MODULE 2

What is Business Environment?

• Every business organization operates in a distinctive environment, as it cannot exist in
isolation. Such an environment influence business and gets affected by its activities.

• As evident, a business organization can not exist a vacuum. It needs people, natural
resources, place and other material things to exist. The sum of all these factors and
forces is called the business environment.

• Generally, the term ‘business environment’ connotes external forces, factors and
institutions that are beyond the control of the business, and they affect the functioning
of a business enterprise.

• These include customers, competitors, suppliers, government, and the social, political,
legal and technological factors etc. along with environmental factors.
BE Contd.
Definitions:
• Business Environment means a collection of all individuals, entities and other factors,
which may or may not be under the control of the organization, but can affect its
performance, profitability, growth and even survival.

• Business environment may be defined as the total surroundings, which have a direct or
indirect bearing on the functioning of business.

• It may also be defined as the set of external factors, such as economic factors, social
factors, political and legal factors, demographic factors, technical factors etc., which are
uncontrollable in nature and affects the business decisions of a firm.
Features
• Dynamic: The environment in which the business operates changes continuously because there
is a wide variety of factors that exist in the environment, causing it to change its shape and
character.
• Complex: There are many forces, events and conditions that constitute business environment,
arising from various sources. So, it is a bit difficult to understand the relative influence of a
particular factor, on the operation of the organization.
• Uncertain: Uncertainty is an inherent characteristic of business environment because no one
can predict what is going to happen in future.
• Multi-faceted: A single change in the business environment, can be viewed differently by
different observers because their perceptions vary as per their understanding of different
dimensions.
• Far-reaching Impact: The survival, growth and profitability, of a business enterprise, depends
largely on the environment in which it exists. A small change in the environment has a far-
reaching impact on the organization in different ways.
• Relative: Business environment is relative since it varies from one location to another or from
one industry or business to another.
 Importance
• Determining Opportunities and Threats: The interaction between the business and its
environment would identify opportunities for and threats to the business. It helps the
business enterprises for meeting the challenges successfully.

• Giving Direction for Growth: The interaction with the environment leads to opening up new
frontiers of growth for the business firms. It enables the business to identify the areas for
growth and expansion of their activities.

• 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.
Importance contd.
• Image Building: Environmental understanding helps the business organizations in
improving their image by showing their sensitivity to the environment within which they
are working.

• Meeting Competition: It helps the firms to analyze the competitors’ strategies and
formulate their own strategies accordingly.

• Identifying Firm’s Strength and Weakness: Business environment helps to identify the
individual strengths and weaknesses in view of the technological and global
developments.
Components
• Business Environment is broadly classified, into two categories:

• Internal Environment: The factors which exist within the organization, providing strength
or causing weakness to the organization, comes under internal environment:
• Value System
• Vision and Mission/Objectives
• Corporate/Organizational Culture
• Human Resources
• Labor Union
• Physical Assets
• Profit/Cash Flow/ Financial Strength
 Components
• External Environment consists of those factors which provide opportunity or pose threats to the
business.
• Micro-Environment: The immediate periphery of the business that has a continuous and direct
impact on it is called Micro-Environment.
• It includes suppliers, customers, competitors, market, intermediaries, etc. which are specific to
the business.

• Macro-Environment: Macro Environment, is one such environment that influences the

functioning and performance of every business organization, in general.
• It comprises of demographic, socio-cultural, legal, political, technological, and global
environment.
Micro-Environment
• The micro-environment is also known as the task environment and operating
environment because the micro environmental forces have a direct bearing on the
operations of the firm.
• The micro-environment consist of the actors in the company’s immediate environment
that affect the performance of the company and its decision-making. These include the
suppliers, marketing intermediaries, competitors, customers and the public.”
• Suppliers: An important force in the micro-environment of a company is the suppliers,
i.e., those who supply the inputs like raw materials and components to the company.
• Competitors: The ones who are having a direct competition in terms of gaining
advantage, larger market share and bigger customer base.
Micro-Environment Contd.
• Customers: The major task of a business is to create and sustain customers. A business
exists only because of its customers.
• The choice of customer segments should be made by considering a number of factors
including the relative profitability, dependability, stability of demand, growth
prospects and the extent of competition.
• Marketing Intermediaries: The marketing intermediaries include middlemen such as
agents and merchants that help the company find customers or close sales with
them.
• The marketing intermediaries are vital links between the company and the final
consumers .
• Financiers: A financier is a person, company, or government that provides money for
projects or businesses.
• Along with financing capabilities of the company, their policies and strategies, attitudes
towards risk, ability to provide non-financial assistance etc. are very important.
Macro Environment
• Macro environment is also known as General environment and Remote environment.
Macro factors are generally more uncontrollable than micro-environment factors.
• When the macro factors become uncontrollable , the success of company depends upon
its adaptability to the environment.
• Some of the macro environment factors are discussed below:
• Economic Environment: I. Economic Condition II. Economic Policy III. Economic System
• Non-Economic Environment:
I. Socia-cultural Environment
II. Political Environment
III. Legal Environment
IV. Technological Environment
V. Demographic Environmental
VI. Natural Environment
VII. International Environment
Macro Env. Contd.
• Economic Environment: The main factors that affect the economic environment are:
• Economic Conditions: The economic conditions of a nation refer to a set of economic factors
that have great influence on business organizations and their operations.
• These include gross domestic product, per capita income, markets for goods and services,
availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital
market etc.
• Economic Policies: All business activities and operations are directly influenced by the
economic policies framed by the government from time to time. Some of the important
economic policies are:
• Industrial policy
• Fiscal policy
• Monetary policy
• Foreign investment policy
• Export-Import policy (EXIM policy)
• Economic Systems: The world economy is primarily governed by three types of economic
systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy.
• India has adopted the mixed economy system which implies co-existence of public sector and
private sector.
Macro Env. Contd.
• Non-Economic Environment: The various elements of non-economic environment are as
follow:
• Social Environment: The social environment consists of the social values; concern for
social problems like protection of environment against pollution, providing employment
opportunities, health care for the aged and old, consumerism, that is, indulging in fair
trade practices to satisfy human wants.

• Political Environment: This includes the political system, the government policies and
attitude towards the business community and the unionism.
• All these aspects have a bearing on the strategies adopted by the business firms. The
stability of the government also influences business and related activities to a great
extent.
Macro Env. Contd.
• Legal Environment: This refers to set of laws, regulations, which influence the business
organizations and their operations. Every business organization has to obey, and work within
the framework of the law.
• The important legislations that concern the business enterprises include:
• Companies Act, 1956
• Foreign Exchange Management Act, 1999
• The Factories Act, 1948
• Industrial Disputes Act, 1972
• Payment of Gratuity Act, 1972
• Prevention of Food Adulteration Act, 1954
• Trade Marks Act, 1999
• Bureau of Indian Standards Act, 1986
• Consumer Protection Act, 1986
• Competition Act, 2002
Macro Env. Contd.
• Technological Environment: Technological environment include the methods, techniques
and approaches adopted for production of goods and services and its distribution. The
varying technological environments of different countries affect the designing of
products.
• For example, in USA and many other countries electrical appliances are designed for 110
volts. But when these are made for India, they have to be of 220 volts. Or 4G to 5G
network etc.

• Demographic Environment: This refers to the size, density, distribution and growth rate of
population. All these factors have a direct bearing on the demand for various goods and
services.
• For example, a country where population rate is high and children constitute a large
section of population, then there is more demand for baby products.
Macro Env. Contd.
• Natural Environment: The natural environment includes geographical and ecological
factors that influence the business operations. These factors include the availability of
natural resources, weather and climatic condition, location aspect, etc.
• Business is greatly influenced by the nature of natural environment. For example, sugar
factories are set up only at those places where sugarcane can be grown.
• Further, government’s policies to maintain ecological balance, conservation of natural
resources etc. put additional responsibility on the business sector.
Internal Environment
• The internal environment is the environment that has a direct impact on the business.
These are generally controllable because the company has control over these factors.
• It can alter or modify such factors as its personnel, physical facilities, and organization and
functional areas like marketing etc. to suit the environment.
• The important internal factors which have a bearing on the strategy and other decisions
of internal organization are as follows:
• Value System: The value system of the founders and those at the helm of affairs has
important bearing on the choice of business, the mission and the objectives of the
organization, business policies and practices.
• Mission & Vision and Objectives: Vision means the ability to think about the future with
imagination and wisdom. Vision is an important factor in achieving the objectives of the
organization. The mission is the medium through which the objectives are achieved.
Internal Env. Contd.
• Management Structure and Nature: The structure of the organization also influences the
business decisions. The organizational structure like the composition of board of directors
, influences the decisions of business as they are internal factors.
• Internal Power Relationships: The relationship among the three levels of the organization
also influences on the business.
• Human Resource: The human resource is the important factor for any organization as it
contributes to the strength and weakness of any organization. The human resource in any
organization must have characteristics like skills, quality, high morale, commitment
towards the work, attitude, etc.
• Company Image: The image of the company in the outside market has the impact on the
internal environment of the company.
• It helps in raising the finance, making joint ventures, other alliances, expansions and
acquisitions, entering sale and purchase contracts, launching new products, etc.
Environmental Factors in Strategic Planning
• For any business to grow and prosper, managers of the business must be able to
anticipate, recognize and deal with change in the internal and external environment.
• Change is a certainty, and for this reason business managers must actively engage in a
process that identifies change and modifies business activity to take best advantage of
change. That process is strategic planning.
• Strategy is effective only if it is flexible. The environment is changing, and the strategy
which is suitable for companies today may bring threat tomorrow.
• Marketers can not believe in strategy only and ignore other forces which are always
changing.
• A stern strategy is useless, because the strategy is based on prediction, but in fact, no one
can predict future precisely.
• So, strategy should be flexible and change with the real environment.
Env. and Strategy contd.
• PEST analysis or PESTLE (Political, Economic, Social, Technological, Legal and
Environmental) or similar approaches to macro-level environment scanning can be useful
in keeping a firm alert to what is happening in the world.
• One drawback or danger with continuous scanning and analysis of such a wide range of
external influences is costly and may result in information overload.
• One prerequisite for effective environmental analysis is to distinguish the vital from
merely important and understanding the basic principles of business-
 Profit by providing and creating value for customers; the resources required from
suppliers which would transform into value creation; intensity of competition.
• Thus, the core of firm’s business environment if formed by its relationships with three
sets of players: CUSTOMERS, SUPPLIERS, and COMPETITIORS which forms the Industry
Environment.
From Env. Analysis to Industry Analysis
• Macro Level factors such as economic trends, changes in demographic structure or social and
political trends are important for strategy formulation.
• These macro-level factors are critical determinants of threats and opportunities a company
will face in future.
• But even more important is to understand and study how these more general environmental
factors affect the firm's industry environment.
• The profits earned or the sustainability of a firm in an industry is determined by three
factors:
 The value of products to customers.
 The intensity of competition.
 The bargaining power of industry members.
 Industry Analysis
• Industry analysis is a tool that facilitates a company's understanding of its position relative to
other companies that produce similar products or services.
• Understanding the forces at work in the overall industry is an important component of
effective strategic planning.
• The firm's proximate environment is the industry environment and hence the environmental
analysis now will focus on the firm's industry surroundings.
• Industry analysis is relevant both to corporate-level and business-level strategy.
• Corporate level is concerned with deciding which industries the firm should be engaged in and
how it should allocate the resources among them. Such decisions require assessment of the
attractiveness of different industries in terms of their profit potential.
• Business level is concerned with establishing competitive advantage by analyzing customer
needs and preferences and the way in which firms compete to serve the customers- key
success factors.
Porter’s Five Forces of Competition Framework
• A Five Forces analysis can help companies assess industry attractiveness, how trends will affect
industry competition, which industries a company should compete in—and how companies can
position themselves for success.
5 Forces contd.
• Porter's Five Forces Analysis is an important tool for understanding the forces that shape
competition within an industry. It is also useful for helping you to adjust your strategy to
suit your competitive environment, and to improve your potential profit.
• It works by looking at the strength of five important forces that affect competition:
• Supplier Power: the ability of suppliers to drive up the prices of your inputs.
• Buyer Power: the strength of your customers to drive down your prices.
• Competitive Rivalry: the strength of competition in the industry.
• The Threat of Substitution: the extent to which different products and services can be
used in place of your own.
• The Threat of New Entry: the ease with which new competitors can enter the market if
they see that you are making good profits (and then drive your prices down).
Rivalry between Established Competitors
• The first of the five forces refers to the number of competitors and their ability to
undercut a company.
• The larger the number of competitors, along with the number of equivalent products and
services they offer, the lesser the power of a company.
• Suppliers and buyers seek out a company's competition if they are able to offer a better
deal or lower prices.
• Conversely, when competitive rivalry is low, a company has greater power to charge
higher prices and set the terms of deals to achieve higher sales and profits.
Bargaining Power of Buyers

• Firms in an industry compete in two types of markets: markets for inputs and market for
outputs.
• In input markets, firms purchase raw materials, components along with financial and labor
services whereas in the market for outputs firms sell their goods and services to customers
(who may be distributors, consumers, or other manufacturers).
• In both the markets transactions create value for buyers as well as sellers and how this value is
shared between them in terms of profitability depends on their relative bargaining power.
• The strength of buying power that firms face from their customers depends on two set of
factors:
 Buyers Price Sensitivity
 Relative Bargaining Power
Bargaining Power of Suppliers
• In Porter’s five forces, supplier power refers to the pressure suppliers can exert
on businesses by raising prices, lowering quality, or reducing availability of their products.
• The idea is that the bargaining power of the supplier in an industry affects the competitive
environment for the buyer and influences the buyer’s ability to achieve profitability.
• Strong suppliers can pressure buyers by raising prices, lowering product quality, and
reducing product availability.
• Furthermore, a strong supplier can make an industry more competitive and
decrease profit potential for the buyer.
• On the other hand, a weak supplier, one who is at the mercy of the buyer in terms
of quality and price, makes an industry less competitive and increases profit potential for the
buyer.
Bargaining Power of Supplier Contd.
• Because raw material, semi- finished goods and components are often commodities supplied
by small companies to large manufacturers, therefore the suppliers lack bargaining power.
• Hence, commodity suppliers often seek to boost their bargaining power by cartelization (e.g.,
OPEC, the international Coffee Organization and farmers’ marketing co-operatives).
• Whereas the suppliers of complex technically sophisticated components may be able to exert
considerable bargaining power (the dismal profitability of personal computer industry may be
attributed to the power exercised by the suppliers of key-components (processors, disk-drives,
LCD screens etc.) and the dominant supplier of operating system (Microsoft).
Threat of Entry (New Entrant)
• The Threat of New Entrants, one of the forces in Porter’s Five Forces industry analysis
framework, refers to the threat that new competitors pose to current players within an
industry.
• It is one of the forces that shape the competitive landscape of an industry and that helps
determine the attractiveness of an industry.
• The Threat of New Entrants exerts a significant influence on the ability of current
companies to generate a profit.
• When new competitors enters an industry offering the same products or services, a
company’s competitive position will be at risk.
• The Threat of New Entrants depends on the barriers to entry which refers to the existence
of high costs or obstacles that can deter new competitors from entering the industry.
• A barrier to entry is any advantage that established firms have over new entrants.
Threat contd.
The principles sources of barriers to entry are:
• Capital Requirements
• Economies of Scale.
• Absolute cost advantage
• Product differentiation.
• Access to channels of distribution.
• Government and legal barriers.
• Retaliation.
Substitutes
• The last of the five forces focuses on substitutes. Substitute goods or services that can be
used in place of a company's products or services pose a threat.
• The price that customers are willing to pay for a product depends on the availability of
substitute products.
• Companies that produce goods or services for which there are no close substitutes will have
more power to increase prices and lock in favorable terms.
• When close substitutes are available, customers will have the option to forgo buying a
company's product, and a company's power can be weakened.
• The absence of close substitute for products as in the case of gasoline or cigarettes means
that customers are comparatively insensitive to price.
 Internal Analysis (Analyzing Resources and Capabilities)

Analyzing the resources and First, how resources can deliver

capabilities of an organization involves superior profits in private companies Second, which resources and
not only exploring the role and and provide the best services in capabilities deliver competitive
contribution of the main resources, publicly owned organizations – called advantage to the organization and
but also developing an understanding the delivery of value added in how they can be improved over time.
of two main issues: strategy;

The value-added route explores how

The competitive advantage route
the organisation takes goods from its
The resource and capabilities analysis attempts to find the special resources
suppliers and turns them into finished
therefore proceeds along two parallel that enable the organisation to
goods and services that are then sold
and interconnected routes: value compete how and why some
to its customers: essentially, adding
added and sustainable competitive resources deliver sustainable
value to the inputs from its suppliers is
advantage. competitive advantage is crucial to
fundamental to the role of every
strategy development.
organisation.
Analyzing Res. and Cap. contd.

• The resources of an organization are those assets that deliver value addition in the
organization.
• The capabilities of an organization are those management skills, routines and leadership that
deploy, share and generate value from the resources of the organization.
• Analyzing the resources and capabilities of an organization has a dual purpose: to identify
where value is added in the organization and to explore and enhance the competitive
advantage of the organization's resources.
• During the 1990’s ideas concerning the role of resources and capabilities as the principal basis
for firm strategy and the primary source of profitability coalesced into what has become known
as the resource-based view of the firm.
Definition
• Tangible resources are the physical resources of the organization that contribute to its value
addition.
• E.g., Plant and equipment at the German chemical giant Bayer can clearly be identified and
valued. The location of McDonald’s restaurants on busy highways, rather than obscure
secondary roads, is clearly a valuable and tangible resource.
• Intangible resources are those resources that have no physical presence but represent real
benefit to the organization, like brand names, service levels and technology.
• E.g., The Mars Company (USA) had a brand name that not only worked in chocolate but was
extended into ice cream. The Sharp Corporation ( Japan) has a knowledge of flat-screen
technology that has allowed the company to develop a strong presence globally in the
computer and television liquid crystal display market.
• Such resources are typically grounded in the history of the organization and have accumulated
over time.
Definition Contd.
• Human Resources comprises the skills and productive effort offered by an organization’s
employees. Human resources do not appear on the firm’s balance sheet- the simple reason
that firm does not own them rather it purchases their services under employment contracts.
• Organizations devote considerable effort to appraising their human resources both at the hiring
stage and as a part of performance reviews and career planning.
• The skills and motivation level of the Human Resources does have an impact on the
profitability, productivity and strategy of a firm.
• The ability of employees to harmonize their efforts and integrate their separate skills depend
not only on their interpersonal skills but also on the organizational context (culture).
Definition Cont.
• Organizational capabilities are the skills, routines, management and leadership of the
organization.
• Having tangible and intangible resources is not enough: the organization must also be able to
deploy and share these resources, to link various parts of the organization together and to co-
ordinate the many activities effectively across the organization.
• In strict definitional terms, this resource is part of number 2, intangible resources.
• However, it is identified separately because of its importance and complexity in human
organizations.
• Competitive advantage arises because some organizations have more organizational
capabilities than others.
• We can see an example of organizational capability at the Toyota Motor Corporation (Japan).
This company’s Toyota Production System has become legendary for its organization to deliver
low-cost, lean manufacturing and also to develop new car models faster than its rivals.
• The company does this by a series of unique company processes that have been developed
over the years and that remain better developed in this company than its rivals.
Organizational Capabilities
• Resources are not productive on their own. A brain surgeon is close to useless without a
radiologist, anesthetist, nurses, surgical instruments, imaging equipment, and a host of other
resources.
• To perform a task, a team of resources must work together. An organizational capability is a
“firm’s capacity to deploy resources for a desired end result.”
• To identify a firm’s capabilities, we need to have some basis for classifying and disaggregating
its activities. Two approaches are commonly used:
• A functional analysis identifies organizational capabilities in relation to each of the principal
functional areas of the firm.
• A value chain analysis separates the activities of the firm into a sequential chain. Michael
Porter’s representation of the value chain distinguishes between primary activities (those
involved with the transformation of inputs and interface with the customer) and support
activities.
 Value Chain
• A value chain is a combination of the systems a company or organization uses to make money.
• That is, a value chain is made up of various subsystems that are used to create products or
services. This includes the process from start to finish.
Porter’s Value Chain Primary Activities
• Inbound Logistics: Inbound logistics include the receiving, warehousing, and inventory control of
a company's raw materials. This also covers all relationships with suppliers.
• Operations: Operations include procedures for converting raw materials into a finished product or
service. This includes changing all inputs to ready them as outputs.
• Outbound Logistics: All activities to distribute a final product to a consumer are considered
outbound logistics. This includes delivery of the product but also includes storage and distribution
systems and can be external or internal.
• Marketing and Sales: Strategies to enhance visibility and target appropriate customers—such as
advertising, promotion, and pricing—are included in marketing and sales. Basically, these is all
activities that help convince a consumer to purchase a company’s product or service.
• Services: This includes activities to maintain products and enhance consumer experience—
customer service, maintenance, repair, refund, and exchange.
 Secondary Activities
• Procurement: Procurement is the acquisition of inputs, or resources, for the firm. This is how a
company obtains raw materials; thus, it includes finding and negotiating prices with suppliers
and vendors. This relates heavily to the inbound logistics primary activity.
• Human Resource Management: Hiring and retaining employees who will fulfill business
strategy, as well as help design, market, and sell the product.
• Overall, managing employees is useful for all primary activities, where employees and effective
hiring are needed for marketing, logistics, and operations, among others.
• Infrastructure: Infrastructure covers a company's support systems and the functions that allow
it to maintain operations (management, planning, finance, accounting, legal etc.).
• Technological Development: Technological development is used during research and
development and can include designing and developing manufacturing techniques and
automating processes. This includes equipment, hardware, software, procedures, and technical
knowledge.
Benchmarking
• Benchmarking is the process of identifying, understanding and adapting outstanding practices
from organizations anywhere in the world to help your organization improve its performance.
• Benchmarking is a strategy tool used to compare the performance of the business processes
and products with the best performances of other companies inside and outside the industry.
• Benchmarking is the search for industry best practices that lead to superior performance.
• Benchmarking offers a systematic framework and methodology for identifying functions and
processes and then comparing their performance with other companies.
Types
• There are different types of benchmarking that the managers can use out of which the identified 3
major types:
• Strategic benchmarking- Managers use this type of benchmarking to identify the best way to
compete in the market. During the process, the companies identify the winning strategies (usually
outside their own industry) that successful companies use and apply them to their own strategic
process. It is also common to compare the strategic goals in order to spot new strategic choices.
• Performance benchmarking- It is concerned with comparing your company’s products and services.
The tool mainly focuses on product and service quality, features, price, speed, reliability, design and
customer satisfaction, but it can measure anything that has the measurable metrics, including
processes.
• Performance benchmarking determines how strong our products and services are compared to our
competition.
• Process benchmarking- It requires to look at other companies that engage in similar activities and to
identify the best practices that can be applied to your own processes in order to improve them.
• Process benchmarking is a separate type of benchmarking, but it usually derives from performance
benchmarking. This is because companies first identify the weak competing points of their products
or services and then focus on the key processes to eliminate those weaknesses.