OVERVIEW OF BUSINESS ENVIRONMENT
1.BUSINESS ENVIRONMENT DEFINED
 All those internal & external factors which affect the function
and performance of firm and its decision making particularly
strategies.
 In a broad sense, business environment includes internal and
external factors.
1.1 Business Ecology
 Refers to the interplay between internal and external
environment
 Internal environment anlyis involves two factos-strengths and
weaknesses.
 External environment includes analysis of two factorsopportunities and threats
Schematic representation
Business
Internal environment
Decision
External
environment
Business decision depends on effective interplay of internal & external
environment
SWOT analysis





An interplay of internal and external environment implies a SWOT
analysis
The key elements in a SWOT analysis are
Strengths- what are my key strengths or core competence. Internal analysis
Weakness:
What are my major weaknesses
Opportunities- opportunities available for growth
ThreatsWhat are the growth inhibiting factors
external analysis
The firm needs to identify its core competence, say human resources,
scale advantage, strategic location etc, weakness, like, attrition etc,
weak supply links , opportunities for growth like organic route(own
expansion) or inorganic (acquisitions) and threats like competitors,
regualtory regimes, geopolitical tensions etc.
Types of environment- in detail





Internal environment defined:
Internal factors are regarded as controllable factors. This refer to
factors which are within the control of the firm and can be altered.
For instance, the rate of attrition. HR policies etc.
External environment –(Micro & macro environment)
These are factors which are outside the firm’s control and is
difficult to alter. For instance, economic factors, socio-cultural
factors, geo-political factors,
Further divided into micro & macro environment.
Micro environment refers to those external factors which have a
direct and immediate impact on the firm, such as suppliers and
distributors. Also known as task environment or operating
environment.
Macro environment refers to those factors which affect the indstry
generally such as socio politcal and demographic factors.
INTERANL ENVIRONMENT
 These include the value system of the organisation, its vision
and mission, strategies etc.
 Vision & mission statements are an integral part and are used
to communicate the strategies and desires of the firm to the
stakeholders. Also communicates business domain of the
company, priorities, directions, business philosophy etc.
 Management structure & nature: The organizational structure,
composition of Board of Directors, extent of professionalism
of management are also important factors. Quality of Board is
a determining factor.
• recent issues in this regard- PSBs- focus on Board
competence, splitting Chairman & MD posts.
• Internal power relations-amount of support from employeesHR-quality of human relations- skill levels• Brand equity is important while raising equity. For instance
AAA rated corporates have an advantage in raising low cost
finance
INTERNAL ENVIRONMENT CONTD….
Other factors
 Physical assets and facilities like the technology, production capacity,
logistics etc.
 R& D and technological capabilities
 Marketing resources, quality of marketing team, brand equity etc
 Financial factors like financial policies, financial position, capital
structure etc.
EXTERNAL ENVIRONMENT
1. Micro environment:
This consists of factors which affect the company’s immediate
environment such as suppliers, customers, marketing
intermediaries, competitors etc. Micro environment has the
following constituents.
1. Suppliers: An important source is suppliers, or those who
supply inputs and raw materials to the company. Uncertainty
regarding supply leads to high inventories
For instance, factories in India maintain stocks for 3-4 months
and imported stocks for 9 months as against an average of a
few hours to 2 weeks in Japan. Many companies resort to
vertical integration to solve this problem ie establishing
captive capacities- good vendor management is essential.
SMEs face this problem. For efficient supply chain
management companies resort to relationship marketing
EXTERNAL ENVIRONMENT CONTD..
2. Customers:
Customer is the king, that should be the motto. The emphasis should
be caveat vendittor’ rather than ‘caveat emptor’Caeat venditor means
sellers beware, In a competitive amrket, poor quality would be
punished. Corproates should also take care to diversify customer base.
3. Competitors:
This is a widely defined term and not restricted to other firms
supplying same product but also include all industries competing for
the customers’ discretionary income. We may loosely define
monopolistic competition as the real competition existing in the world
market. This may be called desire competition and is usually found in
countries with limited disposable income.
Competition among alternative product categories offering similar
level of utility is termed generic competition. As in pharma industry.
External environment contd
Product competition: This implies the choice as to which particular
format is to be chosen. For instance a choice between black and white
and color TVs.
Brand competition: This implies the choice as to which brand to
choose from among competing brands.
4. Marketing intermediaries: This include other firms that aid the
concerned firms in marketing and distributing their produce to the
final buyer. These include middlemen, warehousing firms,
transportation firms, media agencies, advertising agencies, financial
intermediaries etc. They are the vital link between the company and
final consumer.
5. Financiers: They are another important factor.
6. Public groups/pressure groups are other agents. They may include
Citizen Forums, media groups, NGOs etc. However, not all pressure
groups are bad and some can be used to disseminate useful
information about the company.
MACRO ENVIRONMENT
• Macro environment also known as general or remote
environment refer to factors which affect the firm in general.
Macro environment is generally more uncontrollable than
micro environment and the company has top adapt to the
environment to be successful.
• Some of the important macro environmental factors are
1. Economic environment
2. Political and regulatory environment
3. Social/cultural environment
4. Demographic environment
5. Technological environment
6. Global environment
MACRO ENVIRONMENT CONTD
1. Economic environment:
This include performnce of global financial systems suchn as
the U.S, European Union, China etc. For instance, subdued
and muted growth in these regions adversely impacts India’s
exports with concomitant impact on other areas.
2. Political/regulatory environment
Policies pursued by various regimes impact domestic
corporations. For instance, the U.S immigration Bill and cap
on visas has the potential to adversely impact IT companies.
3. Social/cultural environment also has an impact. The sicla
value system and culture impact corporates. For instance, Mc
Donalds’ find it difficult to penetrate Chennai since there is a
strong favour for South Indian dishes
MACRO ENVIRONMENT CONTD
4. Demographic environment: This is a major factor. In the
present age, every company ahs to design [products that suit
customer demographics. The tastes and aspirations of
customers in different demographics segments vary and
products have to be attuned to suit those needs.
5. Technological environment: Keeping abreast with technology
is of utmost importance. In the present er, technology is
changing very fast. A company which does not keep updated
with latest technological developments will be at a loss.
6. Global environment: This is an extremely important variable.
Variosu developments in the global sphere such as rules
framed by WTO, bilateral treaties entered into by nations etc
profoundly impact global environment
India’s recent stance at WTO regarding food subsidies.
COMPETITIVE STRUCTURE OF INDUSTRIES
The sate of competition can be explained using Michael
Porters’five forces model. They are
1. Rivalry among existing firms
2. Threat of new entrants
3. Threat of substitutes
4. Bargaining power of suppliers
5. Bargaining power of buyers
Some of the common entry barriers are the following
1. Government policy- a good example is the situation before
and after liberalization
2. Economies of scale- This is size advantage and threatens
entry
3. Cost advantage, both due to economies of scale and also due
to other factors such as proprietary know how.
COMPETITIVE STRUCTURE OF INDUSTRIES
4. Product differentiation characterized by brand image,
customer loyalty, product attributes etc.
5. Monopoly power; The MRTP being replaced by CCI has
reduced this barrier to a certain extent.
6. Capital requirements: High capital intensive nature of the
industry.
Porters model in detail
1. Rivalry among existing companies: factors influencing rivalry
among existing companies Are the following.
 No of firms and their relative market share
 State of industry growth
 Fixed and storage costs
 High exit barriers leading to enhanced competition
 Diversity of competitors
2.
2. Threat of substitutes
Substitutes limit the pricing power and potential returns by
imposing a ceiling on the price level. The earlier instance of
monopolistic competition is a good example for this. Substitutes
might be close or perfect substitutes though perfect substitutes
are not in practice.
3. Bargaining power of buyers: By virtue of their bargaining
power, buyers can force changes in price levels. Major factors
impacting buyers’ bargaining power are the following.
1.
2.
3.
4.
5.
Volume of purchase relative to the total sale
Importance of the product to the buyer
Degree of standardisation or differentiation
Switching costs
Buyers’ profits ( low buyer profits forces price down)
Bargaining power of suppliers
1. Extent of domination in the supplier industry
2. Importance of the product to the buyer
3. Importance of the buyer to the supplier
4. Substitutabiloity of the product
5. Switching costs
6. Extent of differentiation or standardisation
STRATEGIC GROUPS
• Strategic groups
These are groups of firms within an industry following the
same or similar set of rules within an industry. These group
help point out the differences among firms within an industry.
Some time each firms may be a strategic group. In the U.S for
eg, there are two strategic groups in pharma industry. One
manufacturing patented drugs focusing on R&D and the other
on generic products that is off patented drugs. In India , for
instance, there are both organized and unorganized players in
various market segments and within each of these categories
there may be strategic groups.
Implications of strategic groups
1. The concept has implications for industry analysis and
identification of opportunities an d threats. A company’s
competitors are firms within the same strategic group.
2. The nature and intensity of competition and business
prospects vary from one strategic group to another.
3. High mobility barriers ensure profitability of firms in the
group are high.
4. If mobility barriers change, firms in one strategy group might
migrate to another strategy group and this can even change
the very nature of a strategy group
5. The competitive standing of different strategy group would
be different with respect to each of the five competitive
forces. For instance, patented drugs has less threat from new
entrants.
Limitation of Porters Five Forces model
The model did not initially recognized the impact of
innovation. However, Porter himself recognized it at a later
stage. For instance, he says that after innovation, a new system
can emerge and ultimately it can again settle down . This
period when there is a disruption created due to innovation is
termed as punctuated equilibrium. Thus, there is an unfreezing
and refreezing process.
Competitor analysis encompasses goals , strategies, capabilities and
perceptions (Porter) . Competitor analysis is important for the
formation of the right strategies. It seeks to find answers to certain
basic questions such as
1. Who are the competitors
2. What are the current strategies of the competitors
3. What are their future goals and likely strategies?
4. What drives the competitor
5. Where is he vulnerable
6. How competitors respond to others strategies?
An analysis of these forces will help formulate the competitor
response profile.
Future goals: Analysis of future goals help to identify the future
strategies and whether they re satisfied with the current position.
 Knowledge of competitor goals may help to reaction to strategic
changes
 Future goals of the parent and the business unit needs to be
examined.
It is also essential to understand
1. The competitors assumptions about itself
2. The competitors assumptions about the industry and other
companies.
3. Identification of the current strategy of competitor is a very
useful element in competitor analysis.
Value chain:
A firms value chain is an important determinant of competitor
advantage. Value is the amount customer pays a firm. A firm
must strive to create value for buyers that exceed the cost of
doing so.
There are two types of value activities-primary and support
Primary activities include
1. Inbound logistics
2. Operations (processing etc)
3. Marketing and sales
4. Services
Support activities include
1. Procurement
2. Technology development
3. Human resource management
4. Firm infrastructure
Structural analysis
Purpose of structural analysis is to diagonise the competitive
forces and to identify the strengths and weakness of the firm
vis-à-vis the industry and help formulate and effective strategy
Structural analysis enables the firm to answer the following
questions such as
1. Howa re the entry barriers?
2. Threat of substitutes
3. Nature of supplier power
4. Power of buyers
5. SWOT analysis of established competitors
ENVIRONMENTAL ANALYSIS AND STRATEGIC
MANAGEMENT
Strategic management defined: Strategic management is defined as
the set of decisions and actions that lead to the development of an
effective strategy to help achieve corporate objectives
Strategic management involves the decision making and activities
which
1. Have wide ramifications
2. Have a long time perspective and which
3. Use critical resources towards perceived opportunities and threats
Elements in strategic management
1. Formulation of mission and objectives: Mission and objectives
define the philosophy, scope and task of an organization. Objectives
must be appropriate to the environment. It should answer two
questions- what is the business and what should be business be and if
the two are different then there is need to reorient.
2. SWOT analysis-whether the company ahs the competence to survive
in the environment.
Liberalization of indian economy has provided great impotence to
strategic management. New forms of competition has emerged.
Changes in business environment might change the scenario. For
instance, US, which once used to export electronic goods now
imports the same from Japan and Korea due to lack of copmparative
advantage.
Strategic alternatives
A company may be facd with severasl alternatives such as
1. Should they be involved in the same line of business?
2. If it continues, should it do so through organic or inorganic
mode?
3. Should it diversify or grow by vertical integration etc
A company wishing to penetrate foreign market has the followig
alternatives
1. Manufacture at home and export
2. Manufacturig in areas such as EEZ or SEZ
3. Do the entire manufacturing abroad
4. Manufacture at home and assemble abroad
5. Contract manufacturing and do only marketing
6. Establish a JV abroad
In a multi unit business, formulation of strategies are essential.
There are 3 levels of strategies
1. Corporate level strategy which is the master strategy aimed at
the organization as a whole
2. SBU level strategy which is aimed at various business units
3. Functional level strategy: Effectiveness of business strategy
depends on its translation into functions such as R&D,
4. Implementation in involves mobilization and deployment of
resources
Evaluation of strategy is essential. A strategy m,ay fail because of
the following
. Improper implementation
Environmental changes
Inappropriate strategy
Strategy management
Evaluation &
control
Mission
Objectives
Implementa
tion
SWOT
analysis
Choice of
strategy
Strategic
alternativess