Business Environment

Topic 1: Social, Political and Ecological Issues

• Business is an important institution in society. Be it for the supply of goods or services, creation of employment opportunities, offer of better quality life, or contribution to the economic growth of a country, the role of business is crucial. So the first question arises in anyone’s mind is what really a business is ?

Business

• “A Business is nothing more than a person or group of persons properly organized to produce or distribute goods or services. The study of business is the study of activities involved in the production or distribution of goods and services-buying, selling, financing, personnel and the like”.

Theory Vs Practice

• Practically the above said definition is true but in theoretical sense it is incorrect.

• Before any activities can be considered in the business, there must exist both the goal of profit and the risk of loss.

Definition of Business

• Business may be defined as a “complex field of commerce and industry in which goods and services are created and distributed in the hope of profit within a framework of laws and regulations”. – K. Ashwathapa

Understanding the Business• To understand any business the critical step is to

explore all the factors related to business and properly judging its impact on the business. There are many factors and forces which have considerable impact on any business.

• All these forces come under one word called environment. Hence understanding the business means understanding its environment.

• Environment refers to all external forces which have a bearing on the functioning of business.

Business Environment• Business Environment : It refers to all external forces which

have a bearing on the functioning of the business.

• 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”.

Various segments

• Global Environment • Natural Environment • Political – Legal Environment • Economic Environment • Socio-Economic Environment • Technological Environment

India’s Business Scenario: An Overview- 2013

TOPIC RANKINGS

• DB 2013 Rank 2012 Rank Change in Rank

• Starting a Business 173 169 -4• Dealing with Construction Permits 182 183 1• Getting Electricity 105 99 -6• Registering Property 94 97 3• Getting Credit 23 23 No change• Protecting Investors 49 46 -3• Paying Taxes 152 149 -3• Trading Across Borders 127 125 -2• Enforcing Contracts 184 184 No change• Resolving Insolvency 116 109 -7

Starting Business India 2011India South Asia OECD

Procedures (No.) 12 7 5

Time (Days) 27 19 12

Cost (% of income per capita)

49.8 21.6 4.5

Paid-in Min. Capital (% of income per capita)

140.1 17.8 13.3

Source: Adopted from: World Bank, Doing Business 2013

Procedures and Cost to Start BusinessNo. Procedure Time to Complete Associated Costs

1 Obtain director identification number (DIN) on-line 1 day INR 100

2 Obtain digital signature certificate on-line 1 day INR 400 to INR 2650

3 Reserve the company name with the Registrar of Companies (ROC) on-line 2 days INR 1000

4 Pay stamp duties online, file all incorporation forms and documents online and obtain the certificate of incorporation 3-7 days INR 22,300

5 Make a seal 1 day INR 350

6 Visit an authorized franchise or agent appointed by National Securities Depository Services Limited (NSDL) or Unit Trust of India (UTI) Investors Services Ltd to obtain a Permanent Account Number (PAN) 7 days INR 94 for Fee and INR 5 for Application Form, (if not downloaded)

* 7 Obtain a tax account number for income taxes deducted at source from the Assessing Office in the Mumbai Income Tax Department 7 days, simultaneously with Procedure 6 INR 60

* 8 Register with Office of Inspector, Mumbai Shops and Establishment Act 2 days, simultaneous with procedure 7 INR 2,400 (registration fee) + 3 times registration fee for Trade Refuse Charges (INR 7,200)

* 9 Register for VAT online 10 days, simultaneous with procedure 8 INR 500 (Registration Fee) + INR 25 (Stamp Duty) for compulsory VAT registration

* 10 Register for profession tax 2 days, simultaneous with procedure 9 no charge

* 11 Register with Employees' Provident Fund Organization 12 days, simultaneous with procedure 8 no charge

* 12 Register for medical insurance (ESIC) 9 day, simultaneous with procedure 10 no charge

Dealing with Construction Permits• There are 34 different procedures under this head at

present in India:• Some of them are:

– Submit application and design plans at Building Proposal office of BMC and pay scrutiny fee [INR 36,417] [1 day]

– Obtain Intimation of Disapproval from the Building Proposal Office and pay fees [29 days, INR 1,301]

– Obtain Commencement Certificate from Building Proposal Office and pay Development Charges (INR 836,100) [ on average takes 10 days]

– Obtain permanent sewerage connection [30 days INR 50,000]

– Obtain permanent water connection [45 days INR 1,210]

Getting Electricity• Just seven procedures!• Examples:

– Submit application to Brihan Mumbai Electricity Supply and Transport Undertaking (BEST) and await site inspection [7 calendar days INR 50.0]

– Submit electrical contractor's wiring and test report and estimated amount to BEST [1 calendar day INR 45,000.0]

– Submit meter security deposit, receive external connection and electricity starts flowing [30 calendar days INR 123,444.3]

Conclusion

• Indian business environment is relatively not conducive for encouraging new businesses

• Slow processing of permits and licenses• The political, financial and economic

environments also further complicate the scenario for business

• Our businesses themselves are not very clean, and many businesses are paying fines, penalties, including three prominent private sector banks for money laundering

Business Environment

• What is, and what should be, the role of business in society?

• How should businesses best manage all of the stakeholder issues that impact them, and that they impact?

– External stakeholders (customers, government, interest groups, etc.)

– Internal stakeholders (employees, owners)

Business and Society• Business scandals, incidents

– Examples: Bernie Madoff (2008), Enron/Arthur Anderson (2001), Exxon Valdez (1989), Union Carbide - Bhopal (1984)

• Business issues– Examples: downsizing retirement pensions, environmental

pollution, product liability

• Broad societal concerns

– General feeling with much of public that business is not ethical and cannot be trusted (particularly since 2001)

Business and Society

• Business – collection of private, commercially oriented organizations

• Society – A broad group of people and other organizations, interest groups, a community, a nation

Society as Macro-environment

• Social – demographic, life style and social values

• Economic – Nature and direction of the economy in which it operates

• Political – processes for passing laws and election of officials. Interactions between firms, politics and government

• Technological – Changes in technological advancements taking place in society

Business and Stakeholder Relationships

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Special-Interest Society

• Society viewed as...

– A whole

– Subgroups by geography• Nation, state, region, city/town, neighborhood

– Subgroups by interest (Interest Groups)• Gender, race, profession, religion, etc.• Other interests (environment, health, social equity, etc.)

– Individuals

20

Special-Interest Society

• make life more complex for business and government• huge number of groups/interests • pursue their own focused agenda• are more active, intense, diverse and focused• attract a significant following• often work at cross purposes, with no unified set of goals

21

Special Interests groups…

Factors in the Social Environment

• Affluence and education

• Awareness through television and the Internet

• Revolution of rising expectations

• Entitlement mentality

• Rights movement

• Victimization philosophy

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Environmental Forces

• Business Environment• Competitive Forces • Technological Forces • Political and Legal Forces

The General Environment and Environmental Forces Affecting Organizations

Adapted from Figure 3.1

The General Environment

Cultural Forces

Political - Legal Forces

Technological Forces

Competitive Forces

Organization

Eco

syst

emP

olitical System

Demographics Economic System

3.2

The General Environment

• Sometimes called the macro-environment.

• Are external factors, such as inflation and demographics, that usually affect indirectly all or most organizations.

Factors in the General Environment

• Type of economic system and economic conditions

• Type of political system • Condition of the ecosystem• Demographics• Cultural Background

Roles of Government in Business

• In the US, the government acts as a watchdog over business

• Provides direction in areas such as:• antitrust,• monetary policy, • defense, • human rights• environmental matters

The Economic System

• The US has an economic system in which there are:

• privately controlled markets• based on supply and demand• free market competition• private contracts• profit incentives• technological advancement

The Ecosystem

• There is a renewed commitment to the environment in the US

• 1981 - 4% wanted environmental improvements

• 1997 - 80% want improvements

Environmentally-Conscious Business Practices Cut back on environmentally unsafe operations Compensate for environmentally risky endeavors Avoid confrontation with state and federal pollution control

agencies Comply early with government regulations Promote new manufacturing technologies Recycle wastes

3.3

Demographics• Characteristics of a population such as age,

race, gender, ethnic origin, and social class• determine the characteristics of work groups,

organizations, specific markets, or nations population.

• Demographics influence marketing, advertising, and human resources decisions.

• Such as the number of individuals the ages of 18 to 25

• They change all the time.

Cultural Forces

• Culture is the shared characteristics, values, and beliefs of a group that distinguishes them from another group

• Such as religion, language, and heritage

Ambiguity or unpredictability of certain factors external to an organization governmental regulations competition stability of inputs demand characteristics

e.g. Customer bargaining power

3.6

Environmental Uncertainty

Turbulent Environment

• Complex, constantly changing• Both ambiguous and unpredictable

Competitive Forces in the Task Environment

Suppliersbargaining

power

Threatof new

competitors

Buyersbargaining

power

Threat ofsubstitute

goods/services

Rivalry amongexisting firms in industry

3.9

Competitors

• Importance and Effect of Competitors– competitors are an important day-to-day

environmental force facing organizations– rivalry among competitors leads to

• price cutting• advertising promotions• enhanced customer service or warranties• improvements in product or service quality

New Entrants

• Barriers to Entry:• economies of scale

– decrease in per unit costs as volume of goods/services produced increases

• product differentiation– uniqueness in quality, price, design, brand

image, or customer service that gives a product an edge over the competition

New Entrants cont.

• capital requirements– dollars needed to finance equipment supplies,

advertising, R&D, and the like necessary to start

• government regulation– may bar or severely restrict potential new

entrants to an industry

Substitute Goods and Services

• Goods/Services– that can easily replace the firm’s goods/services– I.e. Starbucks introduced a new drink called

Frappuccino. It is a cold drink that can substitute for the more traditional hot coffee drink

Customers

• Potential Effects of Customers– they may drive down prices– push for more or higher-quality products– increase competition among sellers by

playing one against each other

Integration• Purchasing or developing related business units

– thought of as facing the customer• Forward Integration-purchasing your customer

– Why?• Backward Integration-purchasing your supplier

– Why?• Horizontal Integration-purchasing competitors

– Why?

Customers cont...

• Exhibit Bargaining Power to the Extent that:– they purchase a large volume relative to the

supplier’s total sales– the product/service represents a significant

expenditure by the customer– they pose a realistic threat of backward

integration, for example: the purchase of one or more of its suppliers

– they have readily available alternatives for the same services/products

Suppliers

• Bargaining Power of Suppliers– often controls how much they can :

• raise prices above their costs• reduce the quality of goods and services

– is increased by patents and copyrights – is increased by supplier-customer alliances

• which are advocated by total quality programs

Impact of Technology

• What is technology?– knowledge, tools, techniques, and actions

• used to transform material , information, and other inputs into finished goods and services

– plays pivotal role in creating and changing an organization’s task environment

Impact of Technology cont...

• Role in Strategy :• creates strategic options not feasible with older

technologies – approaching those of traditional large-scale

manufacturing facilities • marketing over the internet• online, real-time financial management systems

– can determine profit and loss on a daily basis• improved access to services (e.g. Banking)

Summary

• Understanding the concept and overview• Business and society• External and internal factors• Factors impacting BE