Environmental analysis

and diagnosis
Environment and its components
introduction
• Business organizations operate in a turbulent environment and the
changes in the environment impact business.
• The changes that take place in the internal and external environments
affect the policy decisions of the business enterprises.
• In order to survive and succeed a company must consider and
understand the environment and make policies to adopt to or alter
the environment.
• Prof. Keith Davis defines business environment as “the aggregate of all
conditions events and influences that surround and affect it”.
• Types of environment:
• Internal environment – goals and value system, hierarchial authority,
structure, the technological equipment and processes, social groups
and teams, the management groups, organizational climate and
culture
• External environment : Micro and Macro environments.
Macro environment
• PEST or STEP or PESTEL
• Political, environmental, socio-cultural, technological, economic and
legal.
• These environments can be further classified into international,
regional, national etc.
Micro environment
• Includes employees, shareholders, creditors, suppliers, customers and
financial institutions, regulatory organizations, channels of
distribution, special interest groups like consumer associations,
community organizations.
• L & T has diversified product mix like machinery for cement, switch
gas, material handling equipment, machinery for diary plants,
computer peripherals etc and has many micro environments.
• Only necessary information should be gathered by L&T from the
relevant environment.
Macro environment – socio cultural
environment
• Key variables in the environment, demographics like literacy rates, sex
ratios, child birth rates, age distribution, educational level, life style,
geographic distribution, mobility of the pollution, cultural variables like
beliefs, values, faiths, religion, customs and traditions.
• Growing fast food culture
• Women moving from kitchen to corporate
• Burgeoning middle class
• Increasing literacy levels
• Declining birth rates and increasing senior citizens
• Increasing health consciousness
• Eg McDonald, the world’s fastest growing fast food chains extended
Indian market with beef and pork as ingredients in pizzas and burgers.
• Since Hindus are religiously against cow slaughter and do not consume
beef and Muslims hate pork there was great opposition in Bombay and
the local shiv sena activities broke down McDonald’s fast food centre at
Mumbai.
• The company relaunched products with no beef and no pork sign boards
and gave wide publicity that animal fat is not used in its restaurants.
• Also added new versions for Indian market such as Mc Imli and Mc spic
exclusively for Indian market.
Social cultural and demographic
variables
• Child bearing rates
• Number of specific interest groups
• Birth and death rates
• Life expectancy rates
• Attitude towards work and organization
• Attitude towards government
• Attitude towards authority
• Ethical norms
• Value system
• Composition of work force
• Attitude towards income, savings and capital formation
• Social ethos towards work and organization
Technological environment
• Managers need technology to design, produce, distribute and sell goods and
services.
• Positive benefits are seen in new products, new machines, new tools, new
material and services.
• Benefits include greater productivity, higher living standards, more leisure
time and greater variety of products.
• Eg, range of cars – subcompacts, compacts, intermediaries, sports, specialty,
variations in engine power, steering A/c, speed control, roof etc.
• Negative effects include pollution, energy shortage, loss of privacy, traffic jam
etc.
• Balanced approach is therefore needed
• Eg, Xerox dominated the world photocopier market with 93 percent of
market share.
• It guarded its technology with over 500 patents.
• Canon was a camera company from Japan that entered into the business
around 1970, didn’t have the process technology to by-pass Xerox patents.
• Canon rewrote the rule book of how copies were to be produced and sold.
• Canon succeeded, not by copying Xerox,but canon believed that individual
and small business would find the product useful only if they could afford it.
Economic environment
• Capital – machinery, building, investment, office equipment, tools and
cash, issuing shares and debentures, borrowings from commercial
banks
• Labor – availability of skilled labor at affordable wage rates. US
companies are outsourcing from India because labor is very cheap
here.
• Prices – the price changes caused by business cycles. A price rise in
one industry affects in other industries. It reduces the purchasing
power of consumers and reduces demand
• Government fiscal and tax policies – government control on
availability of credit through fiscal policy has considerable impact on
business. If business profit taxes are high, the interest to go into
business gets marginalized.
• Customers: people want value for money they buy and service that
satisfy their needs. Companies are customizing products to specific
groups or individuals.
• Eg., CRM, auto companies opening service centres.
• Economic factors and economic growth
• Interest rates : when goods are to be bought using borrowed funds.
• If interest rate is low, demand for products will [Link]. Auto mobiles,
appliances, capital equipments, housing materials etc.
• Interest rate also determines the cost of capital of company.
• Currency exchange rates: when rupee was devalued in 1991,, it was to
make the Indian products cheaper in world market and boost Indian
exports.
Political and legal environments
• Attitude of government.
• Prevalence of political uncertainty has effect on business strategy. No
business likes to commit itself for long term strategies or investment
with uncertain countries.
• Legal environment consist of judiciary and legislation.
• Companies act 1956, factories act 1948, payment of wages act 1936,
minimum wages act, shop and establishment act, trade union act
Natural environment
• Geographical and ecological factors, natural resources, endowments,
weather and climatic conditions, topographical factors, location
aspects in global context, port facilities, are relevant.
• Availability of natural resources may affect the demand patterns.