CHAPTER 1: BUSINESS ENVIRONMENT: CONCEPT AND SCOPE

Under the guidance of: Dr. Kshamanidhi Adabar

Introduction
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A business organisation does not exists in a vaccum. It is in fact dependent on external environment. It is an open system as it affects and is affected by outside events and factors which make up the external environment. Apart from these, business is also affected from the forces which are inside the business organisation. Thus, business

environment consists of all those external and internal factors that have a bearing on the business. The relation of a business and
environment can be better understood from the input-output model of business system. The task of management is to receive inputs from external factors, convert them into outputs which is then sold in external environment

FIGURE 1.1 Business System: Input-Output Model

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MANAGEMENT

INPUTS

TRANSFORMATION PROCESS

OUTPUT

EXTERNAL ENVIRONMENT

External Environment
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It is consists of those factors that affects a business enterprise from outside. External environment is generally classified into two broad forms:

MICRO ENVIRONMENT MACRO ENVIRONMENT

External Micro Environment

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External Micro Environment cont

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Suppliers of inputs: An important factor in the external environment

of a firm are the suppliers of its inputs such as raw materials and components and the firm should ensure that it should have regular supply of inputs such as raw materials. To ensure regular supply inputs some firms adopt a strategy of back-ward integration and set up captive production plants for producing raw materials themselves. Customers: The people who buy and use a firms product & services are an important part of external micro-environment. Since sales is a critical for a firms survival and growth, it is necessary to keep the customers satisfied.

External Micro Environment cont

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Marketing Intermediaries: In a firms external environment marketing

intermediaries plays an essential role of selling and distribution of its products to the final buyers. They are responsible for stocking and transporting goods from production site to their destination, that is, ultimate buyers. Competitors: Business firms compete with each other not only for sale of their products but also in other areas. Completion may also be of different types: Absolute monopoly (like public utilities) Non-price competition (Coca-Cola and Pepsi) Brand competition (Arial and Surf washing powder) Desire competition (manufactures of cars, televisions, etc.)

External Micro Environment cont

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Publics: According to Philip Kotler, Public is any group that has a actual or potential interest in or impact on companys ability to achieve its objective.
For example: a consumer protection firm in Delhi headed by Sunita Narain came out with an amazing fact that soft drinks like Coca-Cola, Pepsi, Limca, etc. had a higher contains of pesticides which posed threats to human health and life. This produced a good deal of adverse effect on sale of these products in 2003 04.

External Macro Environment

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External Macro Environment cont

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Economic Environment: Economic environment includes the type of

economic system that exists in the economy, the nature and structure of economy, the face of business cycle, the fiscal, monitory and financial policies of government, foreign trade and investment policies of government. This economic policies of government presents both the opportunities and threats. Social and Cultural Environment: Members of a society wields important influence over business firms. People these days do not accepts the activities of business firms without question. Activities of business firms may harm the physical environment and impose heavy social costs.

External Macro Environment cont

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Political and Legal Environment: Business are closely related to the

government. The political philosophy of the government wields a great influence over business policies. Besides, it requires that working of the private sector were to be controlled by a suitable industrial policies of government. Industrial Regulation Act 1951 Industrial Policy Resolution 1956 Foreign Ex-change Regulation Act (FERA) Monopolistic and Restrictive Practices Act (MRTP)

External Macro Environment cont

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Technological Environment: It affects the success of firms and the

need for technological advancement cannot be ignored. The nature of technology used for production of goods and services is an important factor responsible for the success of a business firm. The firms which use outdated technologies cannot compete globally. Therefore, technological development plays a vital role in enhancing the competitive strength of business firms. Demographic Environment: It is also important for business firms as it determines the choice of technology by them. It includes the size and growth of population, life expectancy of the people, rural-urban distribution of population, educational level of labour force.

External Macro Environment cont

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Natural environment: is the ultimate course of many inputs such as raw materials ,

energy which business firms use in their productive activity . Natural environment which includes geographical and ecological factors such as materials , water and forest resources etc are all highly significant of for various business activity .natural environment also effects demands for goods. For example: In regions where there is a high temp. in summer there is a high demand for dessert coolers, air conditioners, etc. Ecological Effects: The efforts by environmentalists and international organisations such as World Bank, the people and the government have now became conscious of the adverse effects of depletion of exhaustible natural resources and pollution of environment by business activity. So govt. imposes additional responsibilities and costs for the firm and it is socially desirable that these costs are borne by the business firms if we want sustainable economic growth.

Figure 1.2 & 1.3 (combined)

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Supplier, Customers, Publics, Marketing, Competitors, etc

Economic, Political, Social, Natural, Demographic, Technological

External factors of a business firm

Internal Environment
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Internal environment includes such factors as:

Value system Mission and Objectives Organisation structure Corporate Culture & Style of Functioning of top Management Quality of Human Resources Labour Unions Physical Resources and Technological Capabilities

Internal Environment cont

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Value System: The value system of an organisation means the ethical

beliefs that guides the organisation in achieving its mission and objectives. The value system of an organisation also determines its behaviour towards its employees. The value system of an organisation makes an important contribution to its success and prestige in the world of business. Mission and Objective: The objective of all firms is assumed to be maximisation of long-term profits. But mission is different from its narrow objective of profit maximisation. Mission is defined as the overall purpose or reason for its existance"which guides its business decisions and economic activities.

to become a research based international pharma companyhas been the mission of Ranbaxy Labs. of India.

Internal Environment cont

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Organisation Structure: It means such things as composition of

board of directors, the no. of independent directors, the extent of professional management and shareholding pattern. An efficient working of a business organisation requires that its organisation structure should be conductive to quick decision making and delays can cast a good deal to the business. Therefore, the managerial capability of directors is of crucial importance for the functioning of a business and achieving its overall mission and objectives.

Internal Environment cont

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Corporate Culture & Style of Functioning of Top Management: It is an

important factor for determining the internal environment of a company. It is generally consider as: Closed and Threatening: In this type of culture the business decisions are taken by top level managers, while middle and work level managers did not contribute in business decision making. As a result, in lower level of managers and workers there is no sense of belongingness to the company. Open and Participatory: In this the business decisions are taken at lower levels of management, and top management have high level of trust and confidence in the subordinates. Free communication between top level and lower level managers is a rule in this type of corporate culture.

Internal Environment cont

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Quality of Human Resources: Quality of employees of a firm is an

important factor of internal environment of a firm. The success of a business depends to a great extent on the skills, capabilities, attitudes, and commitment of its employees. Therefore, for efficient management of HR employees are divided into different groups and manager may pay little attention on the technical details of the job done by a group and encourage group corporation. Labour Unions: The other factor determining the internal environment of the firm. Unions collectively bargain with top level regarding wages, working conditions, etc.. Smooth working of a business requires that there should be a good relations between management and union.

Internal Environment cont

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Physical Resources and Technological Capabilities: Physical

resources like plant and equipments, and technological capabilities of a firm determines its competitive strength which an important factor determining its efficiency and unit cost of production. It is important to note that rapid technical progress, especially unprecedented growth of information technology in recent years has increased the relative importance of intellectual capital and HR as compared to physical resources of the company.

Figure 1.4 Internal Environment Factors

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Business Environment and Management Strategy

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Management strategy is defined as the set of decisions and actions adopted to achieve the corporate objectives. From evaluation and scanning of external environment, the management can identify the opportunities and threats presented by the external environment and strength and weaknesses of the firm as revealed by its internal environment. This analysis is generally called SWOT Analysis:

S (strength) O (opportunity) W (weaknesses) T (threats)

The environment may present many opportunities for its growth but it may not be able to use it to its advantage due to internal weakness. Thus, business environment present both oppoptunity and threats for the firm. These opportunities and threats of business environment have to be scanned and evaluated in the light of the internal factors. The economic reforms aimed at liberalisation and globalisation of the Indian economy have changed the business environment for the Indian firms. As a results, domestic competition has increased as well as Indian firms face threats from the imported products.

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Business Environment and Management Strategy cont

Strategic Management
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The strategic management is concerned with the determination, given the business environment it confronts, of long term goals and objective these goals.

Strategic Management Process

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Deciding about the Mission of the Organization

Setting corporate Level Objective

Impleme ntation of corporate Strategy

Scanning and Evaluation of the Business Environment

Formulat ing Corporat e Strategy

THANK YOU
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Presentation by: (Group 01) Amit Fogla (124205) Anuj Naik (124211) Sanket Bajaj (124253)