase the share of an Indian company and Escorts was saved

3 Demographic: It is Demographic environment which decides the all the

marketing mix for the organization Structure of demographic decides type of product as in India lot of research is going on to reduce the cost of product and launce products at cheapest possible as 1 Rs sachet of shampoo or 5Rs ice-cream

11 Business Environment: The Concept

cone It is demography which decides the pricing, promotion and distribution

strategy India’s 70% population is leaving in villages and of this 70% major part

is youth that’s why every business house is launching new products specifically

for rural market ITC launched its unique and ambitious programme called

e-chaupal targeted at rural market

4 Socio Culture: Socio culture variable like the beliefs, value system, attitudes of

people, their demographic composition have a major impact on their personality

and behavior style The conspectus of needs and the pattern of consumers’

preferences have undergone a change in 1990s This change has led to the

production of more cars, refrigerators, air conditioners and other articles which

were at one time considered to be ostentatious and luxurious Not only this socio

culture decides the preference of consumer even in India itself, company's

launched products in south and north are many times different because of changes

in preference Companies have to change their product portfolio because of

cultural preferences as Macdonald and KFC did when they launched their

restaurant chain in India

5 Technological: Technological forces present wide range of opportunities and

threats which have to be accounted for in the process of business strategy

formulation Technological advancement may dramatically affect “organization’s

products, service, markets, suppliers, distributor’s competitors, customers,

manufacturing process, marketing practices, financial composition, and

competitive position.” Some of the important factors that influences operating in

the technological environment are as follows:

™ Sources of technology, like company sources, external source, and foreign

sources, cost of technology acquisition, collaboration in and transfer of

technology

™ Rate of change in technology, rate of obsolesce

™ Impact of technology on human being, the man machine system, and the

environmental effect of technology

™ Communication and infrastructural technology in management

In fact technology is today a decisive factor And from FMCG to Microprocessor

industry every body is investing heavily on technology Level of technology of

consumer also influences the decisions As organizations have to modify the

product according to the level of technology of the target costumer as in

developing nations any complex household machine, which needs programming,

will not work

6 Global Environment: The international environment consist of all those factors

that operates at the transnational, cross cultural, an across the border level which

have an impact on the business of an organization World is today a global village

World is getting closer and closer as far as business is concern For the sake of

business countries are burying their grievances and are developing economic

relationship Erstwhile hard poles as America and Russia are today goods friends,

China and India is coming closer, India have signed bilateral treaty with Sri

Lanka, India is developing close economic relationship with South Africa and

Brazil, India is planning to develop a road network with South East Asia, India is

close ally of ASIAN, India is a signatory of WTO which is multilateral trade

agreement among more than 100 nations India is in a process of laying down a

gas pipeline from Iran to India through its archrival Pakistan All this is just a

glimpse of International environment Every new bilateral and multilateral

agreement opens new vistas for business and also gives new threat in the form of

global competition

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Business Environment and Ethics 7 Economic Environment: The economic environment consists of macro level

factors related to the means of production and distribution of wealth, which have

an impact on the business of an organization The economic structure whether it is socialist, mixed or capitalist, its stage whether its developing or developed, economic policies such as foreign trade policy, industrial policy, fiscal policy, GDP growth rate, policy of licensing, monetary policy, development of financial institutions, development of money and stock market, extent of globalization all have a drastic impact on business As slight change in monetary policy can release 1000crore of rupees in economy which result in decrease in interest rate, which further increases the investment and inflation too Banks lending rate decides the level of investment in any country Higher the interest rate lower the level of investment In most industrialized nations like USA this interest rate is between 4%-6% on the other hand in India in 1991 PLR (prime lending rate) was 17%-18% which was reduced to 8%-10% by 2000 because of change in economic policy

8 National Competitive Advantage: Despite globalization number of industries are

clustered in specific and small number of countries As many of the most successful computer and biotechnology firms are based in USA, many of the successful chemical and engineering industry is based in Germany, many of the successful electronics industry is based on Japan Many of the successful call centers are situated in India, many of the customized software companies are clustered in India This suggest that in nation in which a company is based may have an important bearing on the competitive position of that company in the global market place

Firm Strategy, Structure, and Rivalry

Factor Endowment Local Demand Condition

Relating and Supporting Industries

Figure 1.2: Michael Porter’s International Competitiveness Model

In a study of national competitive advantage Michael Porter identified four attributes

of a national or country – specific environment that have an important impact on the global competitiveness of companies located within that nation

1 Factor Endowment: A nation’s position in factors of production such as skilled

labor, capital, technology or the infrastructure necessary to compete in a given industry

2 Demand Condition: The nature of home demand for the industry’s product and

service

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3 Relating and Supporting Industry: The presence and absence in a nation of

supplier industries and related industries that is internationally competitive

4 Firm Strategy, Structure and Rivalry: The condition in the nation governing how

companies are created, organized and managed and the nature of domestic rivalry

Check Your Progress 2

What is macro environment? What are the broad dimensions of macro

environment?

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1.3.3 Micro Environment

Microenvironment or competitive environment refers to the environment, which an

organization faces in its specific arena This arena may be an industry, or it may be

what is referred to as strategic group Besides looking at primary demand and supply

factors, the firms examine state of competition it faces Because it also determines that

whether it remains in same or will start new business All the business decision that is

new business, pricing, distribution channel, promotion strategy, product portfolio etc

depends upon to extent upon the competitive position of the firm Like every new

entrant in the glucose biscuit segment have to study and consider the marketing mix

strategy of existing players as Britttania, Parle, Priyagold etc., before deciding its

marketing mix

Professor Michael Porter of the Harvard Business School has convincingly

demonstrated the state of competition in and industry is a composite of five

competitive forces

The Five Forces of Competition

According to Michael porter five forces of competition are:

1 The rivalry among sellers in the industry (threat of competitors)

2 The potential entry of new competitor (the threat of new entrant)

3 The market attempts of companies in other industries to win customers over to

their own substitutes products (threat of substitute)

4 The competitive pressure of stemming from supplier-seller collaboration and

bargaining (bargain power of supplier)

5 The competitive pressure stemming from seller-buyer collaboration and

bargaining (bargain power of buyer)

Threat of Substitutes

Figure 1.3: Michael Porter Model of Five Forces

Bargain power

of Supplier

Bargain power

of Buyer

Threat of New Entrant

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Business Environment and Ethics Threat of New Entrant

A new entrant in an industry represent a competitive threat to the established firms, sometimes called the incumbents The entrants add new production capacity and bring substantial resources that were not previously required for success in the industry There are various entry barriers which hinders the entry of new entry This barrier are challenge for a new entrant and a protective shield for the established player The barrier are:

1 Economies of Scale:Existing large firms enjoy low cost per unit They have enough room to reduce price as they may taking high profits or they may be selling product at such a low price that new player couldn’t produce it at that cost as it might be producing small quantity

2 Cost disadvantage independent of scale: Besides economies of scale existing

firm have other many cost advantages as proprietary product knowledge, such

as a patent, favorable access to raw material, favorable location, lowering borrowing cost and government subsidies etc

3 Learning and Experience Curve: Established companies an advantage of

learning curve Because of this learning curve established firm are in a better position as they better skilled and equipped human resource

4 Product Differentiation: It differences in physical or perceived characteristics

make an incumbent’s product unique in the eyes of the consumer, new entrant must overcame the resulting brand loyalty

5 Capital requirement: It is said the offender must have three times power than

that of defender Thus offender required capital not only to establish new business but also to compete from established firms Even the cost of capital

is higher for a new firm as lenders hesitate to lend to lend new people

6 Switching Cost: Sometimes the costs (Physical, Psychological and financial)

incurred in switching from one supplier to another supplier This also resists the customer to go for new vendor

7 Access to Distribution: The middleman is reluctant to deal with the product

which is new to market It is more critical in industrial and international market as there are few middle man and who usually prefer only establish products

Government and Regulatory Environment

Government policies as license, permit, broadcasting regulations, liquor policies, anti monopoly policies like in India MRTP and in America Anti trust law, etc also work

as barrier for new entrant

1 Bargain Power of Supplier:Suppliers have little or no bargain power when there are many suppliers and supply exceeds demand and supplier competes with each other to grab the order On the other hand bargain power is very high when in question is of high technology and supplier have an expertise, or supplier is working at economies of scale so having a significant cost advantage, or supplier regular augment the product in interest of consumer, or supplier also finance the buyer, sometime supplier also increase its bargain power buy advertising its product directly to end consumer As INTEL even being an industrial product it advertise its processor heavily among end consumer and thus created as brand value among end use, the result of this was that before buying computer ask for

“s Pentium Inside” and this increases the bargain power of supplier that is supplier

2 Bargain Power of Buyer: Today we are leaving in market oriented economy, where consumer is king Buyer enjoys as significant bargain power when sellers are many and buyers are few or when production capacity exceeds the demand