Business environment 1 st module mba Management

MODULE -1

BUSINESS ENVIRONMENT

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Business Environment

• Learning objectives:


Environmental scanning-meaning,nature and scope

Economic and non-economic environment

Interaction between internal and external environments

Overview of political, socio-cultural, legal technological

Global environment


Business Environment What is Business? Business is an activity which involves buying and selling of goods & services. Modern business covers a complex field of industry and commerce which

involve activities related to both production and distribution. These activities on the one hand satisfy societal need and desires and on the

other hand bring profits to business firms. All the business activities are normally motivated by profits, in case , any of

these activities is carried out by some organization for the purpose other than profit seeking, it cannot be justifiably considered as business.



What are the contribution from business?

Economic growth

creates employment opportunities

Provides all kinds of goods and services

which we need for consumption


NATURE OF MODERN BUSINESS

Large size

Oligopolistic character

Diversification

Global reach of modern business

Technological orientation

Change

Government control


NATURE OF MODERN BUSINESS.

• Business that matters today is large in size. • Indian companies in terms of revenues, profits, assets and

stockholders equity are relatively small as compared to the companies in developed countries.

• Reliance industries • Hindustan Lever • Telco • Larsen and Toubro • Tata Motors • Maruti Udyog • Hero Honda


Nature of Modern Business

Only Four companies figure in the Fortune list of 2003.

• Indian Oil • Bharat Petroleum • Hindustan petroleum • Reliance industries Most of the fortune 500 companies are located in the USA – Biggest capitalist economy, 189 of the worlds largest Co’s belong to US Japan - second largest with 104 of the Fortune 500 Europe – Western Europe holds 138 of the worlds largest companies.


Nature of Modern Business.

Present day business is Oligopolistic in its nature.

Small No. of firms selling a homogeneous /differentiated

product. Interdependence among the sellers.

Any change in its price & sales or in the quality of its

product, or any other variable whose value under is

control is likely to evoke retaliation from other other firms

in the same line of business.


Nature of modern of business DIVERSIFICATION:

• Today not many corporate confine their activities to production of a

single commodity.

• Some business firms prefer related products to their existing production. This is called concentric diversification.

Ex: Maruti Udyog

• Adding new unrelated products or services for existing customers is

known as conglomerate diversification.

• Ex: JK Group has interest in textiles, engineering, Computers

•



• Big business houses usually expand their activity by establishing new companies which undertake production of unrelated new products or services. This is conglomerate diversification.

• Ex: TATA’s

• However, diversification may not always contribute to growth of a business enterprise.

In the recessionary phase, it is quite risky to aspire for

growth by going for unplanned diversification.


Nature of modern business In India some big companies including DCM, Britannia, ITC and Nelco

did not benefit from diversification. Companies lacking resources and managerial expertise do not foray

into new business. In some of the developed countries even some of the business giants

have preferred takeover of companies operating in their own lines of production

Even in the Indian markets some of the business giants have preferred

takeover of companies in their own areas. Ex: Coco-cola , for example has taken Parle Soft Drinks, Honda has taken over Kinetic Honda Whirlpool has taken over Kelvinator Refrigerators.


Nature of modern business

Technology Orientation:

Modern business is technology oriented. People expect that the quality of products should improve overtime and the real cost.

All this can be accomplished by the business if It pays attention to

sophistication of technology.

Modern companies regard technological research strategic to their

future, They carry out their R & D activities very close to their

headquarters.


Nature of Modern Business Change: Today a business firm clearly needs to move faster if the fear of

irrevalance is not to become a reality.

A modern firm must be vigilant all the time and be ready for change.

Improvement in quality, packaging or product design is not sufficient to retain customers, the firm should promptly introduce new products and create demand for them.

The business through its innovative moves can always

Create synthetic wants and thus find space to produce new goods

To satisfy them.


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Nature of Modern Business

Government control: Since the late 1980’s role of the government in both developed and underdeveloped economies has diminished. Advantage of Government in business is required to correct market failure manifested in the form of monopoly & pollution. Government through monetary & fiscal regulation attempt to create stable business conditions

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Environment by definition is something external of an individual or an organization.

Therefore in strict sense, business environment refers to an external factors which have a direct or indirect bearing on the activities of business.

Certain aspects of both internal and external environment pose a threat to business, other aspects provide opportunities for business growth.


ENVIRONMENTAL SCANNING

• What do you mean by Environmental scanning?

• It is the process of monitoring & collecting the information about the various current and potential changes taking place in the environment to facilitate in decision making and problem solving.


ENVIRONMENTAL SCANNING

• Objectives of Environmental scanning:

1. To provide and understanding of current and potential changes taking place in the environment. 2. To provide inputs for strategic decision-making.

3. To facilitate and foster strategic thinking in

organization.


Benefits of Environmental scanning

• “Firms which systematically analyze and diagnose the environment are more effective than those which don’t”

1. Development of broad strategies and long –term policies of the firm.

2. Development of action plans to deal with technological advancements.

3. To foresee the impact of socio-economic changes at the national & international level.

4. To analyze the competitors strategies and formulation of effective counter-measures.

5. TO keep oneself dynamic.


Business Environment-Internal Factors

• Internal Environment :

• Value system, Goals and objectives, Management structure,

• Relationship among the various constituents,

• Physical assets,

• Technological capabilities

• Human, financial and marketing resources make the internal environment of business.


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• Internal Environment :

• Persons holding top positions in certain modern enterprises have some values which influence their policies, practices and overall internal environment.

• Ex: JRD TATA –Value system – responsibilities towards his employees did some some commendable work in the field of labor welfare.

• Attitude of TATA’s to employ 8 disabled persons out of their total workforce of more than sixty thousand.

• The company value system need not be always positive. It can be totally negative.

• Cases of pharmaceutical companies selling banned drugs world over.

• Rational firms attempt maximize long-run profit.



• There are often differences in the goals and objectives of the various firms, which in turn, lead to differences in the overall internal environment and also in priorities, policies and direction of development.

• Ex: Corporate enterprise professionally managed or family controlled.

• Board of Directors - dynamic entrepreneurs capable of taking

quick decisions or the BOD may be dominated by persons with conservative or bureaucratic outlook.

• Nominees of Financial institutions having large holdings – their decision making.

• Conflicts among BOD’s, Erosion of shareholders confidence in the BOD’s

• Serious differences among the senior executives officers on critical matters are critical factors in the Co’s internal working conditions.



• Functioning & Competitiveness of a company are very much influenced by physical resources, Production technology, R&D work and distribution logistics.

• Co’s R&D activity and the speed at which technological changes occur determine Co’s internal environment which in turn influence Business decisions.

• Quality of Human Resources of a Company,

• Depends on Commitment, attitude and morale of the employees also have an impact on business as an internal factor.


Business Environment-External Factors

• External Environment of Business consists of institutions, Organizations and forces operating outside the company.

• External Environment of business may be classified into :

• A) Micro Environment

• B) Macro Environment

• Micro environment refers to such players whose decisions and actions have a direct bearing on the company. Since modern business broadly has two aspects, Viz, Production and selling of goods,


Micro Environment of Business

• The micro environment of business can be divided :

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BUSINESS

Customers

Input Suppliers

Competitors

Workers & their unions Publics

Marketing

Intermediaries

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Micro Environment of Business

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Micro Environment has great relevance on Co’s business

operations.

The players in micro-environment do not effect all the

companies in an industry in the same way. Their decisions

and actions often differ in accordance with the size,

capability and strategies of each company.

Ex: 1. Suppliers of inputs are more accommodating if

the Company is large.

2. Competitor does not mind starting price war if the

rival co. is small

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Business Environment • Suppliers of inputs: Important factor in Co’s success is low

cost of production of goods.

• Availability of raw materials without any interruption especially raw materials thru out the year lessen the financial burden on the company.

• Sometimes monopolistic suppliers manages to secure

monopoly control over the supply of some strategic raw material, such as iron ore or copper, it starts regulating its supply to generate maximum possible monopoly profits.

• No Co. should depend for the supply of some input on single source.

• Supply management should be high on agenda of the company.


Business Environment-Internal factors

• Workers and their Unions: • Labor is an important input in production.

• Any policy that disturbs labor peace at the company level

may adversely affect its competitiveness.

• Also constant conflict between labor and management will not allow the company to grow and overtime may transform into a sick unit. 27 4/10/2013 Babasabpatilfreepptmba.com


• Customers: Demand for product – individuals, business

enterprises, institutions & the government.

• loyalty depicts customer satisfaction.

• Universally accepted fact that the satisfaction of customers is the ultimate bench mark of the Co’s success.


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• Marketing intermediaries: Wholesalers, retailers, distribution firms agents etc

constitute an important element .

• Co. lacking its own distribution channels can’t afford to have conflict or strained business relations.

• Some Co’s adopt direct mail or data base marketing.

• EX; nestle –slump in demand for baby products – France

• CO. could have responded to this situation by lowering production laying-off workers.


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• Competitors: Brand Competition: affect sales operations of the business firms.

• A Company encounters various forms of competition. The most common competition which a company’s products faces is from differentiated products of other companies.

• Ex: In the Air conditioner market Voltas air conditioner faces competition from other branded air conditioner such as Videcon, Elgi, Samsung companies.

• Public : Environmentalists, consumers protection groups & media persons may influence both Production & Sales.


Macro environment

• Macro environment of business consist of the following factors:

• A. Economic Environment

• National

• Global

• B. Non –Economic Environment

• Political

• Socio Cultural

• Demographic

• Technological

• Natural


Economic Environment of the Business (National)

• Business enterprise is essentially an economic institution. It conducts its activities in the market system with the objective profit maximisation.

• In Modern economy there are five sectors contribute to the development of the economy they are:

• The Business sector

• The household sector

• The capital market

• The Government

• These factors determine the prospects of business activity.

In a recessionary situation business firms encounter steep fall in effective demand leads to business slowdown. Developed financial system –precondition for the efficient mobilization of financial resources for the business.


Global Environment

• Globalization- expansion of business activities across boundaries of the nation states.

• It refers to a process of increasing economic openness growing economic interdependence and deepening economic integration between countries in the world economy.


Global Environment

• Over the past ten years the Indian economy is integrates into the global economy.

• The three policy measures initiated to realize the objectives of globalization are:

• 1. Exchange rate adjustment and rupee

• convertibility.

• 2. Import liberalisation &

• 3. Opening upto foreign capital


Political Enviroment

• A stable & dynamic political environment due influences business growth.

• In a capitalist economic system corporate firms are very powerful, yet they have to operate within the parameters which are determined by the broad policies of the government.

• Ex: MRTP Act, FERA because of the experiences of the colonial era, Foreign capital & the multinationals corporations were suspects.


Legal enviornment

• Govt. sets the legal framework within which business firms operate.

• Legislations defining: property and business organizations, • laws of contracts • bankruptcy( one who’s assets are used to repay

debts), • Mutual obligations of labour & management • Laws and regulations, the way the business are

carried out constitute legal environment of business.


Legal enviornment

• Economic legislations can be classified into two categories:

• 1. legislations – facilitatory role in business.

• Ex: contract act –rules for systematic exchange transactions.

• 2. legislations- restrictive role in business

• Ex: Sherman anti-trust act in 1890, Clayton anti-trust act 1914

• Federal trade commission act 1914 of USA to prevent unfair

• monopolistic unfair practices.

• In India – MRTP-Monopolies & restrictive Trade Practice ACT-1969.

• Foreign Exchange Regulation Act (FERA) -1973 –directly regulated the foreign exchange related transactions of the indian business.

• Both MRTP & FERA – diluted – stringent & restrictive in nature.


SOCIO-CULTURAL ENVIRONMENT

• Business firms operate in a socio-cultural environment & their strategies needs to be formulated keeping this factor in view.

• Ex: western countries are modern & liberal.

• People-more receptive to new products & no prejudice against any kind of advertising.

• Health conscious-product injurious to health of the people can’t be successfully introduced.


SOCIO-CULTURAL ENVIRONMENT

• Muslim societies –conservative. Womens still under Purdah.

• Demand for cosmetics & western cloths are limited.

• Business firm aiming at capturing markets for its products in these diversified societies has to be careful about the cultural sensitivities of these societies.

• India- liberal outlook, modeling by young women for advertising fashionable products, wine & beer is acceptable in Indian society.


Technological environment

Technology- Knowledge about machines & processes.

Any business- cannot survive with outdated techniques in

international competition.

Four decades ago –technology of Fiat was unsophisticated.

Users had no choice & thus product survived for a long period.

Setting up of Maruti udyog Ltd., the situation changed due to

superior technology.

Technological environment affects business from the demand side as well.

Ex: In a country where power is scarce, demand for electrical appliances will be limited.

Erratic power supply and frequent load shedding creates market for inverters.


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Business environment 1 st module mba Management