Factors that shape the company’s strategy

Business environment refers to all those aspects of the surrounding of business enterprise which
have influence on the functioning of the business. There are two broad components or factors
that determine business environment are (1) Internal Environment factors and (2) External
Environment factors.

(I) Internal Environment factors:

Internal environment includes internal factors of the business. It includes plans and policies,
human resource, financial resource, corporate image, plant and machinery, labour-management
relationship, promoter’s vision etc. The components of internal environment are controllable.

The following are the factors of internal environment:

1. Plans & Policies: The plans and policies of the firm should be properly framed taking into
consideration the objectives and resources of the firm. Proper plans and policies help the firm to
accomplish its objectives.

2. Human Resource: The survival and success of the firm largely depends on the quality of
human resources. The social behaviour of the employees greatly affects the working of the
business. The characteristics of human resource like skill, quality, morale, commitment can
contribute to the success of the organisation.

3. Financial Resources: Capital is the lifeblood of every business. Finance relates to money. A
firm needs adequate funds to meet its working capital and fixed capital requirements. There is a
need to have proper management of working capital and fixed capital.

Financial factors like financial policies, financial status (position) and capital structure
influence the internal environment of a firm affecting its performance- If the firm enjoys
sufficient financial resource, it can spend on research and promotional activities.

4. Corporate Image: A firm should develop, maintain and enhance a good corporate image in the
minds of employees, investors, customers etc. Poor corporate image is a weakness of the firm.

5. Plant and Machinery: Plant and machinery is the internal part of the business firm. If the
machines are obsolete or outdated, they should be replaced by a new one, or that adversely
affects the business firm.

6. Labour and Management Relationship: There should be smooth labour and management
relationship. The management should understand the problems of their workers and gain
confidence in them. The labours should be motivated by providing with monetary and non-
monetary incentives (benefits).
7. Promoters vision: The promoter should have far sight vision to forecast opportunities and
threats in the business so that the opportunities are properly grabbed and threats are diffused off
in time.

(II)External Environment Factors:

The environment, which lies outside the organisation, is known as external

environment. External factors are unpredictable and uncontrollable. They are beyond the control
of the company. “In environment there are several factors which constantly bring opportunities
and threats to the business firm. It includes social, economic, technological and political
conditions”.

External environment is further classified as:

I. Micro Environment II. Macro Environment

I). Micro Environment:

Micro environment is also known as operating environment. It consists’ of

company’s immediate environment that affect its performance. It includes customers, suppliers,
intermediaries, competitors etc. The micro environment consist the elements that directly affects
the company.

1. The customers: Consumer is the king of the market. They are the centers of the business. They
are one of the most important factors in the external environment. Customer satisfaction has
become more challenging due to globalization.

2. The competitors: The company has to identify its competitor’s activities. Information must be
collected about competitors in respect of their prices, products, and promotion and distribution
strategies. World is becoming a global market. Business firm has to face tremendous competition
not only from Indian business firm but also from foreign firms. To achieve growth and success
they have to monitor various activities of their competitors.

3. The Suppliers: Suppliers supply raw material, machines, equipment’s and other supplies. The
company has to keep a watch over prices and quality of materials and machines supplied. It also
has to maintain good relations with the suppliers.

4. Society: Society affects company’s decisions. The expectation of the society from the business
is increasing. Therefore the business firm maintains public relations department to handle
complaints, grievances and suggestions from general public.
II. Macro Environment:

The macro environment consists of the larger societal factors that affect the
working of a firm. Macro environment is also known as general environment. The macro factors
are generally uncontrollable.

1. Demographic Factors: Demographic Environment relates to the human population with

reference to its size, education, sex ratio, age, occupation, income, status etc. Business deals with
people so they have to study in detail the various components of demographic environment.

2. Economic Factors: Economic environment consists of economic factors that influence the
functioning of a business unit. These factors include economic system, economic policies, trade
cycle, economic resources, gross national product, corporate profits, inflation rate, employment,
balance of payments, interest rates, consumer income etc. Economic environment is dynamic and
complex in nature

3. Technological Factors: Technology has brought about far reaching changes in the methods of
production, quality of goods, productivity, and packaging. There is a constant technological
development-taking place. The business firm must constantly monitor the changes in the
technological environment, which may have a considerable impact on the working of a business.

4. Cultural Factors: Culture involves knowledge, values, belief, morals, laws, customs, traditions
etc. Culture passes from one generation to another through institutions like family, schools, and
colleges. Business is an integral part of the social system.

5. Political Factors: The political environment in a country influences the legislations and
government rules and regulations under which a firm operates.

6. Natural Factors: Resource availability like land, water and mineral is the fundamental factor in
the development of business organisation. It includes natural resources, weather, climatic
conditions, port facilities, topographical factors such as soil, sea, rivers, rainfall etc.

7. Legal Factors: The state sets the formal rules, laws and regulations for the country’s
operational system. It creates a framework of rules and regulations within which a business has
to operate. The business should have complete knowledge of laws and policies to run the
business effectively.
Industry Analysis

An industry analysis is significant business function which is performed by business proprietors

and other management experts to evaluate the present business environment. This is considered
as effective market assessment tool designed to provide a business with an idea of the intricacy
of a particular industry. Industry analysis reviews the economic, political and market factors that
influence the way the industry develops. Major factors can include the power manipulated by
suppliers and buyers, the condition of competitors, and the possibility of new market entrants.

Industry analysis assists businesses to comprehend many economic factors of the

marketplace and how these factors may be tactfully used to gain a competitive advantage.
Although business possessors may conduct an industry analysis according to their particular
needs, a few basic standards exist to perform this important business function. Small business
owners often conduct industry analysis before starting their business. This analysis is included in
the entrepreneurs business plan that summaries specific components of the economic
marketplace. The factors that that should be analyzed in industry analysis are as follows

1. General features and basic conditions of the industry

2. Industry environment
3. Industry structure
4. Industry attractiveness
5. Industry performance
6. Industry practices
7. Emerging trends

Porter's Five Forces Analysis

The primary model to assess the industry analysis was developed by famous management
theorist, Michael E. Porter in his 1980 book Competitive Strategy. Porter's model demonstrations
that rivalry among firms in industry depends upon five forces. Main purpose of Five Forces is to
determine the attractiveness of an industry. However, the analysis also provides basis for
articulating strategy and understanding the competitive scene in which a company operates.

Components of Five forces model:

1. Industry rivalry (degree of competition among existing firms): Tough competition leads to
reduced profit potential for companies in the same industry. In competitive industry, firms have
to compete fiercely for a market share, which results in low profits. Rivalry among competitors
is tough when:
1. There are many competitors;
2. Exit barriers are high;
3. Industry of growth is slow or negative;
4. Products are not differentiated and can be easily substituted;
5. Competitors are of equal size;
6. Low customer loyalty.
2. Threat of substitutes (products or services): Availability of substitute products will limit
company’s ability to increase prices. This force in Porters model is especially threatening when
buyers can easily find substitute products with attractive prices or better quality and when buyers
can switch from one product or service to another with low price.

3. Bargaining power of buyers: Powerful consumers have a substantial impact on prices.

Consumers have power to demand high quality or low priced products. If the price of the product
is low, it directly impact in the revenue of producers. While higher quality products usually raise
production costs. In both situations, there is less profit for producers. Buyers exert strong
bargaining power when:
1. Buying in large quantities or control many access points to the final customer;
2. Only few buyers exist
3. Switching costs to other supplier are low
4. They threaten to backward integrate
5. There are many substitutes
6. Buyers are price sensitive

4. Bargaining power of suppliers: powerful suppliers can demand premium prices and limit
profit of company. Porter stated that strong bargaining power permits suppliers to sell higher
priced or low quality raw materials to their consumers. This directly affects profit of the buying
firms because it has to invest more for materials. Suppliers have strong bargaining power in
following conditions: There are few suppliers but many buyers;
1. Suppliers are large and threaten to forward integrate;
2. Few substitute raw materials exist;
3. Suppliers hold scarce resources;
4. Cost of switching raw materials is especially high.

5. Barriers to entry (threat of new entrants): It acts as a deterrent against new competitors.
This force decides how easy (or not) it is to enter a particular industry. If an industry is lucrative
and there are few barriers to enter, rivalry soon deepens. When more organizations compete for
the same market share, there is less profit. It is crucial for existing organizations to generate high
barriers to enter to prevent new entrants. Threat of new entrants is high when:
1. Low amount of capital is required to enter a market;
2. Existing companies can do little to retaliate;
3. Existing firms do not possess patents, trademarks or do not have brand reputation;
4. There is no government regulation;
5. Customer switching costs are low ;
6. There is low customer loyalty;
7. Products are nearly identical;
8. Economies of scale can be easily achieved.
The importance of industry analysis:

The basic purpose if industry analysis is to assess the relative strengths and weaknesses of an
organization relative to other players in industry. Industry analysis helps the firm the following
ways

1. Identify industry attractiveness

2. Know the competitive position
3. Environmental survey becomes complete
4. Industry analysis serves as an introduction to strategic formulation
5. Helps the firm to identify and build competitive advantage.