ev beck ! Business fnv'Venment bvirt 2 ewarte® Tntroduction to Business 1 Environment CHAPTER OUTLINE ] 1 1.2 Nature of Business Environment The Concept of Business Environment 1.3. Significance of Business Environment 1.4 Types of Business Environment 1.4.1 Internal Environment 1.4.2 External Environment ~ 1.5 Elements of External Environment 1.5.1 Micro Environment_/ 1.5.2 Macro Environment ~/ 1.6 Impact of Environment on Business and Strategic Decisions 1.7 Coping with Environmental Changes ¢ Summary © Test Questions14 1.1 The Concept of Business Environment The term business environment means “the aggregate of all the forces, factors and institutions which are external to and beyond (he control of an individual business: enterprise but which exercise a significant influence on the functioning and growth of individual enterprises.) Keith Davis defines business environment as “the aggregate s that Surround and affect business. of all conditions, events and influent ‘According to Bayord O. Wheeler, business environment refers to “the total of all things external to firms and industries which affect thelr organisation and operation” In the words of Arthur M. Weimer, “business environment encompasses the ste or set of conditions, economic, social. political, or institutional in which clin business op ‘ations are conducted vironment means all those internal and external factors that Thus, br SS € have an impact on business. 1.2 Nature of Business Environment “/ Business environment Is characterised by the following features: : 1. Aggregative: Business environment is the totality of all the internal and external forces which influence the working and decision-making of an enterprise. —H inter-related: Different elements of business environment are closely inter-related and interdependent. A change in one clement affects the other elements. Economic environment influences the hon-economic environment which in turn affects the economic conditions) For example, economic liberalisation in India since 1991 has opened up new opportunities for private sector and foreign entrepreneurs, Similarly, social pressures against polluion led to the enactment of anti-pollution laws. Therefore, managers should not consider environmental factors in isolation | from one another. A wholistic approach is necessary for proper understanding of business environment. pea e rary Business environment is dynamic in nature as it keeps on changing ‘om time to time. \4. General and Specific Forces: Business environment consists of both general and specific forces. General forces such as economic, social, political, legal, natural and technological conditions influence all business enterprises. Specific forces such as wvestors, customers, competitors, suppliers, etc. affect individual enterprisés directly. 4, Relative: Business environment is a relative concept: It differs from-eountry © country and even regior n- and UK have a different kind-of cavironment than communist economies. The nature of economic system in a country affects the environment of business. Anter-temporal; Business environment is also an inter-temporal concept as it eae over time. for example, busmess environment in India today is much differnt Tronr that prevailing before 1991. In the short run business environment may remain static. But in the long run, it ddes change. Uncertain: Business environment is largely uncertain because it is very difficult to forecast the future environment. When the environment is volatile, ie., changes very fast, uncertainty increases. gc en a% Introduction to Business Environment 8. Contextu: which the busin Business environment provides the macro fram 88 firin (a micro unit) operates. The environmental for those given within which an individual enterprise and its mana; Business environment € ercises tremendous influence on the workin success of business firms. Different elements of business environment have different types and degrees of influence on business. factor thiat has a favourable impact on one firm may adversely effect anothe enterprise must . Therefore. management of a busine a deep understanding and appreciation of the environme: The changes \aking place in environment must be continuously monitored to jud their impact on business. Appropriate and timely steps must be taken to £ environmental changes. AI3. Dy , tn, 1.3 Significance of Business Environment © %S, Rs © ‘The survival and success of any enterprise depends upon its inherent ties (physical. financial. human and other r esources) and its ability to adapt to the changing environment Its very important for business firms to understand their environment and changes occurring in it. Business enterprises which know their environment and are ready to adapt to environmental changes would be successful. On the other hand, firms which fail to adapt to their environment are unlikely to survive in the long run. For example. some Indian firms suffered considerably because they failed to appreciate the tightening regulations against environmental pollution. Knowledge of environmental changes is very helpful in the formulation and implementation of business plans. A business can obtain this knowledge through environmental scanning. Environmental scanning is the process by which organisations monitor their relevant environment to identify opportunities and threats affecting their business. With the help of environmental scanning, an enterprise can consider the impact of different events, trends, issues and expectations on its business operations. Firms which systematically analyse and diagnose the environment are more effective than those which do not. Some of the direct benefits of understanding the environment are given below: (@ First Mover Advantage: Awareness of environment helps an enterprise to take advantage of early opportunities instead of losing them to competitors. For example, Maruti Suzuki became the leader in small car market because it was the first to recognise the need for small car on account of rising petroleum prices and a large middle class. (ti) Early Warning Signal: Environmental awareness serves as an early warning signal. It makes a firm aware of the impending threat or crisis so that the firm can take timely action to minimise the adverse effects, if any. For example, when new firms entered in the mid segment cars (threat), Maruti Udyog increased the production of its Esteem threefold. Increase in production enabled the company to make faster delivery. As a result the company captured a substantial share of the market and became a leader in this segment. (iii) Customer Focus: Environmental understanding makes the management sensitive to the changing needs and expectations of consumers. For example,Business Environment Hindustan Unilever and several othe: shampoo and other products realisi the firms to increase sales. (iv) Strategy Formulation: Eny for strategy making. For example, ITC realised that there is a vas; wey ee Oass in the travel and tourism industry in India and the Government Is han tee this industry because of its employment potential. With the help of thie kyruen ITC planned new hotels both in India and abroad. Study of environment rvotte en organisation to analyse its competitors” Strategies and thereby forthe ettecive counter strategies. All strategic decisions such as what business to do, whether to expand oF reduce a business, and so on require a thorough understanding of the internal and external environment of the organisation, (v) Change Agent: Business leaders act as agents of change. They create adrive for change at the gross root level. In order to decide the direction and nature of change, the leaders need .to understand the aspiration of people and other environmental forces through environmental scanning. For example. contemporary environment requires prompt decision-making and power to people. Therefore, business leaders are increasingly delegating authority to empower their staff and to eliminate procedural delays. (vi) Public Image: A business firm can improve its image by showing that itis sensitive to its environment and responsive to the aspirations of public, Leading firms like Reliance Industries. ICICI Bank and others have built good image by being sensitive and responsive to environmental forces. Environmental understanding enables business to be responsive to their environment. (vii) Continuous Learning: Environmental analysis serves as broadbased and ongoing education for business executives. It keeps them in touch with the changing scenario so that they are never caught unaware. With the help of environmental learning managers can react in an appropriate manner and thereby increase the success of their organisations. Knowledge of changing environment can keep the organisation dynamic in its approach. ‘ 1.4 Types of Business ionic ‘There are two broad types of business environment: i Internal Environment, and 2. External Environment. T FMCG companies launched small sachets of ng the wishes of customers, This move helped Internal environment refers to all the factors existing within a business firm. internal factors are considered controllable because the enterprise has control over these factors]For example, a company can miodify or alter its organisation structure, policies and programmes, personnel, physical facilities and marketing { mix to suit.the changes in the enyironment. However, an enterprise may not sometimes have complete control over all the internal factors. Internal environment imparts strengths of causes weaknesses. A strength is an inherent capability of an enterprise which can be used to gain strategic advantage over Its competitors, On the other hand, weakness means an inherent limitation or constraint ofan enterprise which creates a strategic disadvantage. |Introduction to Business Environment 7 The external environment consists of forces and factors outside an enterprise. ‘The external forces are by and large beyond the control of a firm and are, therefore, regarded as uncontrollable. For example, a company has almost no control over national income, social forces, government policies, population, etc. However, sometimes a powerful corporation may be able to change some external factors. . External environment creates opportunities and threats for an enterprise. An opportunity is a favourable condition whereas a threat is an unfavourable condition in the external environment. Internal Business External Environment Firm Environment Fig 1.1. Environmental Forces Influencing Business Firm 1.4.1 Internal Environment @ The main internal factors which influence business decisions are as follows: 1. Culture: The values, beliefs and attitudes of the founders and top management of the company exercise a strong influence on what the company stands for, how it does thinigs and what it considers important) When the value system is shared by all the members, the organisation is li € more succe value system of Narayana Murthi and its acceptance by those at the he affairs have been responsible for the high ethical standards of Infosys TechnologySimilarly, the strong cultures have contributed to the success of Wipro Corporation and Tata Steel (formerfy TISCO)_J = za 2. Mission and Objectives: The business philosophy and purpose of a company gui ide its priorities. business strategies. product market scope and development process. The mission of Dhirubhai Ambani to make Reliance the biggest group in theprivate sector prompted him to launch world scale plants in petrochemicals and other industries) Ranbaxy's mission “to become a research based international pharmaceutical company” led it to enter foreign markets. Similarly, mission and Purpose of other companies have guided their thrust area and portfolio strategy. 3, Top Management Structure: The composition of the board of directors, the degree of professionalisation of managesfent and He organisational structure of'a company have important-be: on its busi letistons. The board of directors sets the direction and monitors the performarice of the company. Com ving highly qualified and responsible boards out perform those lac! such boards of _ et ose ange aE a ane ot The shareholding pattern of a company also influence its functioning. Some companies are closely held (like Wipro) where the promoters hold majority of the shares. In widely held companies (like Tata Steel) promoters hold minority of the shares. Nominees of financial institutions may exercise control over decision-making when the financial institutions have large shareholding in the company. Lord Swaraj Paul could not acquire control over DCM and Escorts due to the support extended by financial institutions to the promoters of these companies. 4. Power Structure: The internal power relationship between the board of directors and the chief executive is an important factor. The extent to which topBusiness Environment 18 different levels the support of shareholders and employees at cer ispiait renin on decision-making and working of the company. pal anaes and practices are important elements of internal environment en at ny Image and Brand Equity: The image and brand equity of the oar le in raising finance, forming alliances, choosing dealers lay a significant rol ni Seances eae new products, entering foreign markets, etc. a 6. Human and Other Resources: The competence, morale and motivation of employees play a vital role in the success of the firm. Tata Steel could easily carryout a ee scale modernisation and restructuring. Some companies face great difficulty in carrying out such programmes due to strong resistance by employees and their unions. Financial position and capital structure, distribution system and marketing competence, R&D and technological capability, physical assets, facilities (production. capacity. technology, etc.) management information system, etc. are other resources which influence the competitiveness and success of a company. 1.4.2 External Environment ‘The external environment of business comprises of micro environment and macro environment. 1.5 Elements of External Environment © There are two major components of external environment—micro and macro. 1.5.1 Micro Environment Micro environment or task environment refers to those individuals, groups and agencies with which the organisations.comes into direct and frequent contact in the course of its functioning. In the words of Philip Kotler, of'the actors in company’s immediate environment that affect the performance. of. the company.\Micro ‘onmental factors exercise a direct and intimate influence on the =a of the enterprise. Therefore, it is also known as Direct Action Environment or specific forces or Stakeholders. Micro environment consists of.the groups in the company’s immediate operating environment which have a stake in the company. However, the micro forces may not influence all the firms in’a particular industry in the same manner. For example, one firm’s supplier environment may be entirely different from that of another firm which has in-house supplies. Even when all the competing firms in an industry have similar micro environment, their relative success depends on how effectively they face the micro forces. Micro environment consists of the following elements: ( Cugtomers: The people who buy a firm's products and se Its custémers,)A business exists to create and satisfy cutoeneal aaa Te different types of customers like individuals, households, Government dey sy -rhment departments, commercial establishments, etc] For example, the customers of a Paper company may include students, teachers, educational institutions, business firms and other users of stationery. “Wy 4 changes very 1c, — ZPAntroduction to Business Environment 2 can have bot groups can | ompany must understand and meet the nex= fa ee acoea Rape canaleittne target customer group or men expectations of its customers. A fi ai ate Ne ton the basis of factors like profitability, elasticity of demand, dependabin, Feaetet competition and growth prospects. It is generally risky to depend upon'g See customer group. The customer environment is becoming global due to Increasing globalisation and liberalisation of the economy. With the opening up of Indian market and foreign markets, the customer is becoming more global in the matter of shopping. 2. Competitors: A company may have both direct and indirect competitors Direct competitors are the other firms which offer the sameor similar products and Services. For example, Sony TV faces direct competition from other brands like LG, Samsung, Onida, Vjdeocon, BPL, etc; Indirect competition comes from firms vying for discretionary income. For example, a cine! house, faces indirect competition from Casino, and other firms marketing entertainment. Due to economic liberalisation and globalisation, Indian companies are now facing competition from both domestic firms and multinational corporations. In order to understand the full Tange of its competition, a company must look at from buyers’ viewpoint. Further details on the competitive environment are given in the next chapter. 8. Suppliers: Suppliers refer to the people and groups who supply raw materials and components to the company. Reliable sources of supply enable the company to carry on uninterrupted operations and to minimise inventory carrying costs. Suppliers also influence quality levels and costs of manufacturin ; At is very risky to dependona attisl esate a strike or any ofher product Sa ETOHGn ace may Cause interruptions.in manufacturing. Therefore, it is advisable to develop and Sustain multiple sources of supply. Some companies like Maruti Suzuki undertake vendor development to ensure timely and. regular supply of materials and parts, The relationship between the suppliers and the firm Teflects a power equation which is based on the extent to which each f them is depende: 4. Marketing Intermediaries: Several marketing intermediaries help a Matany in Promoting, selling and distributing its products to consumers. Middlemen like-agents, Wholesalers, and retailers serve as a link between the company and its customers) Transportation firms and warehouses assist in the cts) Advertising agencies, marketing research agencies retail distribution network has contributed significantly to the suecese of companies like Hindustan Unilever and Dabur India. 5. Financiers: The shareholders, financial institutions, debenture holders and banks provide finance to a company. Financial capacity, Policies and attitudes of financiers are important factors for the company. For example, the company cannot raise funds through shares if the financiers are not risk taking > 6. Publics: Publics include all those Sroups who have an actual or Potential, interest in the company or who influence the company's ability to achieve its objectives. Media groups, environmentalists, non-government nese (NGOs), consumer associations and local community are examples of publics) These publicsL B10 Business Environment can have both positive and negative impact on a business firm. For example, media gyoups Can be used (© disseminate useful information. A company can cooperate with the local people to improve its image as well as to provide some benefit to the people. On the negative side, local community concerned with public health can force a company to suspend operations or to take pollution control measures. Non- government organisations often organise protests against firms suspected of being guilty for child labour. cruelty against animals and damage to nature. For example, one of the leading companies tn India was attacked by the media for writing advertisements on rocks near a famous hill station, Such activities of publics can tarmish the image of business 7. Workers and Trade Union: Workers and their union are an important component of micro environment. A firm's relations with its workers and trade union have a significant impact on its functioning and performance. Company's work environment and industrial relations system must be conducive to efficient functioning, Acording to Philip Kotler, “companies must put their primary energy into effectively managing their relationships with their customers, distributors and suppliers. Their overall success will be affected by how other publics in the society view their activity, Companies would be wise to spend time monitoring all their public, understanding thetr needs and opinions and dealing with them constructively.” 1.5.2 Macro Environment — Macro environment refers to the general environment or remote environment within which a business firm and forces in Its mlero environment operate. A company does hot directly or regularly interact with the macro environment. Therefore, macro environment 15 also known asJndirect Action Environment. Forces in the macro environment, however, create opportunities for and pose threats to the company. The macro environment forces are less controllable than the micro forces, Therefore, success of an enterprise depends on its ability to adapt to the macro environmet, For example, when there is a substantial increase in the cost of imported raw materials due to depreetation of the Rupee, production of such materials within the country may become necessary Mato environ w ent consists of the following components: Political and legal environment (i) Social and cultural environment (i) Econonue environment (iv) Financial environment (v) Technological and physical environment (o) Natural environment (ott) Global environment 1, Political and Legal Environment: Political environment comprises the ‘ments relating to government affairs. It serves as the regulatory framework of =ae Introduction to Business Environment business. The main constituents of a country's political as follows: nd legal environment are <-{) The constitution of the country. (i Political organisation—organisation and philosophy of political parties, ideology of the Government, nature and extent of bureaucracy, influence of primary groups, business donations to political parties, political conscious-ness, ete. «_ lu) Political stability—structure of military and police force, election system, law and order situatioi,, President's Rule, foreign infiltrations, secessionist activities, ete. (wr Tmage of the country and its leaders 2 Poreign. -policy—alignment or non-alignment, relations with neighbouring countries. of) Defence and military policy (vii) Laws governing business, and legal system. a | P C Macro (Indirect) Environment (5 CCA Fates a — ~Boctal and Legal Environment Cultural Environment -—————1_ Micro (Direct) Environment Customers Internal Environment } oo Culture Mission and Objecuives ‘Management Structure Power Structure Company Image & Brand Equity Human and other Resources Natural Environment wouuoanug a10ve%3 ( Market Intermediaries Technological and Physical Environment Fig. 1.2. Elements of Business Environment ntsLaz Business Environment (viii) Flexibility and adaptability of laws—constitutional amendments and direction of public policies. (ue) The judicial system—implementation and effectiveness of laws. 2. Social and Cultural Environment: Social environment refers to the characteristics of the society in which a business firm exists. Social and cultural environment consists of the following: (i) Demographic forces—size, composition, mobility and geographical dispersal of population} (ii) Social institutions and groups (iti) Caste structure and family organisation. {iv} Educational system and literacy rates.) _(v) Customs, attitudes, beliefs, values and life styles. tea astes, preferences of people, and their buying behaviour. Family, marriage, education, religion, attitudes to work and wealth and ethics are some examples of socio-cultural factors.» 3. Economic and Financial Environment: The economic environment comprises all those economic forces which influence the functionir ig of business eplerprises, ég., the nature and structure of the economy. the stage of economic development, economic resources, the | of income, economic policies, distribution of income, etc. The main components of economic environment are as follows: li) The nature of economic system—capitalist, socialist or mixed economy. (iQ) Ecotiomie structure—occupational distribution of labour force. structure of national output, capital formation, investment pattern, composition of rade, balance/imbalance between different sectors, five year plans. (v) Economic indices—gross national product, per capita income, rate of savings and investment, price level, balance of payments position, interest rates, ete. (vii) Product (vi) Economie infrastructure and stage of development of the economy. Juct markets and faétor markets—degree of competition, market size, te Economie Environment Technologteal, Physteal Social and Cultu al and Natural Environment————>|_ Business J¢——— "reIntroduction to Business Environment 4, Technological and Physical Environment: The main elemen, technological and physical environment are the following: (i) Sources and types of technology. (Wi) Rate of technological change. ‘ees i) Approaches to production of goods and services. on (wv) cy ores aU ’ 9 Research and Development (R&D) systems. ‘ 5. Natural Environment: The main natural forces are as follows: Climatic and geographical conditions. a “Ag Hatitarats Gopaeetal and other natural resources. (iti) Ecologivat-system— fee (iv) Levels of pollution. ~~6. Global Environment: International agencies (World Bank, IMF, WTO, EEC, etc.), international conventions, treaties and agreements, eGonomic and business conditions in other countries, etc. Certain developments such as a hike in the crude oll price have global impact. Developments in information and communication technologies facilitate rapid spread of culture across countries. Economic conditions abroad affect Indian firms. For example, exports increase when markets expand abroad. International political factors can also affect business. For example, improvements in relations between India and Pakistan has led to higher trade between the two countries. WTO regulations have far reaching impact on business in India. Import and investment liberalisation by WTO has led to greater competition in India. The main determinants of international environment are as follows: ‘The state of the world economy and distribution of world output. International economic cooperation. International market structure and competition, Barriers to international trade and investment. National economic policies of differe: Role of multilateral economic instit International economic laws, treaties, agreements, codes and practices. Political system and conditions in different countries. . Cultural factors in different countries. Growth and transfer of technology. Growth and spread of multinational weeprganrPenr i. “ 1.6 Impact of Environment on Business and Strategic Decisions A business enterprise is a part of society and changes in environment influence its functioning and performance. The environment may pose constraints on the enterprise as well as open new opportunities for it. The impact of different elements of macro environment on business decision-making may be summarised as follows: 1. The economic system prevailing in a country determines the scope for private enterprises, The gencral level of development of the economy influences the Jo9 it ure and size of demand tributions of agrie ferent types of b for bus to thi vulne Business Environment Porations and liberal imports due to liberal economic policy of the Government. 2. Social and c x : 2. Social and cultural forces exercise significant influence on business. For example, demographic factors like size and growth rate of population, age composition employment pattern and income levels affect demand fe and services. High birth rates and growing incomes create ean ri oe Huge population and rising per capita income have made developing coun ae like India, China, Russia, ete, attractive markets for RIURaHGea Caracas The mobility of population across occupations and regions has implications for business. If labour is easily mobile its supply to business is smooth. When labour is very heterogeneous in terms of caste, religions, language, etc. its management becomes more difficult. Social consciousness among public requires more responsible behaviour on the part of business in the matter of environment, customer service and labour welfare. Growing number of working women have increased the demand for life style products. Demand for reservation in jobs for minorities and women, equal pay for equal work, rise in middle class are some of the social changes affecting business. The costs of ignoring the customs, beliefs, tastes and preferences of society can be very high. Pepsi's cola lost market share in some countries where the company's slogan ‘come alive’ translates as ‘c Customs and beliefs of society shap' example, social pressures again: turn stimulated new technology cause changes in plant location. baby food, toys and other sucl movement led to new marketing s' Management. 3. The political and legal envir business has to function. The challenge: ‘om ome out of the grave’ in local language. e the legal and technological system. For \st pollution led to antipollution laws which in to reduce pollution. Shifts in population may Preference for small family influences sales of h items. Emergence of a strong consumer trategies such as Customer Relationship ment provides the framework within which viability of a business firm depends upon its .s arising out of political and legal change. No ity for meeting the i ability Se without understanding the dynamics of the country's business can succeed political system and wi and honest political system instability due to terrorism, growth: Political decisions have In fact major thout the support of public opini serves as a boost for growth fall of Government, civil war, economic policies su‘ ion. A stable, efficient of business. Political etc. restricts business serious economic and business implications. ch as industrial policy, fiscal policy andare political decisions ¢ of gowernance The supportive ¢ and Hyderabad as the b larly. deregulation of capita ational and foreign direct i India in a big way due to removal of controls over fore / Government influences business. For example. indus: .out political democracy. A united and fair oppos: the Government not to be irresponsible towards and honest judiciary (courts) help to protect the ¢ Business activities become easier when different ministries and depar of the Government work in a cooperative and coordinated m of economic liberalisation has created new opportunities for busi and at the same ume g to threat in the form of intense c chnological. geographical. phy business. For example, cable TV has 2 has damaged carbon paper business Digital wa em of production (robots controlling factories) and di marketing). Factories are located near sources of raw materials. Natural environment is the source of resources used by business. Natural geographical and ecological factors influence decisions concerning plant location. marketing mix and so on. For example. jeeps are in great demand in hilly areas Demand for woollens is much more in states and countries having cold climate whereas states and countries having hot and humid climate require more airconditioners and desert coolers. Demand pattern for food. medicines, etc. also vary due to differences in climate. Modifications in product packaging and storage may be needed due to differences in weather. ‘Champagne and caviar are out. Burgers, vada pars and pizzas are in. As companies cut | back on employee entertainment and inflation squeezes family budgets. the days of full houses may have ended for many popular city restaurants, but low-cost. quici-serace food joints are minting money. McDonald's has seen a 30 per cent increase in sales over the last year and Pizza Hut a 7 to 8 per cent increase last month alone. Fast food restaurants are also getting innovative. Pizza Hut is trying to push sales with it new ‘Magic Times’ meal that costs € 99 per head. HyperCity—a mega food mall Mumbai—has launched a ‘Meals-To-Go' business. ‘Source: Hindustan Times, December 14, 2008. 1.7 Coping with Environmental Changes An organisation may use several techniques to cope with its environment 1. Buffering: Buffering techniques are used to soften the impact of envitonment on the organisation. Stocking materials, preventive maintenance, employee trauning, DEE———————t Business Environment oC a 16 bullding inventory are examples of buffering. These precautionary measures aon the organisation to avoid damage due to changes in environment. For examp! ss S tnaintaining a supply of raw materials, the Company can operate at full capacity: there are problems in obtaining fresh supply for firms faced with seasonal fluctuations offer price cuts in order to ‘spread sales more cvenly throughout the year. Special air fares for hight flights is another example of levelling 3. Anticipation: It means acquiring information aby environment. For example, a manufacturin, Product before deciding production schecly which organisations frequently anticipate ¢ ‘echnology and availability of hu S. 4. Rationing: It involves allocating organisational resources according to a Systemn of priorities. Rationing Is resorted to when an organisation ts unable to meet all the demand, f br example, when the demand exceeds Supply, the manufacturer tay ration supplies to dealers out probable changes in the ig firm tries to anticipate demand for its ules and related matters. Other areas in #es are customer needs, competition, ‘vironment involves facing the challenges '« Organisation attempts to control events and reduce its dependence on them By developing several n Fedluce dependence on one or two suppliers. An enterprise ray collaborate with others and may enter {nfo contracts. Advertising, public Felations and lobbying are also ex mples of dominating 6, Changing: An organisation may change Itself. its operations and ‘Output. For Chample, it may change its product line to meet changes in customers’ preferences, Changing ts a more difficult Coping strategy, while taking action in Fesponse to; {h environment interrelationships between Various elements of environment and thelr likely impact should be understood, Concept: Totality of forces influencing business, Pi Nature: Aggregative, interrelated, relative {nter-temporal, uncertain and contextual, ©: First mover advantage, early warning signal customer focun, strategy making change agent, public unage, continuous learning Types: (0) Internal-—cutture, mission and objectives, management Structure, power syntem, ‘Company® image and brand equity, human and other Fesources. (1) External—miero and macro, Micro Evironment: Customers, Competitors, suppliers, market intermediaries, ‘Anancters, pubbies Macre Bavironment: Political and legal, social and cultural, economic and financial, technological and physical. natural and global Coping: Buttering levelling anticipation ‘(absaing. dominating and changing techniques can be used to cope with the changing environ nentes Environment Introduction to Business Environmm nt Discuss t TEST QUESTIONS Very Short Answer Questions 1 NOnseD 8 Define the term ‘Business Environment What is Internal Environment? What is External Environment? és What is meant by Micro Environment? A What do you understand by Macro Environment? How does economic environment influence business What is the significance of business environment What is Political Environment? Short Answer Questions Distinguish between Micro Environment and Macro Environment What is socio-cultural environment? What is meant by politico-legal environment? State the main components of economic environment Describe the main elements of social and cultural environment. What are the environmental factors? Why should a manager be concerned with business environment? “Business environment is dynamic.” Explain Explain the features of business environment Long Answer Questions a geen ° Seon 12. 13, 14. 15. 16. 7. Explain the concept and na Discuss the significance of Explain various elements Discuss various compone: Explain the main element Explain, with suitable examples, the impact of business environment on business and Strategic decisions, Discuss the environment ture of business: environment. understanding the environment of business of internal environment of business, ‘ls of micre environment of business, ts of macro environment. Discuss various techniques that business ‘Organisations can use to cope with changes. withel in their environment. r ronment? Discuss the importance ofthe study of business environment. What environmental factors Distinguish between intern: Bring out and explain the encourage business activities? What factors discourage? \al environment and external environment. economic and non-economic factors which affect business, cro economic parameters on business, “The term environment refers to the total enterprises and their management” Exptain Examine the following {a} The soctological environmentee ee Business Environment ie in environment. For example, by ‘aintaining a supply of raw materials, the company can operate at full capacity ever there are problems in obtaining fresh supply for a specified period. 2. Levelling: Whereas builering absorbs environmental fluctuations, lepeling or smoothing attempts to reduce fuciuations in the environment. For example, retail ice cuts in order to spread sales more for night fights is another example of Anticipation: It means acquiring mformation about probable changes in the cavironment. For example, a manufacturing firin tries to anticipate demand for its Product before deciding production Schedules and related matters. Other areas in {which organisations frequently anticipate Changes are customer needs, competition, technology and availability of human resources, 4. Rationing: it involves System of priorities. Rationing all the demand, For example, may ration supplies to d allocating organisational resources according to a dhe the te tue af Organisation is unable to mect ‘hen the demand exceeds supply. the manufacturer involves facing the challe ‘The organisation attempts to control events By developing several Pliers. An enterprise lute contracts. Advertising, public 6 of dominating and converting threats into opportuniti in the environment and reduce its dep Suppliers, a firm can reduce de may collaborate with others ard may ente relations and lobbying are also examp| 6. Changing: An organisation Guimble. tay change its product lin Penence on one or two su; in environment interre} thelr Ukely impact shoul: ‘SUMMARY Y of forces influencing business, Concept: Totalit Nature: Augregative, interrelated, Significance: First mover advant change agent, public image, continuons, learning Types: (1) Internal—culture, mission and obj Company's tmage and brand equity. hum (W) External Micro Environment: Customers, Competitors, suppliers, market intermediaries, financiers, Publics Macro Environment: Political ayy te technological and physical. natural Coping: Battering levelling be used to cope with the ae, early lectives, management st ructure, power system, lan and other resources, ro and macro ‘Wal, Social and c1 4 gtobal. wktPation, rationing. dominating and changing techniques can changing environ Mural. economic and financial,tntroduction to Business Environment iss U & s TEST QUESTIONS Very Short Answer Questions w NOYES Define the term ‘Business Environment What is Internal Environment? What is External Environment? What is meant by Micro Environment? What do you understand by Macro Environment? How does economic environment influence business? What is the significance of business environment? What is Political Environment? Short Answer Questions Oarousune Distinguish between Micro Environment and Macro Environment What is socio-cultural environment? What is meant by politico-legal environment? State the main components of economic environment Describe the main elements of social and cultural environment. What are the environmental factors? Why should a manager be concerned with business environment? “Business environment is dynamic.” Explain Explain the features of business environment Long Answer Questions 1 a ones cen u 12, 13, 14 15, 16 17. Explain the concept and nature of business environment. Discuss the significance of understanding the environment of business Explain various elements of internal environment of business. Discuss various components of micrc environment of business Explain the main elements of macro environment, Explain, with suitable examples, the impact of business environment on business and strategic decisions, Discuss the environmental factors influencing business. Explain the various components or facets of business environment. Explain the factors that influence the external environment of business Discuss various techniques that business organisations can use to cope with changes in their environment. ‘What is meant by business environment? Discuss the importance of the study of business environment. What environmental factors encourage business activities? What factors discourage? Distinguish between internal environment and external environment. Bring out and explain the economic and non-economle factors which aflect business Explain the impact of macro economic parameters on business. “The term environment refers to the totality of all the factors which are external to and beyond the control of individual business enterprises and their management.” Expiasn. Examine the following {a) The soctological environment affects and gets affected by the economic environenent of business. do yo wh market env iit ae, 2132. 33 Business Environment (b) Business envirom z onmer aes nt is very complex, with heterog oe geneous elements in th © external challe se pees lenges faced by business! F 1¢ important factors in business environ aon 38 nment that influence business in Indi. Give examples in support of your answer. t do yor es you mean by “business environment?” Explain the various market and nore market environments influencing business in India ain the meaning and definition of “Business Environment * piscuss in detail any isions of general environment of business: ways in which business environment affect the growth and in a country? ‘affect the business environment in & count wha Expl two dimer What are the various development of business the set of forces which eenniple tal SUPPONe Oy answer. in brief the recent trends in the es. ee i India’s envil Dee brie the uence di omens y? Give of India. onment What are business? Ext plain with ent.” Explain. . vir ORT ct business environment sui pusiness ! what econ? explain scuss ae tthe ™ mic and the ro the muEnvironmental Analysis "environmental Analysis _ CHAPTER OUTLINE 9.1 concept of environmental Analysis 2.2 Process of Environmental Analysis oe weapon of Environmental Analysis ental Analysis Limitations of Environm al Analysis 24 g5 Techslanss of Environment 2.6 approache 2.7 environmen al analysis and strategic Management competitive structure of Industries . t Questions case Study e summaryBusiness Environment 22 2.1 Concept of Environmental Analysis in a dynamic state and several interrelated factors Cinco Une fe ay eee are ene monitoring and forecasting requires appropriate data base and food analytical skills. Business firms that are able to read early warning signals oe in environmental changes and make appropriate adjustments in their policies ant practices reduce risk and uncertainty. They can gain competitive advantage over the Fwals. Failure to do so can erode profitability, reduce market share and even lead to industrial sickness 's taken rather than viewing the environmental forces in piecemeal manner. This is necessary because different elements of business environment are interrelated 2.2 Process of Environmental Analysis 6 The process of environmental analysis consists of the following stages: 1. Environmental Scanning: Scanning means the process of analysing the environment for identifying the {actors WaTelrmay wscente The busines. Ts purpose is to identi he ig trends or Bly’ ig Signals. Such fends may have evolved over time or Hi vironmental scanning”alerts the organisation 9 SRE Se in the external environment so that Sullable strategic initiatives may be taken before these forces become critical for the organisation Scanning is basieally-expteratory in nature. There are so many “tnvironmental-factors which influence the 0} eration of a busmess. All thesefactors may ndt be reley: a (oat enferprise.Thetelor eentearand ner omen must be identified. Several factors, e, managerial philosophy, age, size, power. scographietimension, type of business of the organisation influence the selection of rélevant environmental factors, environment is collected. Once the relevant factors in the environment are identified, adequate data about these factors are gathered so as to ascertain their emerging pattern and trends. Monitoring is a follow up and deeper analysis of relevant7 Environmental Analysis : environmental forces identified through scanning. Several techniques are i collect the relevant facts about environmental factors. Company records, Pubticay spying and verbal talks with the employees, customers, dealers, suppliers competitors are the main sources of data. 3, Environmental Forecasting: Scanning and monitoring reveal wnat hay happened and what is happening. Forecasting is the process of estimating the relevant events of future based on the analysis of their past and present behaviour. It is necessary to anticipate future events before any strategic plans are formulated. Forecasting can focus on future aspects of the environment which affects the organisation. Forecasts are made for economic, social, political and technological elements of environment. Several techniques like time seriés analysis, econometric model, scenario building, delphi method, etc. are used for the purpose of forecasting. 4. Diagnosis (Assessment): Environmental factors are assessed in terms of their impact on the organisation. Some factors in the environment may entail an opportunity while others may pose a threat to the organisation. The degree oT impact may also vary from one factor to another. SWOT analysis, ETOP and other such techniques are used for environmental diagnosis. ‘The four stages given above are intertwined as can be seen from Fig. 2.1 (tie) fog oe Seater se oe ey Fig 2.1. Source: Fahey and Narayanan, Micro Environmental Analysis for Strategic Management, West Pub. Co., 1986, p. 43, 2.3 Importance of Environmental Analysis Environmental analysis offers the following benefits: (i) Environmental analysis makes managers aware of the linkage between an organisation and its environment and keeps them alert and informed. (ii) Environmental analysis helps the company to identify the threats and __. opportunities before it. It serves as an early warning signal allowing the company to develop appropriate responses. Deane een24 Business Environment (at) Through environmental analysis an organisation can gain understanding of how the industry's environment is being transformeg iv) The environment changes so fast that an organisation's equilibrium with its snalycle the pay be disturbed quickly. With the help of environmental analysis the organisation can know the causes of disequilibrium. Suitable changes can then be made to create the new equilibrium. (v) Environmental analysis helps the plane, (vl) Environmental analysis is essential for must have a vision of the business (a guidi analysis (the radar). Research studies als undertake systematic environmental anal not undertake such an exercise. ing star) and a system of environmental ‘0 suggest that those organisations which lysis perform better than those which do 2.4 Limitations of Environmental Analysis Environmental analysis, particularly the forecasting part, suffers from several Iimitations: 1. Based on Assumptions: All forecasts are based on certain assumptions which may not always-be-true. The basi c assumption behind forecasting is that nd there is an orderly pattern in their behaviour. ‘This assumption may not hold good in all cases, As a Tesult forecasts may become unreliable.) a = . Forecasts merely indicate the trend of future events “Tens ant enue The Wars techniques arious techniques of forecasting simply project The s ani t Sarinot guarantee that a particular trend will occur ia future. Al events do not change haphazardly and forecasts eo Wrong, they only differ in the degree of error. There is always a possibility of mistake eae ae 3. ‘Time-consuming and Expensive. Lot of time and money are involved in the collection, analysis and interpretation of ‘dal forecasting| ronmental Analysts and used. Forecasting techniques sho be kept flexible through contingency p! d be improved as far as possible lanning and other means. 2.5 Techniques of Environmental Analysis Several techniques are used for analysing and dfzgnosing the enaronment. Two such techniques are given below: 1, SWOT Analysis: SWOT is acronym for strengths. weaknesses. opportunities and threats. While strengths and weaknesses can be identified by analysing the internal environment {corporate appraisal). opportunities and threats can be identified by analysing the externa! environment. SWOT analysis can also be modified into TOWS (Threats. Opportunjuies, Weaknesses and Strengths). Strength: A strength 1s an inherent capability of the company which to gain strategic advantage over its competitors. Country-wide distribution network. for example, is a strength of Hindustan Unilever Limited Weakness: A weakness 1s an inherent limitation or constraint of the company which creates strategic -iisadvantage for it. Family fued is today a weakness of Reliance Industries. Opportunity: An opportunity is a favourable condition in the company’s external environment which enables it to strengthen its position. Economic liberalisation and globalisation offers an opportunity to companies which want to enter banking. insurance, telecommunication sectors. Threat: A threat is an uhfavourable condition in the company’s external environment which eauses a damage or risk to its position. Competition from multinational corporations is a threat for Indian firms SWOT analysis is helpful in the formulation of an effective strategy that can capitalise on the opportunities and neutralise the threats faced by an organisation. 2. ETOP: ETOP is the acronym for environmental threats and opportunities Profile. A spebimen of ETOP is given below: ETOP for a Bicycle Company Environment Impact Social T Customer preference for sports cycles which are fashionable, easy to ride and durable Political +> No significant impact Economic + — Growing affluence among urban consumers, export potential high Regulatory 1 Bicycle industry a thrust area for exports. Market t Industry growth rate for sports cycles is high at 30 per cent Technological upgradation in progress Up arrows (t) indicate favourable impact (opportunity), unfavourable impact (threat) while horizontal arrows (- Technological down arrows (+) indicate ) indicate a neutral impact: tel 26 Business Environment} { SWOT Analysis of Hindustan Unilever Ltd. (HUL) i | strengens | OPS songbrand porto | © consumer understanding © R&D ability © distribution reach | & igh quay manpower | Weaknesses | 6 increase consumer spends on education, consumer durable, entertainment, travel ete ' resulting in fower share of wallet for FCG | © lumted success in changing the eating habits of people | © complex supply cain configuration } © unwieldy mumber of stock keeping units (SKUs) [9 Aispersed manufacturing loeations Opportunities | ® increased penetration especially in rural areas | © brand growth through increased consumption depth | # frequency of usage across all categories | © upgrading consumers through innovation to new levels of quality and performance | © emerging modern trade to be effectively used for introduction of more upscale personal | care products | © growing consumption in out of home categories ‘Threats | © low-priced competition | © spurious/counterfeit products in rural areas | © changes in fiscal benefits |[___# unfavourable prices in ots 3. Quest (Quick Environmental Scanning Technique): Quest provides a broad and comprehensive method for scanning the environment. It seeks to indicate trends and events in the external environment that have critical implications for future strategies. It is a systematic way to understand high priority issues and to focus management's attention quickly on strategic areas for which more detailed analysis would be beneficial. QUEST is based on the following assumptions: (0) Individual executives in a firm have a view of the dynamics of the changing cnvironments which face them. (it) In aggregate these views represent the organisation's understanding of its environment ‘The steps involved in the implementation of QUEST are as follows: 1. Review current conditions in the environment. 2. Explain purpose and methodology of the QUEST. 3. Review futures’ literature to stimulate thinking. 4. Define scope and boundaries of discussion,Environmental Analysis 5. Identify key issues. S -eed list. z 7 sass propabilty of occurrence of each event § Develop a Cross Impact Matrix (CIM). 9. Analyse CIM and develop scenarios. ‘The main benefits of QUEST are: (i) Greater awareness of environmental changes. (ii) Better strategic planning and ccisloneeaslane ) Better understanding of markets and competition. ; 10} Improvement in resource allocation, diversifications and acquisitions Cross-Impact Matrix Bvent Probability 1 2 L 2 3 4 5 4, BCG Matrix: Boston Consulting Group (BCG) developed a matrix to analyse and understand the entire business portfolio of a firm. Theretore, it is also known as “portfolio analysis.” Fig. 2.2 shows the four square matrix. & = Sure Questions Marks s 3 & 3 8) cash Cows be 6 ae Tow Relative Market Share Fig. 2.2. BCG Matrix. 1. Stars: The star business generates high profits and high cash flows. Maximum investment is advisable in such business or products. 2. Question Marks: This business has a low market share in a fast growing market. It yields low profits and marginal cash flow. Investment may be made in such business to increase market share. 3. Cash Cows: In this business the firm has a high market share in a slow growing market. Though the profit is low but high cash is being generated 4. Dogs: Business in this category has no future. Therefore, much investment is not advisable. However, if managed well dogs business may become cash cows ace an28 Business Environment BCG ma a gor ‘a Ce Aa ee for deciding which business to expand and IP 1 formulating strategies for different products/product lines 6's fireer Howeves tt considess ohiy tot) atticiuions(arkelct rca) aah, growth) and only two degrees (High and low) of each dimension. There are ee 5 other dimensions of business performance. Some business may fall in medium ee 5. Core Competence: According to GK Prahsiad and ary Ramey ea competence is an enduring strength of an organisation. Its characteristics are as follows: (a) It is a source of competitive advantage for the company. (b) It can be applied to a wide variety of markets {c) It is difficult for competitors to imitate Core competence is generally defined in terms of special technical or product expertise, For example, Honda Motors of Japan has core competence in auto engines, Sony has core competence in miniaturisation and can make any product tiny. Due to its core competence, Honda has produced world class cars, motor cycles and scooters. Similarly. Sony has product miniature walkmans, tape recorders, televisions, etc. due to its core competence. A firm should understand and focus on business in which it has core competence. 6. Sectoral Analysis: After analysing the general or macro environment, it is important to study the sector or industry in which an entrepreneur operates. 7. Competitive Analysis of Market: Competitive analysis is basically an insight into the status of the market for his product or service. It gives a real and pragmatic picture of the marketability of the product/service in relation to competitive products/ services) 8. Pestel: Pestel analysis stands for “political, economic, social. technological, environmental and legal analysis.” It is a part of the external analysis when conducting a strategic analysis or doing market research and gives a certain overview of the different macro-environmental factors that the company has to take into consideration. 2.6 Approaches to Environmental Analysis There are three main approaches to environmental analysis. These are given below: 1. Systematic Approach: Under this approach, information for environmental analysis is collected systematically. Information about the environmental factors having a direct impact on the organisation is collected regularly. Continuous updating enables the organisation to monitor changes in the environment. 2. Ad hoc Approach: In this approach, an organisation conducts special surveys and studies to understand trends in the environment from time to time. Such studies may, for example, be undertaken when the organisation is to launch new projects or to develop new strategies, Unforseen developments may also be investigated with respect to their impact on the organisation. i 3. Processed form Approach: Using this approach, the organisation uses information in a processed form available from various sources both inside and outside the organisation. When an organisation uses information published by government agencies and private institutions, it makes use of secondary data which is available in a processed formEnvironmental Analysis 2.7 nvironmental Analysis and Strategic Management Q According to A. Sharplin, strategic management is “the formulation and implementation of plans and the carrying out of activities relating to the matters which are of vital, pervasive, or continuing importance to the total organisation.” In the words of Ansoff. strategic management is “a systematic approach to a major and increasingly important responsibility of general management, to position and relate the firm to its environment in a way which will assure its continued success and make it secure from surprises” Glueck defines strategic management as Defining Business | ‘a stream of decisions and actions which _ |_Mission and Objectives leads to the development of an effective T strategy or strategies to help achieve cor- SWOT Analysis porate objectives”. Strategy is defined as “a | « Environmental Analysis |< | unified, comprehensive and integrated plan | « Self Appraisal 4 the strategic advantages of the firm Feria Sante to the challenges of the environment. It is “designed to ensure that the basic objectives Strotegc Alternatives | oa: cial . ? and Choice of Strategy of the enterprise are achieved”. Strategic management involves formula- | tion, implementation. review and control of Implementation of = || strategies for achieving the company’s Strategy. objectives and mission. Strategies cannot be y formulated and controlled withoutathorough [Evaluation and Control knowledge of the company’s internal and of Strategy external environment. Therefore, environ- ig 2.5, The Strategle Management Process mental analysis plays a vital role in the process = of strategic management which consists of the following steps: 1. Defining Business Mission and Objectives: Strategic management process begins with the formulation of mission and objectives of the organisation. Mission is the fundamental unique purpose that sets an organisation apart from other organisations and identifies the scope of its operations in terms of products and markets. It represents business philosophy and implies the image which the organisation secks to project. Corporate objectives are the end results which are to be realised for achieving the mission. Mission and objectives lay down the foundation for strategic management. They relate the organisation to the society, and state what the organisation stands for. In order to define clearly its mission and objectives, an organisation must seek answers to certain basic questions: (i) What business the company is in? (ii) What should the company’s business be? (iii) Who are the company’s customers? Environmental analysis is helpful in finding answers to these questions. Objectives help define the company in its environment. With changes in the external and internal environment, the corporate objectives need to be modified or redefined. A company should from time to time assess how well its objectives tap its resources and opportunities before it. ha——— llss—isS a Business Environment 2. SWOT Analysis: Corporate appraisal and environmental analysis are the (Wo constituents of SWOT analysis. Corporate appraisal reveals the organisation's Strengths and weaknesses. Environmental analysis reveals the opportunities and threats before the organisation. Opportunities should be availed of and the impact of threats neutralised in order to capitalise on organisational strengths and minimise the weaknesses, ‘The environment might entail several opportunities but the organisation might not have the strengths to exploit all the opportunities. Similarly, a company might lack the strength (0 face environmental threats, In such a situation the company might give up the line of business in which it is not competent to survive. Since Nberalisation and globalisation, many firms have sold off their non-core business so as lo concentrate on their core business. For example, Parle sold its soft drinks business (Thumpsup) to concentrate on mineral water (Bisleri) Companies like Reliance have diversified into new businesses (tclecommunications--Rellance Inlocom) to capitalise their strengths 3. Strategic Alternatives and Choice of Strategy: Once an organisation ‘dentifies its strengths and weaknesses and environmental opportunities and threats, the next stage in the process of strategic management is generation of strategic alternatives and the choice of the most appropriate strategy. There may be several alternalives before the organisation, e.g., continue in the same business oF get out oft expand the existing business or enter a new business, etc. No organisation can choose all the alternatives. Therefore, the organisation has to consider some of the tore promising alternatives in the light of its mission and objectives, its strengths and weaknesses, and environmental opportunities and threats. After proper evaluation and comparison of various alternatives, the most suitable one is chosen. The chosen alternative becomes the company's strategy 4. Implementation of Strategy: A good strategy alone cannot lead to success Us effective 1mplementation is necessary. Detailed plans of action are prepared and the necessary systems and resources are raised to put the chosen strategy into action. In a large and diversified company, corporate strategy needs to be spelt out into strategies at strategic business units and functional levels. Sound organisational structure, effective leadership, functional policies, effective information system, sound control system, resource allocation are necessary for successful implementation of strategy, 5, Evaluation and Control of Strategy: In the last stage of the strategic management process, the top management ascertains whether the strategie choice as implemented Is achieving the objectives of the organisation. The chosen strategy may fail to mect the objectives due to poor implementation, unforeseen changes in the environment or inappropriate strategic choice. The corrective actions will depend upon the cause of failure, More effective implementation of strategy, better analysis of internal and external environment and changes in the organisational mission and objectives may be some of the actions, Evaluation and control are treated as the last stage of the strategic management process, However, this 18 an ongoing process because continuous monitoring 1swhenever something 20¢5 wrong as a dynamic process. Evaluation y change in any of the (. gnvironmental Analysis es 26s i able action in ime Jd be treated jons whenever there is an, required for taking sult strategic management shou! the feedback for modifica affecting strategy. re of Industries ® a 2.8 Competitive Structul ics, a company must identify and understand a the industry. Michael Porter! has developed the competitive dynamics of an industry industry depends upon the Inorder to formulate appropriate strate; the nature and degree of competition in a model identifying the forces that affect ‘According to this model, the state of competition in an following five forces: 1, Threats of entry. 2. Bargaining power of buyers. 3, Bargaining power of suppliers. 4. Threats of substitute products. 5. Rivalry among existing firms. POTENTIAL ENTRANTS: + Fi Entry Barriers re £ > ,_ | Bargaining Power MONG™ ‘SUPPLIERS ealning RIVALRY AMONG Bargaining Power a of Suppliers | EXISTING FIRMS, of Buyers BUYERS, 7 Threat of Substitute Products SUBSTITUTES Fig. 2.4. Forces Shaping Industry Competition. Threats of Entry Threats of new entrants tends to be ¢ high when the industry is ver pare a ay as expected retaliation from the edsting ieee ne nce 0 an industry bring new capacity, the des! Sal ae I. ire to gain substantial resources. As a result competition in the ae enn eee the following act as barriers to entry: Tee 1. Economies of Seale: Econo : Economies of scale restrict entry by faa to come on a large scale or to accept a cost. sEaeae Small pe eae pout and large players are discouraged due to heavy risk Sriesasieea'ct nl! i in the areas of production, marketing, financing and oe oe he Differentiation: Brand image, customer loyalty and unique aa S create a barrier by forcing new entrants to spend heavily to pene customer loyalty. Product differentiation may act as powerful barrier fetes era ¢ brand |. Michael, Porter, Competitive Advantage— Wichael B Porter Competive Advantage—Techniques for Analysing Indusiries and Competitors Strategy eeys quite high such sonal products, 3 Capital Requirements: The ng 4s due to capital intensive o he minimum sized urea fe, ‘ales a bar Cobra i at gs re tl es Ee} me ese requirements, Perlod of 7-8 ye ae aS in the case an industry ere; ay ace prictary technology, acce: Y accure from 1 at low prices, favourat favourable locatio ; product, or 2. are produced by industries caning high profits. Rivalry Among Existing Firms ‘The various factors stated above are external form of competition. Rivalry among casting firms 1s the most visible form of competition. Firms in an indusiry are interdependent because competitive actions of a firm usually affect others and may be retaliated. Competitive actions include product improvements, new products. better customer service, price changes, promotional measures, etc. ‘The degree of rivalry among competing firms depends upon the following factors: 1, Number of firms in the industry, their relative market share and their competitive strengths, etc. Degree of differentiation in the products of rival firms in terms of produrt positioning, prices, distribution channels, after sale service, credit terms. etc. State of growth of industry—in a stagnant industry one firm can expand sts sales only at the cost of other firms. Cost advantages/disadvantages of rival firms—when fixed costs are high there 1s pressure to increase sales and competition increases. Similarly, when there are economics of scale firms are tempted to increase capacity and rivalry gocs up. Strategic stake—when a number of firms have high stake in the industry rivalry Is greater. 2 peBusiness Environment 214 ‘ers also lead to more rivalry. a Wace firms are very diverse in the personalities, strategies and origins rivalry becomes stronger. Degree of Change Stable Dynamic Cel 1 cell 2 Stable and predictable environment Few components in environmetit Dynamic and upredictable environment Few components in environment & # Components are somewhat similar’ ‘and Components are somewhat similar but < remain basically the same are in continual process of change é ‘minimal need for sophisticated knowledge Minimal need for sophisticated 6 of components knowledge of components ‘ Cel 3 Cell 4 § Stable and predictable environment Dynamic and unpredictable. environment & | y Many components in environment Many components in environment 3 Components are not similar to one Components are not similar to one another § _ another and remain basically the same and are in continual process of change 9 High need for sophisticated knowledge of High need for sophisticated knowledge of ‘components components Fig. 2.5. Environmental Uncertainty Matrix, SUMMARY Concept: The process of monitoring, analysing and understanding environmental forces and trends. Process transformation, equilibrium, Limitations: Based on assumpyi Scanning, monitoring, forecasting and assessment. Importance: Organisation environment linkage, threats and opportunities, environmental Techniques: SWOT and ETOP. narrow range of alternatives, ‘ons, not absolute truth, time and strategy formulation. consuming, and expensive,environmental Analysis x ches: Systematic, adhoc, processed form : % Approse jement Process: Defining mission and objectives. SWOT analysis, stratep, N pete ea choice, implementation, review and control. a of Industries: Threats of entry, bargaining power of buyers, bargaining cana: suppliers, substitutes, and rivalry among existing firms po TEST QUESTIONS very Short Answer Questions 1. What is ‘Environmental Analysis"? Why is it necessary? What is meant by ‘Forecasting’? What do you understand by SWOT? What is ETOP? What is meant by competitive structure of an industry? What is core competence? earner Short Answer Questions 1, Explain in brief the concept of environmental analysis, What is environmental diagnosis? Describe the importance of environmental analysis. Describe the limitations of environmental analysis. Explain briefly alternative approaches to environmental analysis. What factors determine threats of entry to an industry? Why is it important to continuously monilur business environment? Long Answer Questions 1 NORPeDN Explain the process of environmental analysis. Discuss the importance and limitations of environmental analysis. 2 8. Explain with suitable examples the major techniques of environmental analysis. 4. Explain the process of strate; gic management, highlighting the role of environmental analysis. With the help of Porter's five forces model, Discuss in detail the environment analysi enhance organisational effectiveness, Discuss the challenges and opportunities for business in the next decade. 8. Explain SWOT analysis in detail. 9. “Firms which systematically analyse and diagnose the environment are more effective than those who don't.” Explain, 10. “Environmental scanni Elucidate. explain the competitive structure of industries, is for an organisation, and suggest how it can ing provides the basic inputs for strategie decision-making. 11. What are the forces that make business environment dynamic? What should be the corporate response to changes in business environment? Can business environment be predicted? How do future expectations affect environmental analysis? How can a business firm monitor business environment of a country? What are the critical requirements for such monitoring? 12, 13,er 6 vy Business nat are the benefits of monitor: “ness Exvironmen 4. What pera 8 ereing business environment oe: of scanning the business environmen: iment? Describe various tech, 5. Perform the SWOT analysis on an niques communication industry. Y organi: 6. Explain the need and im, r components of bsineas omnes g asco “An in-depth understand management of any busy “Success of a business 8 aro.” Explais environment.” Discuss. P'S¢ 4¢Pends upon h ee “Business is the 18. 19. In the light of th i is statement explai environment aa essential for firms which w: i : i Want to surave mn Explain ae In 1967 McDonald's opened its first restaurant outside the United States. in Canada. By 1985 international sales represented about one fifth of McDonald's total revenues. Yet fast food has barely touched many cultures. While 90 per cent of the Japanese in Tokyo have eaten a McDonald's hamburger, few outside the cities know what a hamburger is, In Europe. McDonald's maintains a very suiall percentage of restaurant sales but commands a large market share of the fast food market. The taste for fast food, American style, is growing more rapidly abroad than at home McDonald's international sales have been increasing by a large percentage of every year Everyday more than 18 million people in over 40 countries eat at McDonald's. Its traditional menu has been surprisingly successful. People with diverse dining habits have adopted burgers and fries wholeheartedly. Before McDonald's introduced the TES to French fries, potatoes were used in ee to make starch. The Germans burgers were people from the city of Hambur; EaReeee eee service, the cleanliness, and the value bea for ee McDonald's success. McDonald's was ee ee i Sanaa ee (ese oeraae i ‘n. Not only are children welcomed, but aa paper.a Saved or may be even Ronald poesia ie twenty langues 's Golden arches promise the same basic menu and QSC & V in every restaurant. bie eat eee ani Sek cameentnc) Rl aaionienenreariemeeg elo Ts ree Ta MCDA see Iti re eel (earls ecarise they falled to mee strictly cons for fast services and cleanliness, even though they were highly profitable. Thi eee its expansion in France. e Be nts are zun by local management and crew. Owners and manager: Ieee: r University near Chicago to learn how to operate a McDonald's restaurar attend the Hamp" V. The main campus library and modern electronic classrooms (whic a ee translation systems) are the envy of many universities. include si 4—— Environmental Analysis a7 McDonald's ensures consistent products by controlling every stage of the distribution Regional distribution centres purchase products and distribute them to indindual restaurants ‘The centres will buy from local suppliers if the suppliers can meet detailed specifications McDonald's has had to make some concessions to available products. For example. itis difficult to produce the Idaha Potato in Europe. McDonald's uses essentially the same competitive strategy in every country. Be first ina market and establish your brand as rapidly as possible and advertise very heavily. New restaurants are opened with a bang, So many people attended the opening of Tokyo restaurant that the police closed the street to vehicles. The strategy has helped McDonald's develop a strong market share in the fast food market, even though its U.S. competitors and new local companies quickly enter the market ‘The advertising campaigns are based on local themes and reflect the different vironments. In Japan, where burgers are the snack, McDonald's competes against confectioneries and the new “fast sushi" restaurants. Many of the charitable causes McDonald's supports abroad have been recommended by the local restaurants. McDonald's has been willing to relinquish the most control to its Far Eastern operations, where many restaurants are joint ventures with local entrepreneurs who own 50 per cent or more of the restaurant. European and South American restaurants are generally company operated or franchised (although there are many affiliates—joint ventures—in France). Like the U.S. franchises, restaurants abroad are allowed to experiment with their menus. In Japan, hamburgers are smaller because they are considered a snack. The “Quarter Pounder” did not make much sense to people on a metric system, so it is called a “Double Burger”. Some of the German. restaurants serve beer, some French restaurants serve wine. Some Far Eastern McDonald's offer oriental noodles. But these new items must not disrupt existing operations. Questions 1. What opportunities and threats did McDonald's face? How did it overcome them? What alternatives could it have chosen? 2. Before McDonald's entered the European market, few people believed that fast food could be successful in Europe. Why do you think McDonald's succeeded? What is the McDonald's basic philosophy? How does it enforce this philosophy and adapt the different environments? Ans. 1. Opportunities ‘Threats (a) Large untapped market (a) Negative opinion about hamburgers in Germany (b) Rapidly growing taste for (b)_Diversity in food habits of different countries, ‘American style fast food. McDonald's overcame the threats and constraints through fast, family-oriented service, cleanliness and value for customer. In Europe, it welcome children and entertained them with crayons and paper, a play land, etc. Its products, handling and cooking procedures and kitchen layouts are standardised and strictly controlled. ‘McDonald's could have chosen the other alternative of diversifying into non-fast food items and traditional foods suited to the tastes of citizens of each country. Before McDonald's entered the European market, few people believed that fast food t could be successful in Europe. McDonald's succeeded because fast food was a menu rapidly in Europe than in America. Its and the taste for fast food was growing more218 Business Environment ¢stablishing brand as rapidly as possible and advertise hea 3. McDonald's basic philosophy is “QSC & Vi McDonald's enforces this philosophy through 10 mee its standards for fast services and cleanliness, eves they were highly sraeable. I also ensures consistent products by Controlling every stage of the distributionCHAPTER oe Managing Diversity CHAPTER OUTLINE 3.1 Cultural Diversity 3.2. Workforce Diversity 3.3 Importance of Managing Diversity 3.4 Framework for Managing Diversity * Summary * Test Questionsof organisations 3.1 Cultural Diversity (Multi- With glob: Culturalism) oD has acquired greate sags e a seen < eee has to be sensitive to management are as follows: Paces er aibusiness Altitudes towards work and achievement Attitudes towards the future. Pattern of decision-making Attitudes towards authority. Responsibility towards family. Expression of disagreement, Language barrier is an example of cultural diversity. For example, making a circle with the finger and thumb to signify "OK" can cause trouble in Japan as it means that you are asking for a bribe. Multi-culturalism or cultural diversity is illustrated in the Fig. 3.1. 1. Power Distance: It means the extent to which employees accept the authority of managers. In high power distance cultures workers follow order as a matter of course. Managers make decisions because they are the managers, and no one questions their right to do so, In low power distance cultures, workers do not accept managerial power structure. Therefore, decision-making is decentralised. 2. Uncertainty Avoidance: It implies the extent to which workers avoid or accept feelings of uncertainty. People with high uncertainty—avoidance feel threatened by ambiguous situations. 3. Individualism: Individualism means the philosophy by which people think of themselves first as individuals and give priority to their own best interests. On the other hand, collectivism is based on the idea that the interest of the group or society should be given priority over that of the individual. OgnRoneManaging Diversity ae 4, Masculinity; It refers to the extent to which the dominant values in a culture are succeSS, Money, and things. A masculine worker is aggressive, assertive, and materialistic. On the other hand, femininity (the opposite ‘of masculinity) refers to purturing, concern for others, and concern for the quality of life Highest Hofstede's Dimensions Lowest India United States France Israel Malaysia Power Distance ti Singapore Denmar Mexico Ireland Israel India Austria United States Japan Uncertainty Avoidance Great Britain 8, Korea Malaysia Greece Singapore India Columbia Australia Pakistan Great Britain Taiwan ‘The Netherlands Peru United States Singapore India Norway pene pore fan Denmark ws Finland Japan Fig. 3.1. Differences in Cultures. Source: Thakur, Burton and Srivastava, International Management, Tata MeGraw Hil, New Pel 1997, p. 38. 3.2 Workforce Diversity Workforce diversity refers to differences in the workforce in terms ofits age, gender, race/minorities, education and productivity. Age has been a popular basis of market segmentation. A culture's age structure is especially important to the distributors of sch products as athletic equipment, designer clothes, compact disks. etc. Gender take up of the workforce is important for management. The nature of workforce diversity is illustrated in Fig. 3.2. She Schedule Gender Castes Tribes The Disabled Workforce Age \ Eaication Productivty Z Fig 3.2. The Nature of Workforce Diversity Soufee: Thakur, Burton and Srivastava, Op. cl p: $0.34 Business Environmer Sexual harrasment has become a significant issue due to growing percentage women in workforce. As applied in the work place, Sexual harrasment means an unwanted sexual behaviour that can involve, for example, words, gestures, sounds actions or physical touching, Racial and ethnic minority issues are also becomin, increasingly important. 3.3 Importance of Managing Diversity 0 Managing diversity effectively is esse, Taylor Cox! of the University of Michigan (USA) has given the following benefits o managing cultural diversity. 1. Lower Costs: As or, ¢ diverse, lack of integrating workers from different cultural bac ibe more creative . However, there must be a core of = People can express their differences) Hetrogeneous groups can Produce better decisions throt ce diversity when people from maéed properly, diversity can increase efficiency and creativity. Failure to manage diversity and interpersonal conflicts, 3.4 Framework for Managing Diversity Q Fig 3.3 outlines seven spheres of activi framework for managing diversity, Managing diversity consists of three related tasks which are described in Fig. 3.3:2 ly that together provide a comprehensive 1+ Taylor H. Cox, Managing Cultural Diversiy—mplcations or Organisational Competitiveness” Academy Management Review, Vol 5, August 1091 2 Adapted from Thakur, Button and Srivastava, Op. ct, pp. 40-42,a acta. Managing Diversity ‘ORGANISATION CULTURE * Valuing differences * Prevailing value system + Cultural inclusion TR MANAGEMENT ‘SYSTEMS (BIAS FREE) * Recruitment * Training and development ** Performance appraisal * Compensation and benefits + Fromotion MIND SETS ABOUT DIVERSITY * Problem or opportunity? * Challenge met or barely addressed? + Level of majority culture buy-in (resistance or CULTURAL DIFFERENCES *+ Promoting knowledge and acceptance + Taking advantage of the opportunities that diversity provides HIGHER CAREER INVOLVEMENT OF WOMEN + Dual career * Sexual harassment Work family contfict HETEROGENETY IN RACE/ ETHNICITY/NATIONALITY * Effects on choesiveness, ‘communication, conflict, morale * Eifects of group identity on interaction (e.g. stereotyping) # Prejudice (racism, ethnocentrism) EDUCATION PROBLEMS, * Improve publlc schools * Educate management on valuing differences Fig. 3.3. Framework for Managing Diversity. Source: Taylor H. Cox, Jr.,and Stacy Blake, “Managing Cultural Diversity: Implications for Or; Competitiveness”, Academy of Management Executive, Vol. 5, Issue 3, August 1991, p. 51. 1. Managing Cultural Diversity: In order to build a more diverse and effective workforce for the success of a company, it is necessary to manage cultural diversity. This will help the company by providing an advantage in recruitment, retention and motivation of workers. A culturally diverse workforce will maximise the company’s ability to deal with a culturally diverse marketplace. Culturally-diverse work teams can better deal with culturally-diverse consumers and other groups. Firms must develop cross-cultural training programmes to help their employees become more sensitive to the cultures of their fellow employees. 2. Managing Individual Diversity: In addition to learning to manage cultural diversity, companies must also learn to manage individual diversity. Within each culture, each individual may be different in many ways. Therefore, the American. adage “different strokes for different folks” need tobe applied carefully and selectively. 3. Managing Workforce Diversity: As business enterprises become more global the challenges of diversity become complex. Success depends to a large extent on the ability to understand and manage workforce diversity. Many problems such as miscommunication, mistrust, poor cohesiveness and stereotyping may arise. Theseik assess the i veneat, jc) Flexible programmes for the rec t (“" mobility of a diverse workforce oe (d) Programmes to the elderly, (e) Alternative work g accommodate family heeds, such as q ay-care and care for Chedules. 1) Telecommuting op) se sil TEST QUESTIONS ee very Short Answer Questions 1. What ts cultural diversity? 2. What is workforce diversity? 3. Describe the elements of a well-designed pro Short Answer Questions 1. Deseribe the cultural aspects which are significant for business, 2. State the factors which cause differences in culture, gramme of managing diversity. Long Answer Questions |. Explain the concept of multiculturalism and the forces which 2. Discuss the benefits of managing cultural diversity to busincey 3. Explain the framework which ean be used for i: 4. ive rise to it,