PGDM IB ITB II_I 205 TBE_Chapter 1

PGDM ITB 2ND Semester_ 2014-15

Dr. Jeet Dogra - Asst. Professor, I I T T M Gwalior

Topic 1: Business - meaning, nature and scope

Topic 2: Characteristics of today’s business

Topic 3: Environment - meaning, constituents of environment (external and

internal environment), factors influencing environment

Topic 4: Environmental analysis; limitations of environmental analysis



Meaning of 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.


Contribution from business

Economic growth

Creates employment opportunities

Provides all kinds of goods and services which we need for consumption


Nature of business

Large size

Oligopolistic character

Diversification

Global reach of modern business

Technological orientation

Change

Government control

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.


Nature of business

Large size

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.

Oligopolistic character

Present day business is Oligopolistic in its nature.

Small No. of firms selling a homogeneous / differentiated product.

Interdependence among the sellers.


Nature 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 business

Global reach of modern 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 business

Technological 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 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.


Nature of 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


Scope of business

Profit earnings

Production of goods and services

Creating markets

Technological improvements

Human resource development

Bring prosperousness to the nation




Today's business are very competitive. There is always a hot competition in

the business world.

The characteristics of business in today’s scenarios are as follows:

1. Creation of utilities

2. Dealings in goods and services

3. Continuity in dealings

4. Sale, transfer or exchange

5. Profit motive

6. Element of risk

7. Economic activity

8. Art as well as science


1. Creation of utilities:

Business makes goods more useful to satisfy human wants.

It adds time, place, form and possession utilities to various types of goods.

In the words of Roger, "a business exists to create and deliver value

satisfaction to customers at a profit".

Business enables people to satisfy their wants more effectively and

economically.

It carries goods from place of surplus to the place of scarcity (place utility).

It makes goods available for use in future through storage (time utility).


2. Dealings in goods and services:

Every business enterprise produces and/or buys goods and services for selling

them to others.

Goods may be consumer goods or producer goods.

Consumer goods are meant for direct use by the ultimate consumers, e.g.,

bread, tea, shoes, etc.

Producer goods are used for the production of consumer or capital goods like

raw materials, machinery, etc.

Services like transport, warehousing, banking, insurance, etc. may be

considered as intangible and invisible goods.

Services facilitate buying and selling of goods by overcoming various

hindrances in trade.


3. Continuity in dealings:

Dealings in goods and services become business only if undertaken on a regular

basis.

According to Peterson and Plowman, "a single isolated transaction of purchase

and sale will not constitute business recurring or repeated transaction of

purchase and sale alone mean business."

For instance, if a person sells his old scooter or car it is not business though

the seller gets money in exchange.

But if he opens a shop and sells scooters or cars regularly, it will become

business.

Therefore, regularity of dealings is an essential feature of business.


4. Sale, transfer or exchange:

All business activities involve transfer or exchange of goods and services for

some consideration.

The consideration called price is usually expressed in terms of money.

Business delivers goods and services to those who need them and are able and

willing to pay for them.

For example, if a person cooks and serves food to his family, it is not business.

But when he cooks food and sells it to others for a price, it becomes business.

According to Peter Drucker "any organisation that fulfils itself through

marketing a product or service is a business".


5. Profit motive:

The primary aim of business is to earn profits.

Profits are essential for the survival as well as growth of business.

Profits must, however, be earned through legal and fair means.

Business should never exploit society to make money.

6. Element of risk:

Profit is the reward for assuming risk.

Risk implies the uncertainty of profit or the possibility of loss.

Risk is a part and parcel of business.

Business enterprises function in uncertain and uncontrollable environment.

Changes in customers' tastes and fashions, demand, competition, Government

policies, etc. create risk.

Food, fire, earthquake, strike by employees, theft, etc. also cause loss.

A businessman can reduce risks through correct forecasting and insurance.

But all risks cannot be eliminated.


7. Economic activity:

Business is primarily an economic activity as it involves production and

distribution of goods and services for earning money.

However, business is also a social institution because it helps to improve the

living standards of people through effective utilization of scarce resources of

the society.

Only economic activities are included in business.

Non-economic activities do not form a part of business.

8. Art as well as science:

Business is an art because it requires personal skills and experience.

It is also a science because it is based on certain principles and laws.

The above mentioned characteristics are common to all business enterprises

irrespective of their nature, size and form of ownership.



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.


Different environmental variables exist internally and externally to

the business enterprise

Environmental variables have a positive or negative influence on the

enterprise

Business environment consists of two sub-environments:

Internal (micro) environment

External environment

Market environment

Macro environment

Mutual relationships exist between

these environments


Business environment broadly consists of the followings:

internal environment

external environment

When we talk of the internal environment we includes those factors which are

within the control of the firm and such factors are concerned with firm's

resources, policies and objectives

But we talk about external

business environment it means

those variables which are

independent of the firm &

therefore uncontrollable.


Business environment

Economic and Non – Economic

Non – Economic:

Political

Legal

Social

Cultural

Technological


Economic

Economic environment consists of three elements:

1) Economic conditions;

2) Economic policy, and

3) The economic system.

By economic conditions, we mean

the nature of the economy,

economic resources,

the level of income,

the distribution of income and wealth and

the stages of development of the economy.

All these factors have a direct hearing on the strategies to he adopted by a

business firm.


Economic

In terms of nature of the economy, there could be free market economy or

capitalist economy where the economy remains in the hands of private

sector.

At the other extreme, there may be centrally planned economy which is also

called as the communist economy.

Here the entire economy remains in the hands of the state.

In between these comes mixed economy where both private and public

sectors co-exist.

However, in mixed economics there may be wide variation.

In some cases, private sectors may occupy more significant place while in

general conditions, public sector may have the upper hand.


Economic

What economic system will exist in a particular country is determined by the

people and the government.

The firm has no control over it.

However, the firm's policies & practices depend upon the type of economy in

trend.

Thus, the economic environment is a very important external factor on which

the working of business firms depends.


Economic

Management cannot overlook the market oriented or non-market oriented

nature of environment.

The management has to keep in view the objectives of national planning or

the economic policies of the government.

In other words, while planning its operation, the firm has to keep in view the

pattern, structure and even the rate of changes occurring on the economic

scenario.


Non – Economic

Political

Legal

Social

Cultural

Technological

BUSINESS

POLITICAL

LEGAL

SOCIAL

CULTURAL

TECHNOLOGICAL


Non – Economic

(I) POLITICAL ENVIRONMENT

Political stability- changes in the form & structure of government

administration

Political organisation- ideology of ruling government; influence of premier

groups; conflicting role of public & private sector

Example:

Nehru: transformation of agrarian economy into industrialised economy

Indira Gandhi: state became active in agriculture sector (subsidised fertilisers,

expansion of institutional credit); tightening of state control over industrial

finance, foreign investment, trade

Since 1990-91, political environment changed- economy increasingly being

liberalised


Non – Economic

(II) LEGAL ENVIRONMENT

Legal policies- formulation & implementation

Economic legislations- facilitator and/ or restrictor

Playa a vital role- dictating dos & don’ts of business

Flexibility & adaptability of law- constitutional amendments

Foreign policy- tariffs, custom unions etc.


Non – Economic

(III) Social Environment

Made up of attitude, desires, expectations, education, beliefs & customs of

people

Changes gradually

To forecast a change is difficult

(IV) Cultural Environment

Organisational culture is the customary or traditional ways on thinking &

doing things, which are shared to a greater or lesser extent by all the

members of the organisation, which new members must learn & at least

partially accept in order to be accepted into the service of the firm.


Non – Economic

A firm wanting to market its product in various regions with diversified

cultures will have to carefully study the existing consumption pattern &

scope for creating demand for new products

After that they have to adjust their marketing communication to cultural

characteristics.

If the society is multi- cultural, then the firm cannot meet the demands of

different groups with a uniform product.

To be successful in a multi-cultural society, the firm will have to carefully

study the consumption behaviour of different groups.

For Example: Companies have to change their product portfolio because of

cultural differences as McDonald and KFC did when they launched their

restaurant chain in India.


Non – Economic

(IV) TECHNOLOGICAL ENVIRONMENT: It refers to body of skills,

knowledge & procedures for making, using & doing useful things

Positive effects of technology:

Increased productivity

Production of new & better goods of standardized quality with more

efficient use of raw materials

Basis for fast growing urban & industrial system

Negative effects of technology:

Displacement of labour

Environmental pollution

Switching over might be costly


BUSINESS DECISIONS INTERNAL

ENVIRONMENT EXTERNAL

ENVIRONMENT


The constituents of environment is divided into:

Internal Environment

External Environment

Internal Environment

Regarded as controllable factors: companies have control over them

Internal economy: some internal factors contribute increase in productivity

Determinants of Internal Environment of an organization

Mission & vision of the organisation

Management strategy

Industrial relations

Corporate culture & values

Career progression of employees / Line & staff relations

Quality control system

Team spirit among employees / Work culture / Compensation system


Pollutants of Internal Environment of an organization

Conflict b/w different owner groups

Conflicts b/w workers & managers

Inter departmental conflicts

Unhealthy competition & conflict among employees

Office politics / Discrimination at work place

Absenteeism


External Environment

Regarded as uncontrollable factors: by and large beyond the control of

company.

External economy: some external factors contribute to the growth of the

company.

Major stakeholders are:

Suppliers

Customers

Competitors

Financiers

Society




Cont..


Environment analysis is evaluation of the possible or probable effects of

external forces and conditions on an organization's survival and growth

strategies.

Features of business environment analysis:

(a) Business environment is the sum total of all factors external to the business firm

and that greatly influences their functioning.

(b) It covers factors and forces like customers, competitors, suppliers, government and

the social, cultural, political, technological and legal conditions.

(c) The business environment is dynamic in nature that means it keeps on changing.

(d) The changes in business environment are unpredictable.

(e) It is very difficult to predict the exact nature of future happenings and the

changes in economic and social Environment.

(f) Business Environment differs from place to place, region to region and country to

country.

(g) For Example: Political conditions in India differ from those in China. Taste and

values cherished by people in India and China vary considerably.


Business Environment Analysis Process:

Scanning: It means the general surveillance of environmental factors & their

interactions

Monitoring: It means to tracking the environmental trends or events

Forecasting: It means to developing plausible projections of direction, scope

& intensity of environmental change

Assessment: It means to identifying & evaluating how & why current &

projected environmental changes will affect strategic management of

organisation


ENVIRONMENT SCANNING:

Strategic planning in which managers try to determine best fit b/w

organisation & its external environment

It is an important step towards corporate planning & business policy

decisions

Aimed at continuous improvement of the company, its policies & programs.



INTERNAL SCANNING: acquisition, analysis, use of information from within

the organisation that will help the management in determining future course

of action of business

EXTERNAL SCANNING: acquisition, analysis, use of information about events

& establishing the relationship of business with its external environmental

variables



Corporate managers analyze the Strengths (S), Weakness (W), opportunity (O)

& Threat (T) that exist for their organisation in the context of its

environment.

O & T are external to the firm.

With S the firm can seize the O & capitalize on it & because of its W it

becomes the victim of T in the environment



MONITORING

SCANNING FORECASTING

ASSESSMENT



Two models for carrying environmental scanning are:

PEST Analysis

SWOT Analysis


• The key elements of the external environment may be summarised as PEST factors which refer to the

Political environment

Economic environment

Socio-cultural environment

Technological environment


Political Environment

• Since tourism entities are affected by current and new government legislation, it is important to understand the location of political power, how political power may change in the future and the likely effects of this on policy (Burns & Novelli, 2009).

• For Example: Following is the distinguishes between policy objectives of typical democratic political parties of the left and of the right.

Left wing

(e.g. Labour / Democrat parties)

Right wing

(e.g. Conservative / Republican parties)

* need to control the free market

* pro trade unions

* some state ownership of industry

* progressive taxation

* regulation of industry

* higher government spending and taxes

* reduce inequality of incomes

* provision of jobs a priority

* comprehensive welfare state

* poverty reduction and social mobility

goals

* belief in supremacy of the free market

* anti trade unions

* private ownership of industry

* proportional taxation

* minimal state interference

* low taxes and government spending

* inequality of income as incentive

* control of state spending a priority

* minimal welfare state

* belief in self-help


Opportunities and threats in the changing political environment

Competition policy

Health and safety

Transport and infrastructure

Global carbon agreements and targets

Taxation and spending plans

Disability and access legislation

Foreign policy

Visa policy and home security

Regulation and deregulation

Regeneration plans

Employment and training policy

Travel advisories

Minimum wages


Economic Environment • The economic environment (Tribe, 2005) affects different types of

tourism entities in different ways.

The success of an international tourism destination such as Mallorca, Spain, will be affected by economic fluctuations in those countries which supply the majority of its visitors (tourism generating countries), as well as its economic attractiveness compared to competitive resorts.

Tour operators such as Kuoni (Switzerland ) and TUI (Germany/UK), face a number of economic environments. First, domestic economic environments affect the expenditure patterns of their clients. Second, the variety of different international economic environments in which their tourism product is located affects the supply of the tourism package.

Providers of tourism services will find the international economic environment affects the demand for their services and the costs of supplying those services.


Key Variables in Economic Environment • The economic environment affects organizations in the tourism sector

in two main ways:

Changes in the economic environment can affect the demand for an organization’s products

Changes may affect an organization’s costs. • Additionally background factors such as share and property prices may

affect organizations.


Opportunities & Threats in Economic Environment

Opportunities Threats

Low interest rates High interest rates

Low unemployment High unemployment

High consumer expenditure Low consumer expenditure

Low oil and other commodity prices High oil and other commodity prices

Low Taxes High Taxes

Favorable exchange rate Unfavorable exchange rate

Stable prices Inflation

Optimistic expectations Pessimistic Expectations


Socio – cultural Environment

• Factors in the socio-cultural environment of tourism entities include

the size and structure of the population

lifestyles and inter-cultural differences

other factors (including attitudes and values about travel, availability

of paid leave and unemployment)

tourist motivations


Technological Environment

• The technological environment offers both opportunities and threats:

Opportunities may be found in cheaper provision, or improvements in

goods and services, in better marketing or easier distribution.

However technology may result in an organisation's product or service

becoming obsolete, or subject to new forms of competition.

• The technological environment may be divided into Information

Communication Technology and other technology.


Technological Environment Information & Communication Technology

• ICT relevant to tourism encompasses information search, purchase of

services, post travel engagement and networking.

• It includes information and reservation systems for airlines, hotels and

attractions, timetables for transport systems, search engines (e.g.

Google) online travel services (e.g. Expedia, Orbitz, Lastminute.com,

Opodo, Travelocity and edreams), destination management systems

(e.g. visitbritain.com), networking and web 2.0 portals (e.g.

tripadvisor.com) and price comparison sites (e.g.

travelsupermarket.com).


Technological Environment • Other areas where technologies have had a significant impact on

tourism include:

Construction techniques - allowing faster erection of buildings.

Bridge technology – extending access and cutting journey times.

Materials – lighter and more durable materials.

Glass – especially with better insulation properties.

Fuels – e.g. biofuels.

Energy – especially alternative sources of energy such as wind and solar power.

Security scanning – which enables quicker and more accurate passenger checking at airports.


Technological Environment For Example: Tourism 2023 Four scenarios from the Future Foundation: 1. Boom and burst: A booming UK economy & high disposable incomes have fuelled a growth in travel worldwide.

2. Divided disquiet: A toxic combination of devastating climate change impacts, violent wars over scarce resources and social unrest has created an unstable and fearful world.

2. Price and privilege: A dramatically high oil price has made travel

punitively expensive.

3. Carbon clampdown: The Government has introduced tradable carbon quotas for all UK households


• SWOT analysis is an executive summary of the different elements of strategic analysis.

• Under SWOT, the detailed analysis of an organisation's external environmental and internal resource position is distilled and summarised into key factors.

• Once the key SWOT elements have been identified, it can be productive to prepare a grid with strengths and weaknesses and opportunities and threats.

• Identification of an organisation's situational position by means of a SWOT analysis is an important phase in prior to consideration of strategic options.

• Appropriate strategies are likely to:

• align opportunities and strengths • transform weaknesses and • overcome threats


Internal (Capability) Analysis Strengths Weaknesses

• Resources

• Products

External (Environment) Analysis Opportunities Threats

• Competition

• Political

• Economic

• Socio-cultural

• Technological


• True to its name, a SWOT analysis is used to help organizations identify the

strengths, weaknesses, opportunities and threats involved in any business

decision.

• The purpose of the SWOT method is to systematically assess the possibilities and to

analyze the outcomes for each factor in order to determine a company’s best course

of action.

• SWOT analysis has been an invaluable resource for Fortune 500 companies for many

years, and it’s an essential aspect of any formalized business plan.

Conducting a SWOT Analysis

• As mentioned earlier, the foundation for a SWOT analysis is based on four words:

strengths, weaknesses, opportunities and threats.

• Strengths and weaknesses reflect what is going on inside of a business, while

opportunities and threats reflect on what is happening outside of a business.

Information for each section comes from varying types of analysis, which are

condensed and listed in each of the four sections.

• A single person can conduct the analysis on his or her own, but involving at least four

people is ideal to achieve a diversity of opinions that represent your entire

organization. Four people can also help spread the workload while exploiting certain

perspectives.

• For example, you might have an idea of the threats to your business’ growth but

your employee in accounting may have a more informed and reasoned opinion of the

threat based on his or her work.


• Remember to avoid simply rushing through a SWOT analysis.

• When done right, a good and thorough analysis can save time by proactively

identifying potential issues instead of allowing those issues to affect your business

before retroactively addressing them.

A Deeper Understanding of SWOT

• Knowing what the words mean in the SWOT acronym is a great start, but the next

step is to understand what types of information you should be considering when

researching each section. Let’s find out.

Strengths

Your company’s strengths are things it does well.

Employees with long tenures are usually the best ones to identify strengths.

Strengths may not always be apparent in revenue or other easily quantified figures,

but instead may be due to high customer satisfaction rates or loyal clients.

This can be a great starting point to steer the dialogue into something positive yet

productive.


Weaknesses

Unfortunately, everything has weaknesses, including your company.

But it takes solid insight and perspective to distinguish those weaknesses from petty

issues or genuinely baseless complaints.

As such, an objective person should address this section.

Furthermore, this type of person should not be afraid to voice his or her opinion or

criticize aspects of the business.

At the same time, this person should also be able to take control and keep the

conversations focused on the task at hand; if not, your analysis might turn into

unproductive and abusive shouting matches.

Opportunities

The process of identifying opportunities is one of the more exciting aspects of the

analysis.

This section seeks to find any and all comparative advantages that your company has

over its competition.

Those with a creative and positive outlook on the company are best suited to handle

this part of the analysis.

The right person will understand long-term goals as well as long-term consequences

of the decisions being made.

They will also be prudent about which opportunities will help the company in the

short and long terms. Unlike strengths and weaknesses, opportunities are seen as

external to the company. Dr. Jeet Dogra - Asst. Professor, I I T T M Gwalior

Threats

Threats are present in any industry and any market.

There’s competition everywhere, and it’s in your best interest to stay ahead of it.

Take the time to notice what your competition is saying through press releases and

social media to help determine the level of the threat your company faces.

An employee who knows your industry and its major players is best suited to handle

this portion of the analysis, as they will have insight on current legitimate threats

and potential future problems that are lurking in the horizon.

As with opportunities, threats are seen as external to the company.


The Final Analysis

After taking the time to complete the SWOT analysis, the next step is to consolidate

your findings in a clear and concise manner.

Keep it simple so the portions of the analysis can be properly considered and a

decision can be made from the findings. Here are some key points to present:

A formal list of internal and external factors. This will provide an overview of

the SWOT results and can sometimes take several pages to finish.

The SWOT matrix. This is a user-friendly way to organize and present the results

by using squares and graphs to highlight key findings.

Prioritize the results. Not every strength or weakness should necessarily be

reported in the initial findings. They can be documented further into the

analysis, but decision-makers will want the key findings first and details later.

Support the findings. Initially, discussions will begin with the summary of the

results, but the final decisions will be made after reading the research behind

the summary.

A SWOT analysis will allow decision-makers the opportunity to create the best

course of action regarding a new project or even as a way to make the most of a

poor past decision. Perhaps most importantly, the collaboration involved can

provide a balanced perspective and get everyone involved in the decision-making

process. (Source: http://www.docstoc.com/article/173009022/How-to-Conduct-a-SWOT-

Analysis?utm_source=email&utm_medium=email&utm_campaign=222&utm_content=7543)


• When you are conducting an environmental analysis, you should keep

in mind that it is only one stage of the business planning process.

• For complex issues, you will usually need to conduct more in-depth

research and analysis to make decisions.

• Keep in mind that an analysis only covers issues that can definitely be

considered a strength, weakness, opportunity or threat.

• Because of this, it's difficult to address uncertain or two-sided factors,

such as factors that could either be a strength or a weakness or both,

with a SWOT analysis (e.g. you might have a prominent location, but

the lease may be expensive).

• A PEST or SWOT analysis may be limited because it:

doesn't prioritize issues

doesn't provide solutions or offer alternative decisions

can generate too many ideas but not help you choose which one is best

can produce a lot of information, but not all of it is useful.


• Some more limitations include:

Price increase;

Inputs / raw materials;

Government legislation;

Economic environment;

Searching a new market for the product which is not having overseas

market due to import restrictions; etc.

• Some Internal limitations may include

Insufficient research and development facilities;

Faulty products due to poor quality control;

Poor industrial relations;

Lack of skilled and efficient labour; etc



Compiled and Edited by:

Dr. Jeet Dogra Assistant Professor

Indian Institute of Tourism & Travel Management, Gwalior, India

(An Organization of Ministry of Tourism, Govt. of India)

E-mail: [email protected]

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PGDM IB ITB II_I 205 TBE_Chapter 1