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7/31/2019 23606461 Nature of Business Environment
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Nature of Business Environment
2009
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Introduction to BusinessBusiness is the organized efforts of enterprises to supply consumers with goods and services.Businesses vary in size as measured by number of employees or by sales volume.All businesses share the same purpose to earn Profits . However, the purpose of businessgoes beyond earning profits.It is an important institution in society and the role of business is crucial.
Be it for the supply of goods and servicesCreation of job opportunitiesOffer of better quality of life
Contributing to the economic growth of the country and putting it on the global map
Scope of BusinessBusiness included all activities connected with production, trade, banking,insurance, finance, agency, advertising, packaging and numerous other relatedactivities. Businesses include all efforts to comply with legal restrictions andgovernment requirements and discharging obligations to consumers, employees,owners and to other interest groups which have stakes in business directly or indirectly.
Society cannot do without business and vice versa.
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Characteristics of Todays Business
Business
Information
Competition
Change - TransitionOpportunities
Diversification
Globalisation
Technology
Business during the 21 st Century There is a trend towards mini organizations along with large corporations. Existence of flexible, flat and team based structures Business is knowledge based. Processes have become complex. Brain power is in
great demand. Information technology will take care of all data management and networkedcomputers handle information.
Organizations have become flat. Dispersed ownership, open minded and a transparent environment is encouraged
1. Three types of diversification maybe distinguished : Concentric, horizontal andconglomerate diversification. Concentric diversification refers to the process of addingnew, but related products or services. Eg : HLL which as Liril, Pears, Rexona, Lux andLifebuoy. Horizontal diversification is adding of new, unrelated products or services for
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EnvironmentEnvironment refers to all external forces which have a bearing on thefunctioning of business. Environment are largely if not totally external,and beyond the control of individual industrial enterprises and their
management. These are essentially the givers within which firms andtheir managements must operate in a specific country and they vary,from country to country.
However, the term business environment refers to the
External Factors. The external environment has twocomponents ie business opportunities and threats to business.Simmilarly, the organisational environment has two componentsie. strengths and weaknesses of the organisation. A SWOTanalysis is thus the first step in strategy formulation
Business DecisionInternal Environment External Environment
Factors influencing Business Decision
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BusinessDecision
Internal Environment
Mission / ObjectivesManagement StructureInternal Power RelationshipPhysical Assets & facilities
Company imageHuman resourcesFinancial CapabilitiesTechnological CapabilitiesMarketing Capabilities
FinanciersSuppliersCustomersCompetitorsPublicMktg Intermediaries
Micro Environment
Economic
TechnologicalGlobalDemographicSocio-CulturalPolitical
Macro Environment
BUSINESS ENVIRONMENT
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Internal Environment
Any business has certain vision, mission and objectives and astrategy to achieve them. Formulation of strategy is defined asestablishing a proper firm-environment fit . Indeed the objectivesshould be based on an assessment of the external environmentand the organizational factors (internal environment).VisionMissionObjectivesManagement StructureHuman ResourcesFinancial FactorsCompany Image and Brand Equity
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The macro environment consists of factors which are beyond the control of the business.There is a symbiotic relationship between business and the environmental factors,environmental factors are dynamic and a particular business firm, by itself, may not be in aposition to change its environment . Macro Environment includes :
Political Environment
Economic EnvironmentTechnological EnvironmentSocio-cultural EnvironmentGlobal Environment.
Macro Environment
Micro Environment
The Micro environment consists of different types of stakeholders -
customers, employees, suppliers, marketing intermediaries, competitors. It isalso known as the Task Environment and Operating Environment and has adirect bearing on the operations of the firm. Changes in the microenvironment will directly affect and impinge on the firm's activities.
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Technological Environment
Technological is the systematic application of scientific or other organized knowledge to practical tasks.Technological environment hold new technological innovation, newproducts, the state of technology, the utilization of technology for maximum inputs and outputs, the obsolescence of technology and the
dynamic changes that frequently occur in technologies which enablefirms to get a competitive advantageTechnology reaches people through businessHelps in increased productivityBusiness needs to spend on R & D and keep up with the technologicaladvances around themTechnology leads to introduction of new products and older productsbecoming outdated and redundant.Technological advances leads to high expectations of consumers interms of qualityLeads to system complexityDemand for capital
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Political Environment
Political Environment refers to the influence exerted by the threepolitical institutions ie. legislature, executive and judiciary inshaping, directing, developing and controlling business activities.
The constitution of a country
Political OrganisationPolitical StabilityImage of the country and its leadersForeign PolicyLaws governing business
Flexibility and adaptability of lawsThe Judicial System
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Economic Environment
Economic Environment refers to all forces which have an economicimpact on Business.The economic environment consists of the demand dynamics, supplysituation, pricing factors, degree of competitiveness, and impact of profitability. It includes the fiscal policy, monetary policy and thetaxation policy, the FDI norms, the investment criterion and financingdecisions. Economic environment includes:
Growth strategyIndustry
AgricultureInfrastructureMoney and Capital Markets
Per capita and national incomePopulationNew Economic Policy
.
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Global Environment : The global environment refers to those factors which are relevant to
business, such as the WTO principles and agreements; other international conventions/ treaties / agreements / sentiments in other
countries etc. For eg hike in crude oil prices has a global impact etc.World is becoming one marketImproving qualityCompetition from MNCsCapital and technology transfersDeciding which markets to enter and what products to manufacture
Adjusting the management process
Socio-Cultural Environment:Culture creates peopleCulture and globalization
Culture determines peoples attitude to business and work.Caste systemSpirit of collectivismEducationEthics in businessSocial responsibility
Social auditCorporate governance
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External Environmental AnalysisEnvironmental Analysis has three goals:
Provides an understanding of current and potential changes taking placeEnvironmental Analysis should provide input for strategic decision making.Facilitate and lead to strategic decisions within an organization.
Environmental Analysis and diagnosis give strategists time to anticipateopportunities and to plan to take optional responses to these opportunities. Italso helps strategists to develop an early warning system to prevent threats or todevelop strategies which can turn a threat to a firms advantage. Firms whichsystematically analyse and diagnose the environment are more effective thanthose which do not.
Process of Environmental Analysis:The analysis consists of four steps:
Scanning : Detect early signals of possible environmental change and detectenvironmental change already underway.Monitoring : Purpose of monitoring is to assemble sufficient data to discernwhether certain trends are emerging, identification of the trends andidentification of areas for further scanning.Forecasting : It is concerned with developing projections of the direction, scopeand intensity of environmental change.Assessment : To determine implications for the organisations current andpotential strategy.
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Environmental Analysis and Strategic Management
Defining Business Mission and Objectives
SWOT AnalysisEnvironmental Analysis + Self Appraisal
Strategic Alternatives and Choice of Strategy
Implementation of Strategy
Evaluation and Control of Strategy13
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Competitive Structure of Industries
The competitive structure of industries is a very important businessenvironment. Identification of forces affecting the competitive dynamicsof an industry is very useful in formulation of strategies.
As per Michael Porter well known model of structural analysis of industries, the state of competitions depends on:
Porters analysis determines the competitive intensity of the industry andthe attractiveness of the market. A highly competitive industry is oneapproaching Perfect Competition whereby businesses are only able toearn normal profits.
Rivalry among firms Buyers
Substitutes
New Entrants
Suppliers
Threat of new entrants
Threat of substitutes
Bargaining powerBargaining power
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Rivalry among Existing firms:
Firms in an industry are mutually dependent competitive motives of a firm usuallyaffects others and may be retaliated. Factors influencing the intensity of rivalry are:
Number of firms and their Relative market shareState of Growth of Industry: In stagnant, declining and slow growth industries, afirm is able to increase its sales by increasing the market share.Fixed or storage costs: In case of high fixed costs, strategy of firms is to increasesales which in turn would improve on capacity utilization.Indivisibility of capacity augmentation : Where there are economies of scale,capacity increases would be in large blocks necessitating, efforts to increase salesto achieve capacity utilization norms.Product standardization, after sales service: In case of firms which havestandardized products; it is price, distribution and after sales service which becomethe distinguishing factors.Strategic stake: Rivalry becomes more intensive if the firms have high stakes inachieving success there.Exit Barrier: If exit barriers are high, firms would keep competing in the sameindustry even though it might not be very attractive.Diverse Competition: Competitors with diverse strategies make the industry highlycompetitive.Switching costs: One time costs that the buyer faces on switching from onesuppliers product to that of another ie cost of new ancillary equipment etc.Expected Retaliation
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Threat of Entry:
Potential competition tends to be high if the industry is profitable or critical and entry barriers are low. Some of the common entry barriersare:Government PolicyCost Disadvantages: Cost advantages enjoyed by established firmsmay discourage entry of new firms such as learning curve, favorablelocation etc.Product Differentiation: Characterized by brand image, customer loyaltyetc. may deter new firms from entering the market.Monopoly ElementsCapital Requirements : High capital intensive nature of the industry isan entry barrier to small firms
Threat of substitutes An industry which has close substitutes available is highly competitivein nature. Existence of close substitutes increases the propensity of consumers to switch to alternatives in response to price increases.Perceived level of product differentiation in the minds of the consumer is also a highly influential factor. 16
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Bargaining power of Buyers :Buyers can in turn also be potential competitors as they may integrate
backwards or bargain for lower costs, better quality of the product etc.The volume of purchase relative to the total sale of the seller The importance of the product to the buyer in terms of the total costExtent of standardization or differentiation of the productSwitching costsExtent of buyers information
Bargaining power of sellers:Important determinants of supplier power are the following:
Extent of concentration and domination in the supplier industry
Importance of the product to the buyer Importance of the buyer to the supplier Extent of substitutability of the productSwitching costsExtent of standardization of the productPotential for forward integration by suppliers
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SWOT AnalysisSWOT stands for Strengths, Weaknesses,Opportunities and Threats
Identification of the threats andopportunities in the external environmentand strengths and weaknesses in the internalenvironment of the firms are the cornerstoneof business policy formulation.
It is the SWOT analysis which determinesthe course of action to ensure the growth /survival of the firm.
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StrengthsStrengthsinternal to the unit; are a units resources and capabilities that canbe used as a basis for developing a competitive advantage; strength should be
realistic and not modest.
Your list of strengths should be able to answer:What are the units advantages?What does the unit do well?What relevant resources do you have access to?What do other people see as your strengths?What would you want to boast about to someone who knows nothing about thisorganization and its work?
Examples: good reputation among customers, resources, assets, people, :experience, knowledge, data, capabilitiesThink in terms of: capabilities; competitive advantages; resources, assets,people(experience, knowledge); marketing; quality; location; accreditationsqualifications, certifications; processes/systems
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Weaknesses Weaknessesinternal force that could serve as a barrier tomaintain or achieve a competitive advantage; a limitation, faultor defect of the unit; It should be truthful so that they may be overcome as quicklyas possible
Your list of weaknesses should be able to answer: What can be improved? What is done poorly? What should be avoided? What are you doing as an organization that you feel could be
done more effectively/efficiently? What is this organization NOT doing that you feel it should bedoing? If you could change one thing that would help this departmentfunction more effectively, what would you change?
Examples: gaps in capabilities, financial, deadlines, morale lack of competitive
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Opportunities Opportunitiesany favorable situation present now or inthefuture in the external environment.
Examples: unfulfilled customer need, arrival of newtechnologies, loosening of regulations, global influences,economic boom, demographic shift
Where are the good opportunities facing you? What are the interesting trends you are aware of? Think of: market developments; competitor;vulnerabilities; industry/ lifestyle trends;; geographical;partnerships
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Threats External force that could inhibit the maintenance or attainmentof acompetitive advantage; any unfavorable situation in the externalenvironment that is potentially damaging now or in the future.
Examples: shifts in consumer tastes, new regulations, political orlegislative effects, environmental effects, new technology, loss of key staff, economic downturn, demographic shifts, competitorintent; market demands; sustaining internal capability;insurmountable weaknesses; financial backing
Your list of threats should be able to answer: What obstacles do you face? What is your competition doing? Are the required specifications for your job/services changing? Is changing technology threatening your position? Do you have financial problems? Could any of your weaknesses seriously threaten your unit?
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POSITIVE/HELPFUL
to achieving thegoal
NEGATIVE/HARMFUL
to achieving thegoal
INTERNAL Origin
facts/ factors of theorganization
StrengthsThings that are good
now, maintainthem, build onthem and use as
leverage
WeaknessesThings that are bad
now, remedy,change or stopthem.
EXTERNAL Originfacts/ factors of the
environment inwhich the
organizationoperates
OpportunitiesThings that are good
for the future,prioritize them,capture them,build on themand optimize
ThreatsThings that are bad
for the future, putin plans to
manage them orcounter them
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SWOT Analysis of Indian Economy
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SWOT Analysis of Indian Economy
Strengths Huge pool of labor force High percentage of cultivable land Diversified nature of the economy
Availability of skilled manpower Extensive higher education system High growth rate of economy Rapid growth of IT / ITes Sector Abundance of natural resources
Weaknesses High percentage of workforce involved in
agriculture Approx a quarter of population below the
poverty line High unemployment rate Inequality in prevailing socio economic
conditions, rural urban divide Low productivity Huge population leading to scarcity of
resources
Low level of mechanization Red tapism, Bureaucracy Low literacy rates
Opportunities Scope for entry of private firms in various sectors
of business Inflow of FDI Huge foreign exchange prospects in IT / ITeS Investment in R & D Area of infrastructure Huge domestic market : Opportunity for MNCs Huge agricultural resources
Threats High fiscal deficit Threat of government intervention in
some states Growing import bill Population explosion, rate of growth of
population Agriculture excessively dependent on
monsoon 24
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AN ORGANIZATIONS ENVIRONMENT
Industry SectorCompetitors ,
Industry size andCharacteristics, Related
Industries
Raw MaterialsSector
Suppliers,Manufacturers,Real Estate
HumanResourcesSector
Labor Market, EmploymentAgencies, Universities, TrainingSchools, Employees in Other
Companies, UnionizationFinancial Resources Sector
Stock Markets, Banks,Savings and Loans,Private Investors
MarketSector
Customers, Clients,Potential Users of Products and Services
TechnologySector
Techniques of Production, Science,Research Centers,Automation, NewMaterials
Economic
Conditions Sector
Recession, UnemploymentRate, Inflation rate, Rate of
Investment, Economics,Growth
Government Sector
City, State, Federal Laws andRegulations, Taxes, Services,Court System, PoliticalProcesses
Socio-Cultural sector
Age, Values, Beliefs, Education,Religion, Work Ethic, Urban vs.Rural, Birth Rate
ORGANIZATION
DOMAIN
Task Environment
MacroEnvironment
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