Unit:1 - MGT 206: Business

Environment in Nepal:
Introduction
TMC -BBA Fourth Semester-
Section ‘A’
Course Instructor- Prerana
Maharjan
  Business & its Environment (Business
Environment):
 A business firm is an open system. It gets resources from the environment
and supplies its goods and services to the environment. There are different
levels of environmental forces. Some are close and internal forces whereas
others are external forces. External forces may be related to national level,
regional level or international level. These environmental forces provide
opportunities or threats to the business community.
 Every business organization tries to grasp the available opportunities and
face the threats that emerge from the business environment. Business
organizations cannot change the external environment but they just react.
They change their internal business components (internal environment) to
grasp the external opportunities and face the external environmental
threats. It is, therefore, very important to analyze business environment to
survive and to get success for a business in its industry.
 It is, therefore, a vital role of managers to analyze business
environment so that they could pursue effective business strategy. A
business firm gets human resources, capital, technology, information,
energy, and raw materials from society. It follows government rules
and regulations, social norms and cultural values, regional treaty and
global alignment, economic rules and tax policies of the government.
Thus, a business organization is a dynamic entity(organization)
because it operates in a dynamic business environment.
 The term ‘business environment’ consists 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. While some of these
factors or forces may have direct influence over the business firm,
others may operate indirectly.
 According to Glueck and Jauch, “The environment includes factors outside
the firm which can lead to opportunities for or threats to the firm. Although
there are many factors, the most important of the sectors are socio-
economic, technological, supplier, competitors, and government.”
 According to Barry M. Richman and Melvgn Copen “Environment consists of
factors that are largely if not totally, external and beyond the control of
individual industrial enterprise and their managements. These are
essentially the ‘givers’ within which firms and their management must
operate in a specific country and they vary, often greatly, from country to
country”.
 Thus, 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.
 Types of Business Environment:
 Business Environment can be classified in
to two categories Namely:
1. Internal Environment: Internal Environment refers to the factors existing within a
business firm. These internal factors are considered to be controllable because the
enterprise has control over these factors. The main internal factors which influences
Business Decisions are as follows:
a) Culture: The values, beliefs and attitudes of the founder and top management of the
company exercises a strong influence on what the company stands for, how it does
things and what it considers important. When the value system is shared by all the
members, the organization is likely to be more successful.
b) Mission And Objectives: The Objectives of all the firms is assumed to be Profit
Maximization in the long run. But Mission is different from this narrow objective of
profit maximization. Mission is defined as the overall purpose or reason for
existence which guides and influences a firm decisions and economic activities.
c) Top Management Structure: The structure of the organization also influences the
business decisions. The composition of the board of directors, the degree of
professionalization of management and the organizational structure of a company
have a important bearing on its business decisions.
d) Power Structure: The internal power relationship between the board of
directors and the Chief Executive Officer is an important factor. The extent to
which the top management enjoys the support of shareholders and employees at
different levels, also has an important bearing on decision making.
2.External Environment: External Environment refers to the factors existing
outside a business firm. These External factors are considered to be
uncontrollable because the enterprise has No or Partial control over these factors.
Further, External Environment can be divided into two types Namely:
A. Micro (Task) Environment: Micro (Task) Environment consists of the factors
in the company's immediate environment. These factors affects the performance
of the company and its ability to serve the customers. Micro Environment consists
of the following:
a) Customers: Customers constitutes an important segment of the micro
environment. Customer is the king of the market and every business exists to
serve its customers. A business has no meaning until and unless there are
customers to serve.
b) Suppliers: Suppliers are the person who supply
various inputs such as money, raw material, fuel,
power etc. and help in the smooth conduct of
business. Further, firms should have more than one
supplier so that changes in the policies of one
supplier does not effect their production schedules.
c) Competitors: Competitors form an important part
of the Micro Environment. Business Firms compete
to capture a larger share in the market. They
constantly watch the competitors policies and
adjust their policies to gain customer confidence.
d)Company Image And Brand Equity: The image and
Brand Equity of the company plays a very important
and significant role in raising finance, forming
alliances, choosing dealers and suppliers etc.
B. Macro (General) Environment: The Macro (General) Environment consists of
the Economic and Non-Economic variables that provide opportunities and threats to
firms. This is largely uncontrollable and therefore, firms must adjust their
operations to these environmental factors. Macro Environment consists of the
following:
a) Political Environment : Political Environment mainly refers to the political
structure, ideology of the ruling government, political stability, public opinion &
government business relations. The degree of political risks existing in a country
determines the investment climate in that country.
b) Legal Environment: The legal environment refers to the frameworks of laws,
regulations & court decision intended to encourage, guide & control business
activities.
c) Economic Environment: The Economic Environment of business is largely
determined by economic system of the country. The major elements of the economic
environment are: the system of economic planning & control , fiscal, monetary,
industrial policies, the conditions prevailing (current) in agriculture, industrial &
service sectors ,etc. Poor economic conditions make the environment more complex
& manager’s job more difficult.
d) Socio-cultural Environment: Social Environment is made up of the social
institutions, class structure, desires, expectations, beliefs & customs of
people in a given society. Closely associated with social environment is
cultural environment that includes values, norms, accepted behavior
patterns of people. These elements directly influence business organizations.
e) Technological Environment: Radical developments have occurred over the
past several years in communication, information, & automation including
robotics. These developments not only presents enormous(huge)
opportunities for business organizations in terms of enhances effectiveness
but also place heavy demands on them in the ever increasing competitive
markets.
f) Global Environment: Global forces are outcomes of changes in
international relationships. International developments have their effects on
domestic business. For instance, the firms dealing with import- export
business are most affected by the changes taking place in the international
market. For eg- the increase in oil prices has far- reaching effects on all
economies & business firms.
 Environmental Analysis:
 Environmental analysis is an ongoing process of monitoring
the environment. Environmental analysis is a process by
which strategies monitor the environment to determine
opportunities for & threats to their firm/business. The main
objective of external environment analysis is to
assess(evaluate) the likely opportunities & threats arising.
 An opportunity is a condition in the general environment
that if exploited(make full use of) effectively, helps a
company achieve its strategic competitiveness.
 A threat is a condition in the general environment that may
hinder(block) a company’s efforts to achieve its strategic
competitiveness.
 Process of Environmental analysis :
 Environmental analysis is an ongoing process. It has a
certain process as mentioned below:
1. Scanning: Environmental scanning involves gathering
information from the environment to assess its nature. It
helps to identify the early signals of potential changes in the
environment. It also detects changes that are already
underway. It normally reveals incomplete, ambiguous
(not clear), unconnected data & information. Many
organizations use special software & internet for
environmental scanning.
2. Monitoring: Monitoring is auditing(examining) the
environment. It involves observation of environmental
changes to see the trend. It helps to identify the effects of
environment in terms of opportunity & threat.
3. Forecasting: Forecasting involves developing feasible
(possible) projection(forecast) of what might happen &
how quickly. It is done on the basis of changes & trends.
Forecasting is a challenging work. It assesses what is likely
to happen in future.
4. Assessing: Assessing determines the timing &
significance of the effects of environmental changes &
trends that have been identified. Assessing connects data &
information with competitive relevance(the boundaries of
competition between business). Equally important is
interpreting the data & information to determine the trend
as oppourtunity or threat for the organization.
  Methods/Techniques/Tools of Environment Analysis:

 Environmental analysis is a strategic tool. It is a process to

identify all the external and internal elements, which can
affect the organization’s performance. It enables an
organization to identify the opportunities & threats that
arise from the general environment.
 There are different techniques of Environmental Analysis.
They are:
1. PESTLEG Analysis
2. Scenario Analysis
3. Poster’s Five Forces Model
1. PESTLEG Analysis:
PESTLEG is the acronym for P=political, E=economic, S=social cultural,
T=technological, L=legal, E=environment & G= global factors. It involves the
analysis of general environment factors. These factors are uncontrollable to an
organization. They analyzed to identify the environment trend/change &
assess possible opportunities or threats.
Under PESTLEG Analysis, the following components of external environment
are analyzed:
 P= Political Environment:
 Political Structure
 Government stability
 Taxation policy
 Foreign trade policy
 Business government relations
 Social welfare policy
 E= Economic Environment:
 Monetary policy
 Fiscal policy
 Industrial & Trade policy
 Current status of agriculture, industry & trade
 Interest rate
 Money supply
 Inflation
 Unemployment
 System of economic planning & control
 S=Socio-cultural Environment:
 Social institutions
 Social class
 Social values
 Demographics
 Lifestyles changes
 Consumerism
 Level of education
 Income distribution
 Social mobility
 Attitudes to work
 T=Technological Environment:
 New discoveries & development
 Rate of technological advances
 Innovative technological platforms
 Government investment in research
 Government & industry focused technology
 Speed of technology transfer

 L=Legal Environment:
 Current legal status
 Process of law formulation & implementation
 Employment regulations
 Competitive regulations
 Health and safety regulations
 E=Environmental Components:
 Environment protection laws
 Waste disposal
 Environmental awareness
 Environmental protection groups
 Energy consumption
 G=Global Environment:
 Relevant (current situation) global market
 International political events
 Degree of regional & global integration (process with which local
market opens up to the global economy).
2. Scenario Planning:
An industry scenario(description of possible action in future) is a forecasted
description of a particular industry’s likely future. It is developed by analyzing the
probable impact of future societal forces on key groups in a particular industry.
The concept of Scenario as a forecasting technique was originated by Royal Dutch
Shell.
 Scenario Planning is a structured way for organizations to think about the
future. It is used for environmental analysis if the traditional forecasting
techniques fail to predict the changes in environment. It is also called
contingency planning(future event which is possible but cannot be predicted
with certainty).
 Scenario are the stories about how the future might unfold(develop) & affect the
business issues. The following are the likely scenarios:
 Favorable Scenario
 Probable Scenario
 Unfavorable Scenario
 Scenario Planning is developed by analyzing the probale
impacts of environmental forces to a particular industry. It
is detailed view of how the business environment of an
organization might develop in the future.
 Scenario Planning can be used to explore & learn the
future & form the corporate strategy. It helps to link the
likely future uncertainties to the decisions that are made
today. It is a planning method that works by understanding
the nature & impact of the most uncertain & important
driving forces affecting the future.
 So, it is concluded that scenarios are attempts to capture
the future for the effectiveness of strategies management.
 3. Porter’s Five Forces Model/ Analysis of Industry
Environment:

 An industry is a group of firms producing products that are close

substitutes(something that takes the place of another thing). Porter's Five
Forces Framework is a method for analyzing competition of a business.
Porter's Five Forces is a model that identifies and analyzes five competitive
forces that shape every industry and helps determine an industry's
weaknesses and strengths. Five Forces analysis is frequently used to identify
an industry's structure to determine corporate strategy. The Five Forces
model is named after Harvard Business School professor, Michael E. Porter.
 According to Michael E. Porter, an industry environment is composed of
“the threat of new entrants, power of suppliers, power of buyers, threat of
product substitutes & rivalry among competitors”. The interaction among
these five factors determine an industry’s profit potential that eventually
determines the strategies options of the firms. The five forces are also called
Porter’s Diamond.
  Scanning methods/ Techniques/Tools/ Methods of Environmental
Scanning:

 Environmental Scanning may be defined as the process by

which organizations monitor their relevant environment to
identify opportunities & threats affecting their business for the
purpose of taking strategic decisions. Environmental Scanning
involves a detail study of the environment.
 Environment Scanning is a process of obtaining information
from the environment. It is done to assess the trend of the
environment & prepare the organization accordingly.
 There are different techniques/ methods of environmental
scanning. They are discussed below:
1.Executive Opinion method:
It is also called executive judgment method. Under this
environment is forecasted on the basis of opinion & views of top
executives. A panel of these executives is formed.
2. Expert Opinion Method: under this environment forecasting is
based an opinion of outside experts or specialist. The expert have
better knowledge about market conditions & customer taste &
preferences. This method is similar to executive opinion method.
However, it uses external experts.
3. Delphi Method:
This method is the extension of expert opinion method. It involves
forming a panel of experts & questioning each member of the
panel about the environmental trend. Later, the responses are
summarized & returned to the members for assessment.
4. Extrapolating Method:
Under this method, past information is used to predict the future.
Different methods used to extrapolate(estimate) the future are
time series, trend analysis, etc.
5. Historical Analogy(comparision):
It is a judgmental forecasting technique. Under this, the
environmental trends are analyzed with the help of other trends
which are parallel to historical trend. For example: sales history of
similar product.
6. Intuitive(based on feelings rather than on facts)Reasoning:
Under this, rational(reasonable) & unbiased intuition is used for
environmental scanning. Environmental dynamism are guessed
on individual judgment.
7. Scenario Building:
Scenarios are the picture of possible future. They are built
on the basis of time ordered sequence of events that have
logical cause & effect relationship with each other.
Scenarios are built to address future contingencies.
8. Cross-impact matrix:
Under this, environmental forecasts through various
methods are combined to form an integrated description of
future. Cross-impact matrix is used to assess the internal
consistency of the forecasts.
  Use of Environmental Analysis in Strategic Management:

 Environmental Analysis is a process by which strategists monitor the

environment to determine opportunities for & threats to their firm.
Strategic Management emphasizes the monitoring & evaluating of external
opportunities & threats in light of a organization’s strengths & weakness.
Hence, it based on environmental analysis. Each step requires analysis of
the environment.
 The following are the steps of strategic management.
1. Strategic Planning: This is the first step of strategic management process.
Strategic planning is concerned with the formulation of strategy. It includes
development of objectives, mission, vision & strategy. It begins with situation
analysis: the process of finding a strategic fit between external opportunities &
internal strengths while working around external threats & internal
weaknesses. SWOT analysis serve as the base of strategic planning. Hence,
environmental analysis is always at the heart of strategic planning.
2. Strategy Implementation: this is the most crucial stage of strategic
management. The overall essence(soul) of strategic management lies in
the implementation of strategy. In this stsge, the strategies are
translated into action.
3. Strategic Control: Under this stage , organizational performances or
activities are monitored to ensure that the direction of strategy
implementation is in the right way. The assumptions about the internal
& external environment in which the current strategy is based are
reviewed & the actual performance is measured. Corrective actions are
taken if necessary so, it is an on- going process.
4. Feedback: This is the last stage of strategic management process.
Under this, information is constantly gathered from the environment to
improve the process of strategic management.
 Hence, it may be concluded that strategic management can no longer
be effective if it is not supported by proper environmental analysis.