BUSINESS

 An organization or economic system where goods

and services are exchanged for one another or for
money.
BUSINESS  Organised efforts of enterprises to supply
ENVIRONMENT consumers with goods and services for a profit.
 Business is an economic and commercial activity
which includes all those activities whose purpose
is to earn profit by transfer of goods & services.

Ditex George Businesses can be state, privately or jointly owned, for

Faculty of Management
Markaz Law College, 1
profit or not-for-profit. 2
Kozhikode

Objectives of Business ENVIRONMENT

 Environment means surroundings, external
objects, influences or circumstances under which
 Profit  Employee satisfaction someone or something exists. It refers to all the
 Power and development factors which have a bearing on the functioning of
 Quality products &  Market leadership something.
services  Service to society
 Growth  Joy of creation
 The environment includes factors outside the firm
which can lead to opportunities or threats to the
 Challenges  Good corporate
firm. Although there are many factors, the most
citizenship important are socio-economic, technological,
supplier, competitor and government.
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1
System of a business organisation Inputs of Business
 Land
 Labour
Inputs Factors of Production
 Capital/Money
 Organisation
Processing
 Materials
 Equipment's
Outputs

5 6

Processing Outputs
 Products
Transformation of inputs
 Services
Manufacturing
Assembling

7 8

2
 BUSINESS ENVIRONMENT NATURE OF BUSINESS
 The term ‘business environment’ denotes the total ENVIRONMENT
surrounding, having various opportunities and constraints for
 Environment is complex
business and have direct or indirect bearing on its functioning
or in other words it can be stated that it refers to the  It is dynamic
aggregate of all forces and institutions which are external to  It is multi-faceted
business and beyond the control of management.  It has far-reaching impact
 Its impact on different firms within the same industry differs
 “Business environment encompasses the climate or set of  It may be an opportunity as well as threat
conditions, economic, social, political or institutional in which
 Environmental change is unpredictable and uncertain
business operations are conducted”. - Arthur M Weimer
 Totality of bearing forces with Specific and General
 “The total of all things external to firms and industries, which impact.
affect their organisation and operation”. - Bayard O Wheeler  Interrelatedness
9 10
Ditex George, Faculty of Management, Markaz Law College, Kozhikode

MACRO (GENERAL / REMOTE) ENVIRONMENT

MICRO (TASK / OPERATING) ENVIRONMENT
FINANCIERS
POLITICAL / LEGAL
GOVT.
INTERNAL ENVIRONMENT ENVT
ENVIRONME PROMOTER’S / SHAREHOLDER’S
NT VALUE SYSTEM
VISION, MISSION & OBJECTIVES
SUPPLIERS MANAGEMENT STRUCTURE CUSTOMERS
INTERNAL POWER RELATIONSHIP
PHYSICAL ASSETS & FACILITIES
DEMOGRAP
HIC
ENVIRONM
BUSINESS
ENT DECISION
CO. IMAGE / BRAND EQUITY COMPETITORS
PUBLICS
HUMAN RESOURCES
FINANCIAL CAPABILITIES
TECHNOLOGICAL CAPABILITIES GLOBAL
SOCIAL / ENVT
MARKETING CAPABILITIES
CULTURAL
ENVIRONME
NT MARKETINGINTERMEDIARIES
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TECHNOLOGICAL / NATURAL ENVIRONMENT

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 Internal Environment Factors in Internal Environment
 Promoters and Shareholders:
 Internal environment refers to the factors internal to
Promoters: A promoter is an individual or organization that helps to raise
the firm. i.e., factors existing within a business firm. money for some type of investment activity. Promoters may raise money for a
These factors are generally controllable because company by offering investment vehicles other than traditional stocks and
bonds, such as limited partnerships and direct investment activities. He is the
the company has control over them and determine founder of the business. Majority of the Board decisions are controlled by him
the potential of a company to meet the since he is the person who holds majority of the stake. He is responsible for
environment challenges. raising capital, targeting initial leads and chasing business opportunities,
entering into initial contracts for business formation and incorporating company.
 Internal environment factors have a direct impact on
the individual organization. It can alter or modify Shareholders: A shareholder in simple terms is a person who buys & holds
such factors. any share of a company. They become members once their name is entered
into the Register of Members. A common shareholder is an individual, business
 It is the set of elements or forces which affects an or institution that holds common shares in a company, giving the holder an
ownership stake in the company. This will also give the holder the right to vote
organization's or firm’s behaviour. on corporate issues such as board elections and corporate policy, along with
13 the right to any common dividend payments. 14

 Value System  Vision, Mission and Objectives

A value system includes the culture and norms of the organization. In other Vision means the ability to think about the future with imagination and wisdom.
words, it's the regulatory framework of an organization and every employee has It is an important factor in achieving the objectives of the organization. The
to act within the limits of this framework. It also includes the ethical beliefs that vision statement focuses on the future; it is a source of inspiration and
guide the organisation in achieving its mission and objective. The value system motivation. Often it describes not just the future of the organization but the
of a business organisation also determines its behaviour towards its future of the industry or society in which the organization hopes to effect
employees, customers and society at large. change.
Eg: Due to its value system a business firm may refuse to produce or distribute
liquor for it may think morally wrong to promote the consumption of liquor.
Eg: 1 - Tata Power
To be the most admired and responsible integrated power
 The value system can be changed or replaced at any moment based on the company with international footprint, delivering sustainable value to all
direction of upper management. stakeholders.
 The value system of a business organisation makes an important
contribution to its success and its prestige in the world of business. Eg: 2 – Markaz
Moulding a generation with progressive attitude and having firm roots
Eg: The value system of J.R.D. Tata, the founder of Tata group of industries, in human values and traditions, a genre who are charged with
was its self-imposed moral obligation to adopt morally just and fair business knowledge of modernity with morality and applying constructive service
policies and practices which promote the interests of consumers, employees, ideas to the society they live in.
15 16
shareholders and society at large.

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 Vision, Mission and Objectives…  Vision, Mission and Objectives…
Mission is the medium through which the objectives are achieved. It is defined A business objective is a detailed picture of a step you plan to take in order to
as the overall purpose or reason for its existence which guides and influences achieve a stated aim. A business aim is the goal a business wants to achieve.
its business decision and economic activities. The choice of a business domain, A primary aim for all business organisations is to add value and in the private
direction of its development, choice of a business strategy and policies are all sector - this involves making a profit. More strategic aims include expansion,
guided by the overall mission of the company. market leadership and brand building.
Eg: 1 - Tata Power The most effective business objectives meet the criteria of being SMART
 To earn affection of customers by delivering superior experience and value, thereby making them our
ambassadors
 Driving competitiveness by operating our businesses at benchmark levels
S – Specific – Objectives are aimed at what the business does. Eg. A hotel
 Executing projects safely with predictable benchmark quality, cost and time might have an objective of filling 60% of its beds a night during
 Growing profitably across the power value chain and allied areas, in focus geographies October, an objective specific to that business.
 Being the lead adopter of technology with a spirit of pioneering and calculated risk taking M - Measurable – Quantifiable - The business can put a value to the objective.
 Practicing ‘Leadership with Care’ by pursuing best practices on Care for our Environment, Eg. Rs. 10 cr. in sales in the next half year of trading.
Community, Customers, Shareholders, People and creating a culture that will reinforce our values
 Enable employees and associates to achieve and unleash their full potential to deliver outcomes in a A – Agreed – By all those concerned in trying to achieve the objective.
sustainable way. R – Realistic – The objective should be challenging, but it should also be able
to be achieved by the resources available.
Eg: 2 - Markaz
 Establishment of value oriented and professional educational institutions and infrastructure worldwide T- Time specific – They have a time limit of when the objective should be
to achieve the vision and leading the charity projects, orphan care and relief campaign through17
achieved. Eg. by the end of the year. 18
selfless service groups

 Management Structure & Internal Power Relationships

Management Structure/ Organisation structure is the hierarchical arrangement of lines of  Physical Assets and Facilities
authority, communications, rights and duties of an organization. Organizational structure
Physical assets and facilities represent physical assets such as plant,
determines how the roles, power and responsibilities are assigned, controlled, and
coordinated, and how information flows between the different levels of management. machinery, building etc. that convert inputs into outputs. These factors like,
production capacity, technology and efficiency of the productive apparatus,
A structure depends on the organization's objectives and strategy. In a centralized
structure, the top layer of management has most of the decision making power and has distribution logistics, etc are among the factors which influence the
tight control over departments and divisions. In a decentralized structure, the decision competitiveness of a firm.
making power is distributed and the departments and divisions may have different Eg: A plant with high production capacity or a large fleet of transportation vehicles.
degrees of independence.
This also influences the business  Financial Capabilities
decisions. The structure and style
of the organization may delay a Financial capabilities like financial policies, financial position and capital
decision making or some other structure are also important internal environmental factors affecting business
helps in making quick decisions. performances, strategies and decisions.
An efficient working of a business
organisation requires that its  Research & Development and Technological Capabilities
organisation structure should be
conducive to quick decision R & D and technological capabilities of a company determine its ability to have
making. Delays in decision innovations in all fields (Production, Products, HR management, Marketing, etc)
making can cost a good deal to a and have advantage over its competitors.
business firm. Ditex George, Faculty of Management, Markaz Law College, Kozhikode 19 20

5
 Company Image and Brand Equity
External Environment
The company image and brand equity of the company matters a lot in raising  External environment refers to external aspects of the
finance, forming joint ventures and other alliance, choosing dealers and surroundings of business enterprise, which have
suppliers, introduction of new products etc. influence on the functioning of business.
Eg: Introduction of a new model of car is easy for an existing brand as
compared to that for a relatively new brand.
 The factors are uncontrollable by the business.
 Some external elements can be manipulated to an
 Quality of Human Resource. extent by company itself, while others require the
Quality of employees (Human resources) of a firm is an important factor of
organization to make adjustments.
internal environment of a firm. The success of a business organisation depends
to a great extent on the knowledge, skills, capabilities, attitudes and  It is the set of external elements or forces which affects an
commitment of its employees. organization's behaviour and may force it to make
 Marketing Capabilities changes in order to be suitable for the new or
changed environment.
Marketing capabilities like marketing strategies, quality of marketing men, brand
equity and distribution network have direct bearing on marketing efficiency.  The external environment can be broken down into two
They are important also for new market exploration and widening and new types:
product introduction.
21 The Micro environment & The Macro environment. 22

Micro Environment  Suppliers

 The micro environment or task environment comprises Suppliers/Vendors are those who supply the inputs like raw materials and other
those forces in the immediate vicinity of an components for production and other functions to the company. It is an
important force of the micro environment of a company.
organization that influence it’s functioning.
Companies need to make sure reliable or continuous supply for smooth
 These factors have a direct bearing on the operations functioning.
of the firm. Inventory Strategy & No of Vendors
 The micro environmental forces need not necessarily  Customers
affect all the firms in a particular industry in the Customers are the basic requirement to run a business. According to Peter. F.
same way. Some of the micro factors may be Drucker, “There is only one valid definition of business purpose, that is to create
particular to a firm. a customer.” The business enterprises aim to earn profit through serving the
customer demand. Success of business largely depends on identifying the
 The micro environment factors that affect the organization need, desire, tastes, likes etc of a customer.
are:
Suppliers, Customers, Competitors, Marketing Customers can be of several categories:- Industrial customers, Wholesale
Intermediaries, and Public. customers, Retail customers, Government customers, Foreign customers
23 24

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 Competitors
 Public
In business, Competitors are companies in the same industry or a similar
industry which offers a similar product or service. The presence of one or more Public can be referred as any group that has actual or potential interest in the
competitors can reduce the prices of goods and services as the companies business, has its impact on the business and its ability to achieve its objectives.
attempt to gain a larger market share. Competition also requires companies to Alumni and parents group for an education institution.
become more efficient in order to reduce costs and thus increase profit.
Firms usually use advertising through mass media to reach these audiences
Activities of business unit adjusts according to the actions and reactions of
and convey marketing messages. It is important for firms to consider the
competitors. This factor should be known to a company as the revenue will only
general publics’ attitude and perception towards its products and activities in
be driven when this factor is in control. - MRTP Act of 1969/The Competition Act of 2002
the marketplace.
 Marketing Intermediaries
Eg: Media Public, Consumer Public, Local Public etc.
Marketing Intermediaries are Individuals or firms that links producers to other
intermediaries or the ultimate buyer. They are the firms that aid the company in
promoting, selling and distributing its goods or services to final buyers through
contractual arrangements or purchase and resale of the item.
Major intermediaries are Middlemen, Physical distribution Firms: (Warehouses
and Transport firms), Marketing service agencies (Advertising agencies market
research firms, media firms, consulting firms) & Financial intermediaries.
25 26

Macro Environment  Economic Environment

 Macro/General/Remote Environment are major external and The economic environment consists of external factors with a bearing in
uncontrollable factors that influence an organization's business, market and the broader economy that can influence a business.
decision making, and affect its performance and
strategies. An economy or economic system refers in which the various economic
activities relating to production, distribution, exchange and consumption of
 As the macro environment is uncontrollable, the success goods and services that are organized in a country and the way in which the
people of a country earn their living.
of a company depends on its adaptability to the
environment.
There is close relationship between business and economic environment.
 The important macro environment factors includes:
Business obtains all its needed inputs from the economic environment and it
 Economic Environment  Legal Environment absorbs the output of business units.
 Political/Govt Environment  Natural Environment
 Social & Cultural Environment  Global Environment Therefore, every business units are surrounded by an economic environment
 Technological Environment  Demographic Environment which consists of economic factors that influence the business in a country.
27 28

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The important factors of Economic Environment include  Political and Governmental Environment
The Political and Governmental environment refers to regulatory requirements,
Structure and
Economic conditions Economic policies Global linkage legal concerns, and any impact from the current political climate of the country
nature of economy or region where the business operates and all the actions taken by the
government, which potentially affect the daily business activities of any
• Industrial policy business or company.
• Income levels
• Trade policy • Magnitude and
• Levels of • Distribution of
nature of cross Political environment gives shape to business. Political stability, Government
development income
• Foreign exchange border. administration, Philosophy of the political parties are some of political factor
of the economy
• GDP Trends
policy which affects the business environment
• Trade flows.
• Sectoral
• Foreign investment
composition of • Demand and The economic and political systems of a country are mutually dependent, the
and technology • Financial flows.
output. supply trends
policy one reflecting the ideologies of the other. It comprises political stability and the
• Inter – sectoral • Price trends
• Membership of WTO, policies of the government. Ideological inclination of political parties, personal
• Fiscal policy IMF, World Bank, interest of politicians, influence of party forums etc create political environment.
linkage.
trade treaties etc
• Trade and BPO
• Monetary Policy
trends Major factors - Political climate, Political stability and risk, Government
29
regulation, Budget deficit or surplus, Taxation, Import and export rules and30
Ditex George, Faculty of Management, Markaz Law College, Kozhikode tariff, Rules on international financial flows

 Social & Cultural Environment  Technological Environment

Socio-cultural environment means the value attitudes, beliefs and customs of The technological environment impacts the scientific processes used in
people in a given group or society. Socio-cultural dimensions complicate the changing inputs (material resources, labor, money, etc) to outputs (goods and
environment in which entrepreneurs have to manage their ventures. Literacy services). The success of many organizations depends on how well they
rate, customs, values, beliefs, lifestyle, demographic features and mobility of identify and respond to external technological changes.
population are part of the social environment.
Advancement in technology has had a dramatic impact on the business world
It is important for managers to notice the direction in which the society is over the last two centuries. The progress of business depends on the level of
moving and formulate progressive policies according to the changing social technology available in a country which gives a massive impetus to the
scenario. economic revival. It also indicates the pace of research and development and
progress made in introducing modern technology in production. Technology
provides capital intensive, but cost effective alternative to traditional labour
Major factors - Demographic factors, Social, cultural and religious attitudes
intensive methods. In a competitive business environment, technology is the
towards work and consumption of goods and services, Education and scientific
spirit, Ethics in business, Social responsibility, etc key to development.

Major factors - Efficiency of Infrastructure, Industrial productivity, New

manufacturing processes, New products and services, New technology
31
impacting company 32
Eg: MIS - Management Information System, Forecasting technology changes, Kodak, Apple

8
 Legal Environment  Natural Environment
The legal environment creates the rules and legal frameworks within which The natural environment is the group of natural resources which is used by
business operates. It has a great impact on the functioning of the organization business. No business can survive in climatically inhospitable conditions.
as it establishes codes and procedures for various types and aspects of Business has broadly two relationships with natural environment. First, the
business and deals with deviations or infringement law like bribery, product environment is the source of resource as raw material and secondly, it has
counterfeiting, gray markets, black markets, consumer deception and tax causes damage in the process of production.
evasions.
Major factors - Environmental Regulations, Permit Requirements, Agriculture,
The coverage, efficiency and efficacy of the legal system determine adequacy, Geographical factors affecting trade, transport and communications,
cost and speed of economic justice and these factors are of great importance Compliance requirements, Environmental contaminants,etc.
for the growth of business. In every country there exist specific pieces of
business legislation which together guide control and regulate business activity,
such as in India, Trade Mark Act 1969, Essential Commodities Act 1955,
Standards of Weights and Measures Act 1969 and Consumer Protection Act
1986, etc.

Major laws – Companies Act, Contract Laws, Minimum wage laws,

Environmental protection laws, Copyright and patent laws, Anti-monopoly laws,
33 34
Laws that favour business investment, etc

 Global Environment  Demographic Environment

The global environment refers to those global factors which are relevant to
The demography refers to the study of population characteristics such as size,
business such as rules and regulations of WTO (World Trade Organisation),
distribution and growth and other statistics. It is the science of population and
principles and agreements with IMF (International Monetary Fund), WB (World
also known as study of statistics which illustrate changing structure of human
Bank), SAARC (South Asian Association for Regional Cooperation), G20 and
population. Also explains how demographic factors have bearing on the way
other international bodies which duly effect the business organisation operating
people live, spend and consume. The demographic data is used for production
their business in any particular country. Business has to exist in world market
analysis, establishing selling outlets, determining advertising and
and then it should understand their effect and take action according to these
communication strategies and for strategic planning. This environment differs
rules and regulations. Business responses and managerial practices must be
from country to country and from one place to another within the country.
fine-tuned to survive in the global environment.

Eg: Size of family: Joint family to nuclear family – Demand for small houses and
Engaging in the global environment can be highly beneficial for a company, and
household items increase.
it can also be extremely risky. Because changes that occur in the global
environment can both assist and hinder a business's ability to operate and must
be prepared for these changes and willing to alter approach in response. Major factors – Size of population, Growth rates – Birth and Death, Density of
population, Age structure, Gender, Urban-rural distribution, Education and
income level, Family size, Family life cycle, Occupation, Social class, Religion,
Major factors – Globalization, Agreements with other countries and
Race, Nationality, etc
organisations, International treaties, Declarations, Protocols, Policies of other
countries, Oil price hike, International terrorism, Cultural exchange, etc. 35 36

9
 Knowing the Environment
 Enacted environment: Organisation seeks to
create its own environment out of the total
external environment

 Domain: That part of the enacted environment

which the organisation carves out for itself. If all
stakeholders agree on the domain, there is
domain consensus.

37 38

Environmental Analysis
 Task environment: this specifies the range of Environmental analysis is a strategic tool to identify all
products to be offered, the technology to be the external and internal elements, which can affect the
organization’s existence, performance, survival and
employed and the productive strategies to be growth strategies.
used to counter competition.
The analysis entails assessing the level of threat or
opportunity each factors might present. These evaluations
are later translated into the decision-making process. The
 It is the task environment that needs constant analysis helps align strategies with the firm’s environment.

surveillance, though elements outside cannot Internal Factors – Direct impact & Controllable - S & W
be ignored.
External Factors – Indirect impact & No/less Controllable - O & T

“The process by which strategists monitor the economic, governmental/legal,

market/competitive, supplier/technological, geographic and social settings with
internal factors to determine opportunities and threats to their firms”
39 40
Ditex George, Faculty of Management, Markaz Law College, Kozhikode

10
 Why Environmental Analysis (EA)?
Limitations
 EA will provide an understanding of current and potential changes taking
place, besides long term future prospective.
 The analysis does not guarantee business success.
 Provides inputs in the form of information which is vital for strategic decision
making.  Environmental analysis does not foretell the future, not does it
eliminate uncertainty for an organisation. It can only reduce the
 EA will facilitate and foster strategic thinking in organisation by bringing fresh frequency and extent of surprises.
view points and ideas in context of business operations.
 The benefit of the analysis is also limited by the reliability and
 Development of broad strategies, long-term policies and action plans of the
firm.
timeliness of data used in the analysis.

 To foresee the impact of socio-economic changes at the national and  Business environment is global and any development in any part
international levels on the firm’s stability. of the world can influence business.

 Analysis of competitor’s strategies and formulation of effective counter  Unless analysis is followed systematically it loses its advantages.
measures.

 It also helps strategists to develop early warning system to prevent threats or  Sometimes too much information relating to business environment
to develop strategies which can turn a threat to the firm’s advantage. 41 may create the doubt in businessmen. 42

Environmental Analysis (EA)

(Sometimes referred as Environmental Scanning & Monitoring) I. Scanning
EA Process in four stages Scanning is the process of analyzing the environment for
the identification of factors which have implications for
I. Scanning the environment to detect the business.
warning signals
It is a general surveillance of all environmental factors
and their interactions in order to identify early signals of
II. Monitoring specific environmental trends possible environmental change or detect environmental
change already under way.

III. Forecasting the direction of future It is exploratory in nature

environmental changes
Identifies antecedents or indicators of potential
environmental changes & issues
IV. Assessing current & future environmental
changes for their original implications 43 Scanning of:- Events – Trends – Issues – Expectations.
44

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II. Monitoring III. Forecasting

The follow-up and an in-depth analysis of the relevant Scanning and monitoring provide a picture of what has
environmental trends identified at the scanning stage. already taken place and what is happening.
It involves tracking environmental trends, sequence of
events or streams of activities Strategic decision making requires a future orientation.

It often involves following up on signals or indications Anticipating the future for the formulation of strategic
unearthed during environmental scanning. plans

The Purpose is to assemble sufficient data to see Forecasting is concerned with developing plausible
whether certain trends and patterns are emerging. and possible projections of the direction, scope and
intensity of environmental change.

45 46

IV. Assessment Approaches to EA

Two approaches
Assessment is drawing up of the possible impact or
implications of the studied variables under consideration I . Outside-in /Macro approach
II. Inside-out (Micro) approach
Evaluates the impact of environmental factors on
I . Outside-in /Macro approach
organizations business.

Explains how the firm - environment fit is possible. It takes a very broad view of the business environment with a
long-term perspective and develops alternative scenarios of the
Assessment involves identifying and evaluating how future. The implication of each scenario to the organization and
and why current and projected environmental changes
industry are drawn up with reference to different scenarios.
(Technique of Scenario Analysis).
will affect the strategic management of an organisation.

Understanding the environment is made relevant by It forecast, occurrence of complex environmental events.
indicating what it means for the organisation. Detailed description, possibility of occurrence of events with
47 consequences for organization. 48

12
A Scenario is a detailed description of how certain events may
occur in the future and their consequences to the organization.

Process of developing scenario - 7 Steps II. Inside-out (Micro) approach

1. Identify: strategic environmental issues
It takes a narrow view of the environment. It forecasts the
2. Select important issues
immediate future environment on the basis of the ongoing
3. Prepare preliminary description of issues environmental monitoring and derives the implications of it for
4. Draw out the implications of issues (Variables that the industry and firm out of it.
can be controlled and cannot be)
5. Develop detailed descriptions of the future
scenarios (Best case, worst, most likely one)
6. Discuss scenarios with top management
7. Develop contingency action plans
49 50
Ditex George, Faculty of Management, Markaz Law College, Kozhikode

Techniques for Environmental Scanning (ES) Verbal & Written Information

 Verbal information includes,
ES Techniques refers to the methods of gathering the relevant information obtained by direct
information for appraising the environment talk with people, by attending
seminars, meetings, etc.
William F Glueck has mentioned the following techniques of
environmental scanning

 Verbal & Written Information

 Written or documentary
 Search and Scanning information includes both
 Spying published and unpublished
materials.
 Forecasting and Formal Studies - Industrial journals & business magazines, published & unpublished,
Government and private materials, E-Medias, TV shows, consultants,
51 52
seminars, workshops etc -

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Search & Scanning Spying
 Working for an organization by secretly
 This involves research for collecting information about enemies or
obtaining the required competitors.
information  Even though it is not considered as
 It is the search for knowledge ethical, spying is used to get information
about the competitor is not uncommon.
and systematic investigation
to establish facts

- Modern firms use computerized technologies like MIS (Management Some legal methods
Information System) – for systematic gathering, processing, storing Read the local papers, Tap your vendors,
and disseminating information. Go to trade shows, Take a plant tour, Play secret shopper, Browse public
documents, Google your competitor's website, Explore social network sites,
53 Find competitors' job ads. 54

Types of Forecasting
Forecasting and Formal Studying Economic
 Forecasting is the use of historic Forecast Social
data to determine the direction Forecast Political
Forecast Technological
of future trends. Businesses The macro economic
Important social
utilize forecasting to determine forecasts serve as a Forecast
factors relevant to Relevant factors
base for deriving
how to allocate their budgets or industry and
business include include changes in the
plan for anticipated expenses for company forecasts.
population relative power of
growth/decline, age political parties,
an upcoming period of time. Important economic
structure, ethnic changes in the internal Technological forecast
factors considered
composition of power structure of encompass not only
 Done by corporate planners or other staff personnel or consultants. include general eco
population, parties, political technological
conditions, GDP, per
occupational pattern, alliances and political
 This pertains to use the information gathered by above mentioned 3 capita income, innovations but also
rural-urban ideologies etc. Political the pace and extent of
methods for picturing the future scenario. distribution of
distribution of forecasts also cover
income, investment diffusion and
population, industrial policy, penetration of
Steps of forecasting and output trends in
migration, factors commercial policy and
different sectors, technologies and their
 Identification of Relevant  Selection of Forecasting industries, price
related to family, life fiscal policy. implications.
style, income levels, International political
Environmental Variables Technique trends, trade and BoP
expenditure pattern,
trends etc developments are also
55 56
 Collection of Information  Monitoring social attitudes etc important.

14
Techniques for Environmental Forecasting
 Trend Extrapolation
 Econometric Techniques
Extrapolating the historical data to the future.
Casual model used to predict major
economic indications. May use simple linear relationship or more complex non linear
relationships for forecasting.
Here, the well established
relationship b/n two or more
 Scenario Development
variables are used to forecast the
future. When not possible to accurately predict the future, organization is
developing alternative scenarios with different possible situations.
Eg: Demand and Consumer income
Develops through a 7 step process.
Most used: Multiple regression analysis
& Time series regression models Generally draws 3 alternatives – a most likely, a pessimistic & an optimistic
Methods of scenario building
Predicting the value of a variable based on the value of two or more other
variables. The variable we want to predict is called the dependent variable & Premising – Systems Diagram – Critical site
variables we are using to predict the value of the dependent variable are
Newspaper headline – Logical possibilities
called the independent variables
57 58

 Judgement Models
 Delphi Method
Involves the use of opinion of
Refined judgement model
people who have intimate
knowledge of relevant factors. Uses a panel of expert on the subject from
whom opinions are gathered, may be using
Methods/Eg: Sales force’s opinion
a semi structured questionnaire and/or
& Juries executive opinion
interview. After consolidation, these are
 Brain Storming documented and circulated among panel
members for evaluation and comments.
Creative method of generating
Repeats the process until a consensus view
ideas and forecasts.
is arrived at.
A group of knowledgeable people
are encouraged to generate ideas,  Strategic Issues Analysis
discuss them and to make
Used for assessing emerging strategic environmental issues
forecasts on the basis of that.
Consists of systematically monitoring of social, regulatory and political
Popular technique of technological
changes that can affect corporate performance and identifying their
forecasting
59
impact on the company. 60
Ditex George, Faculty of Management, Markaz Law College, Kozhikode

15
Tools & Techniques for Environmental Analysis (EA)
SWOT Analysis
Environmental Analysis A framework for
analyzing a company’s
SWOT Analysis internal and external
environment and that
stands for strengths,
PEST Analysis weaknesses,
opportunities, and
threats.
Porter’s Five Forces Analysis
61 62

SWOT Analysis of Indian Economy

Example: Harley-Davidson Weaknesses
• High percentage of workforce involved
 Strengths Strengths
in agriculture
• Huge pool of labor force
• Approx a quarter of population below
 Strong & adaptable brand image • High percentage of cultivable land
the poverty line
• Diversified nature of the economy
• High unemployment rate
 Weaknesses •
•
Availability of skilled manpower
Extensive higher education system
• Inequality in prevailing socio economic
conditions, rural – urban divide
 Limited ability
to develop new • High growth rate of economy
• Low productivity
• Rapid growth of IT / ITES Sector
• Huge population leading to scarcity of
non-traditional products • Abundance of natural resources
resources
• Low level of mechanization
 Opportunities • Red tapism, Bureaucracy
• Low literacy rates
 Growing leisure interest in
Opportunities Threats
motorcycles worldwide • Scope for entry of private firms in various sectors • High fiscal deficit
of business • Threat of government intervention in
 Threats • Inflow of FDI some states
• Huge foreign exchange prospects in IT / ITES • Growing import bill
 Differing
foreign policies governing • Investment in R & D • Population explosion, rate of growth of
• Area of infrastructure population
motorcycles 63
• Huge domestic market : Opportunity for MNCs • Agriculture excessively dependent on
64
• Huge agricultural resources monsoon

16
PEST Analysis
PEST analysis describes a framework of macro environmental
factors. It is part of an external analysis when conducting a
strategic analysis or doing market research, and gives an
overview of the different macro environmental factors to be taken
into consideration. It is a simple and effective tool used in
situation analysis to identify the key external (macro environment
level) forces that might affect an organization.

 Political Factors
 Economic Factors
 Socio Cultural Factors
 T echnological Factors 65 66

Objective of PEST Analysis olitical Factors

Political factors may have direct or indirect impact on the organization’s
Find out the current external factors operation. Decisions made by the government may have an effect on
affecting an organization. the business. The political arena has a big influence on how
organizations operate, the purchasing power of the customers and other
businesses.
Identify the external factors that may  How stable is the political environment?
change in the future.  Influence the Government Policy / Law on your business
 Government’s position on Marketing Ethics
Exploit the changes (opportunities)  Government’s policy on the economy
or defend against them (threats)  Government’s view on culture under religion
better than competitors would do.  Political System is responsible for Law Making.
 Immediate laws which affect any business in general are Central Excise,
Sales Tax/ VAT, Corporate Income Tax, Personal Income Tax & Service
Tax
67 68
 Environmental Protection Law

17
 olitical Factors conomic Factors
 Controls if any on Marketing Strategies The organization is affected by economic factors. Economy also affects
 Like Marketing / Advertising of Cigarettes, Tobacco, Alcohol etc. the purchasing power and behavior of the consumers.
 Control on Pricing of essential commodities, etc
 Government Policies on the Economy  Government outlook towards
 Bank Financing - Interest Rates - Exchange Rate Mechanism - Incentives
 Role of Public Sector - Role of Private Sector - Role of Joint Sector
for Exports - Restrictions for Imports - Inflation - Labour Policies
 Level of Government Spending
 Avenues for Capital Creation
 Size of the Capital Market - Role of the Regulator - Type of the Instruments -
Nature of the Investors
 Business Cycles
 Monsoon
 Energy Availability
 Cost of Energy

69 70
Ditex George, Faculty of Management, Markaz Law College, Kozhikode

ocio - Cultural Factors echnological Factors

These factors have a big influence on the consumer needs and wants. Technological change plays an important role in shaping how
Sociological factors also affect the size of potential markets. organizations operate. Technological factors are important in gaining
Furthermore, companies may change various management strategies to competitive advantage. Technological innovations can improve
adapt to prevailing social trends. production efficiency, quality, speed and can reduce cost.
 Demographics & Distribution of Income  Advantage of Technology
 Division of population - Male / Female - Age Group of the Population  In terms of Economies of Scale
 Disposable Family Income - Disposable Income in the hands of the different  New Discoveries & Innovations
Age Groups - Education Level of the Age Groups
 Speed & Cost of Technology Transfer
 Distribution of Income
 Rate of Obsolescence
 Social Mobility
 Legislation regarding technology
 Life Style Changes & Consumerism
 Attitude to living - Different Age Groups - In tune with available disposable
income - Thrust on taking care of present needs by spending than saving for
the future - Joint living and nuclear families - Availability of various media
tools - Reach of the media to the population
71 72
 Educational Levels

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Other variants of PEST… Porter’s Five Forces Analysis
The Five Forces model of Porter is an outside-in business unit
Variants that build on the PEST framework include: strategy tool that is used to make an analysis of the competitiveness
and attractiveness of a particular company and its industry structure.
PESTEL or PESTLE, which adds legal and environmental
Named after Harvard professor, Michael E. Porter, this
factors to PEST.
framework identifies five forces that can help investors
identify opportunities and threats within an industry
PETELS stands for Political, Economic, Social, Technological,
and helps to determine whether or not a business can
Environmental and Legal.
be profitable, based on other businesses in the
industry.
SLEPT adding legal factors.

DESTEP, adding demographic and ecological factors. As per him… "Understanding the competitive forces, and their
underlying causes, reveals the roots of an industry's current profitability
while providing a framework for anticipating and influencing competition
(and profitability) over time“. "A healthy industry structure should be as
much a competitive concern to strategists as their company’s own
73 74
position."

Porter’s 5 forces are: Threat of new entry, Supplier power, Buyer power,
Threat of substitution and Competitive rivalry. Scoring of forces
Potential  Each market force is scored on a spectrum, with high
entrants representing the highest threat and low representing the
lowest threat.
Threat of
new entrants  All five forces are then taken together and evaluated
holistically on the same low/high spectrum.
Bargaining power
Industry competitors
of suppliers
Suppliers Buyers Medium
Rivalry among
existing firms Bargaining power
of buyers
Low High
Threat of
substitutes

Substitute
75
products
76

19
 Threat Threat
Threat
of of Profits of established Suppliers can exert power Threat
of of
New
New firms in the industry may New
New
Entrants
by threatening to raise Entrants
Entran be eroded by new Entran
prices or reduce the
ts competitors ts
quality of purchased
goods and services

Bargaining Power
 Sources of entry barriers of Suppliers

 Economies of scale
 A supplier group will be powerful when
 Product differentiation  The supplier group is dominated by a few companies
 Capital requirements and is more concentrated than the industry it sells to.
 Switching costs  Supplier industry is dominated by a few firms
 Access to distribution channels  Suppliers’ products have few substitutes
 Government Policy  The industry is not an important customer of the
supplier group
 Suppliers’ product is an important input to
77 78
buyers’ product

Threat Threat
Threat Buyers threaten an industry
of of Threat
of of
New
New by: Forcing down prices, New
New
Entrants
Entran bargaining for higher quality Entrants
Entran
ts or more services, playing ts
competitors against each
other

Bargaining Power Bargaining Power Bargaining Power Bargaining Power

of Suppliers of Buyers of Suppliers of Buyers
 The threat of limiting the potential
returns of an industry by placing
 A buyer group is powerful when
a ceiling on the prices that firms
 It is concentrated or purchases large volumes relative to seller sales
in that industry can profitably
 The products it purchases from the industry are standard or charge without losing too many
undifferentiated
customers to substitute products.
 Purchase accounts for a significant fraction of supplier’s sales
 Buyers face few switching costs
 The buyers pose a credible threat of backward integration Threat of Products with similar
Substitute function, limit the prices
 The industry’s product is unimportant to the quality of the buyer’s Products
products or services 79
firms can charge 80
Ditex George, Faculty of Management, Markaz Law College, Kozhikode

20
 Threat
Threat
of of The intensity of rivalry among competitors in an
New
New
Entrants
Entran
industry Outcomes are
ts Competes in  Numerous or equally
 Price balanced competitors
 Advertising  Slow industry growth
 Product introductions  High fixed or shortage costs
Bargaining Power Bargaining Power
 Increased customer service  Lack of differentiation or
of Suppliers of Buyers
or warranties switching costs
 Capacity augmented in large
The more players there are, the more intense the competition for the same
customers. As companies struggle to differentiate themselves, it’s easy to make increments
pricing the central point.  Price competition often
leaves the entire industry
worse off
Threat of  Advertising battles may
Substitute
Products
increase total industry
81
demand, but may be costly 82
Ditex George, Faculty of Management, Markaz Law College, Kozhikode

21