Introduction to Business Environment.

Unit I
Business and Environment
Meaning of Business and Environment.
 According to Prof. Owen, “ A business is an enterprise
engaged in production and distribution of goods for sale
in market or rendering of services for a price.”
 In simpler words, it is the act of making oneself busy
or the state of being busy for the purpose of making
money.
 Environment is the sum total of all the surroundings,
conditions , situations or events in which all the
related parties react to or are affected by its changes.
 Any business operates in two contexts or worlds:
Internal and external.
Internal factors
Organizational structure
Human resources
Departments/ Divisions within
Work systems/ culture
• External Environment
▪ Political Environment
▪ Socio-Cultural Environment
▪ Economic Environment
▪ Technological Environment
▪ Environmental Factors
▪ Legal Environment
▪ Basically known as PESTEL or PEST or STEEPL or SLEPT

The 6 environments that effect business are ‘not things We can change’

These are the things you react to

Meaning of Business Environment

 “the aggregate of all conditions, events and

influences that surround and affect a
business.”
 Keith Davis
 “The environment that includes factors
outside the firm which can lead to
opportunities or threats to firm.” (Is it
enough ??)
 William F. Glueck and Lawrence R. Jauch
 Business System and its Environment
(Input-Conversion-Output)
Technological

Input: Output
Materials Goods
Goods
Land (tangible)
(tangible)
Socio- Labor Process Services
Services
Political/
Legal
Cultural Capital (intangible
(intangible
Management ))
Information
Feedback
Actual vs. Desired.

Economical
Classification/Components of Business
Environment

Internal Business Environment

External Business Environment
General Environment , Macroenvironment or Remote Environment
Operating environment , Microenvironment or Task Environment
Global or International Business
Environment
Internal Business Environment of
Business Environment

Employees
Organizational Structure
Corporate Culture
Shareholders
Unions
Classification of Business Environment

External Business Environment

 General Environment , Macro-environment ,
Remote Environment or Contextual
Environment
 political, economic, socio-cultural, technical, legal, environmental
 Consists of broad forces in a business environmental surroundings.
 Influences organizational activities by posing opportunities and threats.
 Operating environment , Microenvironment ,
Task Environment or Immediate Environment
customers, suppliers, distributors, government, special interest groups, financial
institutions, media, competitors
They are immediately relevant for the achievement of goals.
Can be controlled to some extent by business.
Global/International business environment.
Business Environment

International laws and treaties

Oil and energy prices/supply
Banking system
Recession
Sanctions
Dollar Price
Environmental Variables
Environmental Analysis
 Environment Analysis involves in identifying the present
and future opportunities and threats to and from the firm’s
principal constituents (stakeholders) along the dimensions
of the firm’s economic, political, legal, technological social
, geographical and competitive environments.
 “Environmental analysis is the process by which strategists
monitor the economic, legal, competitive, geographic,
technical and social settings to determine opportunities and
threats to their firms.”
▪ William F. Glueck
 “The process of assessing the emerging trends.”
▪ Philip Kotler
Environmental Analysis: Process
 Identifying Environmental Factors
 Brainstorming among members help to identify environmental factors.
 Common trends and current changes in environment help to identify
environmental factors.
 Selecting Relevant Factors
 Finding out the most relevant factors which influence the operation of
the environment.
 Assess the threats and opportunities brought by such factors.
 Developing Strategic Position
 Assumptions are made considering those selected factors.
 Short term and long term plans are formulated to cope with the
changes.
Techniques of Environmental Analysis

 Environmental Scanning
 Technique of acquiring information and analyzing the trends.
 Acquired information are from both the environments:
internal and external.
 These information are brought to the top management and
these information are discussed among the member which
follows a process for further analysis.
 On the basis of such information both long term and short
term strategies are formulated to cope the environmental
changes that probably may create a difficult situation or
threats or bring opportunity to the organization.
External Environment Internal Environment
• Political • Organization culture
• Economical • Human resources
• Socio-cultural • Physical assets
• Technological • Interpersonal relations

Observed through Observed through

• Journals • Report
• Media • Conference
• Professionals • Committees
• Meetings • Employees
• Members • Members

Top Management
Responses to Data
• Understand
• Interpret
• Correlate
• Extrapolate
Fig: Steps for
• Decide
Environmental
Scanning.
Corporate Strategy
Scanning Methods

Extrapolation Method
information from the past to explore the future
Historical Analogy
trend is studied by establishing historical parallels
Intuitive Analogy
rational intuition by the scanner
Scenario Building
constructing a time-ordered sequences of events that have a
logical cause and effect relationship
Delphi Technique
collection of expert opinion on a issue and asking for the
decision from such experts.
 SWOT Analysis

 Acronym for Strength, Weakness,

Opportunity and Threats.
 Planning tool for environmental scanning so
as to formulate corporate strategy developed
by Albert Humphrey in 1960’s and 1970’s.
 This tool is used as an framework to organize
the data provided.
Strength
 Characteristics that gives an
advantage over others usually
explains the internal capabilities
which are distinct to others.
 Positive tangible and intangible attributes
internal to an organization this gives an
competitive advantage over others.

 Examples: abundant financial resources,

well-known brand name, economies of
scale, lower costs, best management
skills.
Weakness
 Characteristics that place a firm at
disadvantageous position than
others.
 Detract the organizations to achieve
its goal and influence its existence.
 Factors which do not meet the
standards which we feel they
should meet.
 Examples: limited financial
resources, incompetent sales team,
poor decision making.
Opportunity
 External attractive factors from
which organizations can groom
and prosper,

 Organizations should recognize

the opportunity and grab them
which should always be
matched with the strength.
 Example: rapid market growth,
economic boom, government
deregulation, sales decline of
substitute products.
Threats
 Factors that cause trouble for
the business which are beyond
organizational control and could
risk the goal or mission.
 Arise when conditions in the
environment are vulnerable to
the existence.
!
 Example: entry of foreign
competitors, changing customer
needs, product life cycle
decline, recession etc.
SWOT Analysis
Tools for Environmental Analysis

STEPE: social, technological, economic, political and environmental

PESTLE: political, economic, social, technological, legal and ethical
STEEPLE: social, technological, economic, environmental, political,
legal and ecological
PEST: political, economic, social and technological
PEST Analysis
 Other methods of Environmental
Analysis
1. Monitoring
 Continuously track down the changes in the environment.
 Now identify how these changes will impact the firm’s
way of doing business.
2. Market and Business Intelligence System
 There is a system developed which automatically
collects and disseminates information from the
environment.
 These information is provided to support the key
strategic decisions.
3. Business Forecasting and Risk Assessment
 Factors like sales, products, markets etc. can be forecasted so as
to decrease risk in future.
 Such forecasting help to cope up the uncertainties firm might
experience.
4. Benchmarking
 Continuously comparing activities of the organization against the
best organization.
 This comparison provides information on how good they are at
doing things than others and what are the ways they can do better
things.
5. Scenario Development
 managers develop scenarios with the alternatives provided so that
they can look after the changes.
 Both best-case and worst-case scenarios are developed and get
prepared for both the situations.
Strategic
Management
& its use in Business Environment.
Concept of Strategic Management

 Pears and Robinson “ the set of decisions and

actions that result in the formulation and
implementation of plans designed to achieve a
company’s objectives. “
 Strategic management is the continuous
planning, monitoring, analysis and
assessment of all that is necessary for an
organization to meet its goals and objectives.
 Use of Environmental Analysis in Strategic
Management.
 Continuously update the changes in external environment
to find out opportunities and threats.
 This will help to build competitive advantage over the
others by enhancing their strength and overcome their
weakness.
 After analyzing the external environmental changes this will
help to formulate strategies so that future uncertainties are
eliminated.
 The three principal ways to increase manager’s capability to
manage the environment are:
1. Reduce the impact of environmental forces. (level of managers act to
reduce the impact of such external environmental forces)
2. Creating a system and add it in the organizational structure.
3. Boundary spanning roles. (interact people outside for information)
Porter’s Five Forces Model: A tool for
Environmental Analysis
 Developed by Micheal E. Porter in 1979.
 A company's success or failure is directly
affected more by the intensity of the
competition within an industry. Industry
environment: threat of new entrants, power
of suppliers and buyers, substitutes and
competition rivalry.
 1. Threat of new entrants:

 new entrants can threaten the market share of

existing companies
 The likelihood of new entrants depends on
barriers to entry as well as retaliation (a form of
revenge) expected from current players.
 Barriers can be things like product differentiation,
market size and economies of scale, capital
requirements, access to distribution channels,
government policy.
2. Bargaining power of suppliers

 when supply is controlled by a few, when

substitutes are not available and the
materials are crucial to the firm.
 these suppliers can reduce quality of the
materials or increase price.
3.Bargaining Power of Buyers

 Depends on how large they buy your product.

 Bargaining power of buyers are weak if the
substitute of the product is available
elsewhere.
 consumers are increasing their power as access
to information is giving them more
alternatives.
4. Threat of Substitute products.

 firms face a major challenge when substitute

products and services are increasingly made
available
 specially when price is lowered while
performance capability is similar.
 5. Intensity of rivalry among
competitors
 Firms operating within the industry are
directly related.
 One’s action will always affect the other’s
way of doing business.
 They compete each other to acquire the
resources which are available and limited.
Thank You So Much.