3-1

Business Environment

•Concept
•Significanc
e
•nature
I 3-2

❑Introduction to Micro Environment – Meaning of Business &

Business Environment,,

❑Types of Business Organizations , SWOT analysis ,

❑ Types of Environment-Internal to the Enterprise (Value System,
Management Structure and Nature, Human Resource, Company Image
and Brand Value, Physical Assets, Facilities, Research &
❑Development, Intangibles, Competitive Advantage), External to the
Enterprise ,

❑Micro- Suppliers, Customers, Market Intermediaries; Macro-

Demography, Natural, Legal & Political, Technological,) Michael
Porter’s Five Forces Analysis, Competitive Strategies
 3-3

Business Environment
●The term business environment implies those external
forces/factors and institutions that are beyond the
control of individual business organizations & their
management and affect the business enterprise. It
implies all external forces within which a business
enterprise operates.
●According to Arthur M. Weimer, “ Business
environment encompasses the ‘climate’ or set of
conditions – economic, social, political or
institutional in which business operations are
conducted.
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BUSINESS ENVIRONMENT
(NATURE)
●It is the sum total of all factors external to business
firm and that greatly influence their functioning.
●It is dynamic in nature i.e. it keeps on changing.
●The changes in business environment are
unpredictable.
●Business environment differs from place to place,
region to region and country to country.
●Different elements of business environment are
closely interrelated and interdependent.
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BUSINESS ENVIRONMENT
(SIGNIFICANCE)

●Determining opportunities and threats

●Identifying firm’s strength & weakness
●Giving direction for growth
●Continuous learning
●Image building
●Meeting competition
 3-6

FACTORS/FORCES OF BUSINESS ENVIRONMENT

The business environment may be

considered at the following three levels :
●Internal environment
●External environment- (i) Micro environment
(ii) Macro environment
 3-7
BUSINESS ENVIRONMENT

Macro
Environmen
t

Micro
environmen
t

Internal
Environment
Firm
 3-8
Forces in the External Business Environment

General/Macro
Environment
Technological Task/Micro Sociocultura
Environment
Forces l
Competitor Forces
s
Global Suppliers Firm Customers Economi
Forces c
Forces
Distributor
s
Political & Demographi
Legal Forces c
Forces
 3-9

INTERNAL ENVIRONMENT
Various factors of internal environment are as follows :
🞂 Value system
🞂 Mission & Objectives
🞂 Management structure and nature
🞂 Internal power relationship
🞂 Human resources
🞂 Company image and brand equity
🞂 Miscellaneous factors – 1. Physical assets & facilities
2. R & D Technological capabilities
3. Marketing resources
4. Financial factors
 3-10

Task / Micro Environment

●Task Environment: forces from suppliers,
distributors, customers, and competitors.
●Suppliers: provide organization with inputs
■Managers need to secure reliable input sources.
■Suppliers provide raw materials, components, and even
labor.
◆ Working with suppliers can be hard due to shortages,
unions, and lack of substitutes.
◆ Suppliers with scarce items can raise the price and are
in a good bargaining position.
■Managers often prefer to have many, similar suppliers
of each item.
 3-11

Task Environment – contd.

●Distributors: organizations that help others to
sell goods.
■Compaq Computer first used special computer stores to
sell their computers but later sold through discount stores
to reduce costs.
■Some distributors like Wal-Mart have strong bargaining
power.
◆ They can threaten not to carry your product.
●Customers: people who buy the goods.
■Usually, there are several groups of customers.
◆ For Compaq, there are business, home, & government
buyers.
 3-12

Task Environment – contd.

●Competitors: other organizations that produce
similar goods.
■Rivalry between competitors is usually the most serious
force facing managers.
■High levels of rivalry often means lower prices.
◆ Profits become hard to find.
■Barriers to entry keep new competitors out and result
from:
◆ Economies of scale: cost advantages due to large scale
production.
◆ Brand loyalty: customers prefer a given product.
 3-13

The General/ Macro Environment

●Consists of the wide economic,
technological, demographic and similar
issues.
■Managers usually cannot impact or control these.
■Forces have profound impact on the firm.
●Economic forces: affect the national
economy and the organization.
■Economic system, economic conditions, economic
policies, economic resources, also includes interest
rate changes, unemployment rates, economic growth
■When there is a strong economy, people have more
money to spend on goods and services.
 3-14

●Demographic forces: result from changes in

the nature, composition and diversity of a
population.
■These include gender, age, education level, ethnic origin,
etc.
◆ For example, during the past 20 years, women have
entered the workforce in increasing numbers.
■Currently, most industrial countries are aging.
◆ This will change the opportunities for firms competing
in these areas.
◆ New demand for health care, assisting living can be
forecast.
 3-15

●Political-legal forces: result from changes in

the political arena.
■These are often seen in the laws of a society.
■Today, there is increasing deregulation of many state-
run firms.
●Global forces: result from changes in
international relationships between countries.
■Perhaps the most important is the increase in economic
integration of countries.
■Free-trade agreements (GATT, NAFTA, EU) decreases
former barriers to trade.
■Provide new opportunities and threats to managers.
 3-16

●Socio-Cultural forces : includes –

• Society's basic values & beliefs
• Perceptions, preferences and behaviors
• Core cultural values and beliefs
• Secondary cultural values
• Sub cultures
Impact : the type of products to be manufactured and
marketed,
the marketing strategies to be employed,
the way the business should be organized and governed,
the values and norm it should adhere to etc,
are all influenced by the social – cultural forces
 3-17

Technological Environment
Consists of forces that affect new technology,
new product development and market
opportunities
●Faster pace of technological change
●Shorter PLC
●Higher R&D budgets
●Concentration on minor improvements
●Increased regulations
 3-18

SWOT Analysis
(Amazon.com Inc.
●Amazon’s Strengths :
1.Strong brand
2.Moderate and expanding business
diversification
3.High capability for rapid technological
innovation, especially in online services

●Amazon’s Weaknesses :
1.Imitable business model
2.Limited penetration in developing markets
3.Limited brick-and-mortar presence
 3-19

●Opportunities for Amazon.com Inc. :

1.Expansion in developing markets
2.Expansion of brick-and-mortar business
operations
3.New partnerships with other firms, especially
in developing markets

●Threats Facing Amazon :

1.Aggressive competition with online and non-
online firms
2.Cybercrime
3.Imitation of business model and products
Amazon.com Inc. Five Forces 3-20

Analysis
(Porter’s Model)
●The following are the intensities of the external
factors affecting Amazon, based on Porter’s Five
Forces Analysis model:

1.Competitive rivalry or competition (strong force)

2.Bargaining power of buyers or customers (strong
force)
3.Bargaining power of suppliers (moderate force)
4.Threat of substitutes or substitution (strong force)
5.Threat of new entrants or new entry (weak force)
 3-21
Competitive Rivalry or Competition with
Amazon.com Inc. (Strong Force)

●Amazon competes against strong

competitors. This aspect of Porter’s Five
Forces Analysis model tackles the effects of
firms on each other.

●High aggressiveness of firms (strong force)

• High availability of substitutes (strong force)
• Low switching costs (strong force)
Bargaining Power of Amazon’s3-22
Customers/Buyers (Strong
Force)
●Amazon.com Inc.’s vision statement and mission stateme
nt
highlight the company’s customer-centric
approach to e-commerce business. This
aspect of Porter’s Five Forces Analysis model
determines the influence of consumers on
firms and the industry environment.

●High quality of information (strong force)

• Low switching costs (strong force)
• High availability of substitutes (strong force)
 3-23
Bargaining Power of Amazon’s
Suppliers (Moderate Force)
●Suppliers control the availability of supplies
or materials Amazon.com Inc. needs for its e-
commerce operations, such as hardware
components for information systems. The
influence of suppliers on the online retail
industry environment is outlined in this aspect
of Porter’s Five Forces Analysis model.

●Small population of suppliers (strong force)

• Moderate forward integration (moderate
force)
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Threat of Substitutes or
Substitution (Strong Force)
●Amazon.com Inc. competes with substitutes
in the online retail market. This aspect of
Porter’s Five Forces Analysis model identifies
how substitutes affect the industry
environment.

●Low switching costs (strong force)

• High availability of substitutes (strong force)
• Low cost of substitutes (strong force)
 3-25
Threat of New Entrants or New
Entry (Weak Force)
●New firms potentially reduce Amazon’s
market share in online retail. The effects of
new entrants are considered in this aspect of
Porter’s Five Forces Analysis model.

●Low switching costs (strong force)

• High cost of brand development (weak force)
• High economies of scale (weak force)
 3-26
BUSINESS ORGANISATION TYPES:

The five forms of business organizations include the following:

❑Partnership.

❑Corporation.

❑Sole proprietorship.

❑Cooperative.

❑Limited liability company.

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Sole proprietorship
This popular form of business structure is the easiest to set up. Sole
proprietorships have one owner who makes all of the business
decisions, and there is no distinction between the business and the
owner.Advantages of a sole proprietorship include:Total control of the
business: As the sole owner of your business, you have full control of
business decisions and spending habits.

No public disclosure required: Sole proprietorships are not required to

file annual reports or other financial statements with the state or federal
government.

Easy tax reporting: Owners don't need to file any special tax forms
with the IRS other than the Schedule C (Profit or Loss from Business)
form.
 3-28

Low start-up costs: While you may need to register your business
and obtain a business occupancy permit in some places, the costs of
maintaining a sole proprietorship are much less than other business
structures.

Disadvantages include:

❑Unlimited liability

❑Lack of structure

❑Difficulty in raising funds:

EXAMPLE: NyKaa, Coca Cola, Dyson etc.

 3-29

Cooperative
A cooperative, or a co-op, is a private business, organization or farm
that a group of individuals owns and runs to meet a common goal.

These owners work together to operate the business, and they share th
profits and other benefits.

Advantages of a cooperative include:

1.Greater funding options

2.Democratic structure
3.Less disruption
 3-30
Disadvantages include:

❑Raising capital: Larger investors may choose to invest in other

business structures that allow them to earn a larger share, as the
cooperative structure treats all investors the same, both large and
small.

❑Lack of accountability: Cooperatives are more relaxed in terms of

structure, so members who don't fully participate or contribute to the
business leave others at a disadvantage and risk turning other
members away.
 3-31
PARTNERSHIP

A partnership is a kind of business where a formal agreement

between two or more people is made who agree to be the co-owners,
distribute responsibilities for running an organization and share the
income or losses that the business generates.

Features of Partnership:
❑Agreement between Partners: It is an association of two or more
individuals, and a partnership arises from an agreement or a contract.
The agreement (accord) becomes the basis of the association
between the partners. Such an agreement is in the written form. An
oral agreement is even handedly legitimate. In order to avoid
controversies, it is always good, if the partners have a copy of the
written agreement.
 3-32

2. Two or More Persons: In order to manifest a partnership, there

should be at least two (2) persons possessing a common goal. To put it
in other words, the minimal number of partners in an enterprise can be
two (2). However, there is a constraint on their maximum number of
people.
3. Sharing of Profit: Another significant component of the partnership
is, the accord between partners has to share gains and losses of a
trading concern. However, the definition held in the Partnership Act
elucidates – partnership as an association between people who have
consented to share the gains of a business, the sharing of loss is
implicit. Hence, sharing of gains and losses is vital.
4.Business Motive: It is important for a firm to carry some kind of
business and should have a profit gaining motive.
5. Mutual Business: The partners are the owners as well as the agent
of their firm. Any act performed by one partner can affect other
partners and the firm. It can be concluded that this point acts as a test
of partnership for all the partners.
 3-33

5. Mutual Business: The partners are the owners as well as the agent of
their firm. Any act performed by one partner can affect other partners
and the firm. It can be concluded that this point acts as a test of
partnership for all the partners.

6. Unlimited Liability: Every partner in a partnership has unlimited

liability.
 3-34
Types of Partnerships

General Partnership
A general partnership comprises two or more owners to run a
business. In this partnership, each partner represents the firm with
equal right. All partners can participate in management activities,
decision making, and have the right to control the business.
Similarly, profits, debts, and liabilities are equally shared and divided
equally.

Limited Partnership
In this partnership, includes both the general and limited partners.
The general partner has unlimited liability, manages the business and
the other limited partners. Limited partners have limited control over
the business (limited to his investment). They are not associated with
the everyday operations of the firm.
 3-35
Limited Liability Partnership
In Limited Liability Partnership (LLP), all the partners have limited
liability. Each partner is guarded against other partners legal and financial
mistakes. A limited liability partnership is almost similar to a Limited
Liability Company (LLC) but different from a limited partnership or a
general partnership.

Partnership at Will
Partnership at Will can be defined as when there is no clause mentioned
about the expiration of a partnership firm. Under section 7 of the Indian
Partnership Act 1932, the two conditions that have to be fulfilled by a firm
to become a Partnership at Will are:
The partnership agreement should have not any fixed expiration date.
No particular determination of the partnership should be mentioned.
 3-36
partnership deed

❑Name of the firm as determined by all the partners.

❑Name and details of all the partners of the firm.
❑The date on which business commenced.
❑Firm’s existence duration.
❑Amount of capital contributed by each partner.
❑Profit sharing ratio between the partners.
❑Duties, obligations and power of each partner of the firm.
❑The salary and commission (if applicable) that is payable to partners.
❑The process of admission or retirement of a partner.
❑The method used for calculating goodwill.
❑The procedure that must be followed in cases of dispute arising
between partners.
❑Procedure for instances when a partner becomes insolvent.
❑Procedure for settlement of accounts in the event of dissolution of a
firm
 3-37
CORPORATIVE SOCIETY

A voluntary association of people joining together with the main

objective of members’ welfare is known as a cooperative society. As
the name suggests, people in this form of business organization work
together and with other people for the accomplishment of a common
purpose. The power to make decisions in a Cooperative Society is in
the hands of an elected managing committee. The Cooperative
Societies Act, of 1912 states that it is compulsory to register a
Cooperative Society. Setting up and forming this form of business
organization requires the consent of at-least ten adult people. The
capital for the business is raised by its members through the issue of
shares. After the registration of the Cooperative Society is complete, it
acquires a separate legal identity in the market. There are different
types of cooperative societies categorized on the basis of their nature
of operations.
 3-38

Limited Liability Partnership?

LLP stands for Limited Liability Partnership. Limited liability
partnership definition –

❑ It is an alternative corporate business form that offers the benefits of

limited liability to the partners at low compliance costs.
❑ It also allows the partners to organize their internal structure like a
traditional partnership.
❑A limited liability partnership is a legal body, liable for the full
extent of its assets.
 3-39
LLP is a body corporate
According to Section 3 of the Limited Liability Partnership Act
2008 (LLP Act), an LLP is a body corporate, formed and
incorporated under the Act. It is a legal entity separate from its
partners.

Perpetual Succession
Unlike a general partnership firmUnlike a general
partnership firm, a limited liability partnership can continue its
existence even after the retirementUnlike a general
partnership firm, a limited liability partnership can continue its
existence even after the retirement, insanity, insolvency or even
death of one or more partnersUnlike a general partnership firm, a
limited liability partnership can continue its existence even after
the retirement, insanity, insolvency or even death of one or more
partners. Further, it can enter into contractsUnlike a general
partnership firm, a limited liability partnership can continue its
 3-40

Separate Legal Entity

Just like a corporation or a company, it is a separate legal body. Further,
it is completely liable for its assets. Also, the liability of the partners
has certain limitations in their contribution to the LLP. Hence, the
creditors of the LLP are not the creditors of individual partners.

Mutual Agency
Another difference between an LLP and a partnership firm is that
independent or unauthorized actions of one partner do not make the
other partners liable. All partners are agents of the LLP and the actions
of one partner do not bind the others
 3-41

❑LLP Agreement
❑An agreement between all partners governs the
rights and duties of all the partners. Also, the partners can devise the
agreement as per their choice. If such an agreement is not made, then
the Act governs the mutual rights and duties of all partners.
❑Artificial Legal Person
For all legal purposes, LLP is an artificial legal person. A legal process
creates it and has all the rights of an individual. It is invisible,
intangible, and immortal but not fictitious since it exists.
❑Common Seal
If the partners decide, the LLP can have a common seal [Section 14(c)].
It is not mandatory though. However, if it decides to have a seal, then it
is necessary that the seal remains under the custody of a responsible
official. Further, the common seal can be affixed only in the presence of
at least two designated partners of the LLP.
3-42
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❖ Competitive Rivals
Porter's first force is what we usually mean when discussing business competition. We
think of Pepsi and Coca-Cola for soft drinks, Apple and Samsung for smartphones,
Nike and Adidas for sneakers, and Ford and General Motors for autos. Indeed, some
of these rivalries are so influential that consumers split almost culturally among
those who have an iPhone, drive a Ford, or prefer Netflix to Hulu .
❑ The number of competitors
❑ Industry growth
❑ Similarities in what's offered
❑ Exit barriers
❑ Fixed costs

❖ Potential for New Entrants in an Industry

Industries where new firms can enter more easily almost always have lower profit
margins, and the firms involved each have less market share
❑ Economies of scale
❑ Product differentiation
❑ Capital requirements
❑ Access to distribution channels
❑ Regulations
❑ Switching costs
 3-44
❖Supplier Power
Suppliers are powerful when they are the only source of something important that a firm
needs, can differentiate their product, or have strong brands

❑The number of suppliers

❑Uniqueness
❑Switching costs
❑Forward integration
❑Industry importance

❖Customer Power
When customers have more strength, they can exert pressure on businesses to provide better
products or services at lower prices
❑The number of buyers
❑Purchase size
❑Switching costs
❑Price sensitivity
❑Informed buyers
 3-45
❖ Threat of Substitutes
When customers can find substitutes for a sector's services, that's a major threat to the
companies in that industry.

❑ Relative price performance

❑ Customer willingness to go elsewhere
❑ The sense that products are similar
❑ Availability of close substitutes

❖ Competitive Measures
When published, Michael Porter's framework marked a departure from the then-dominant
models of business strategy, steeped in classic competition
 3-46

Netflix Porter's Five Forces Analysis

Micheal E Porter presented Porter's Five Forces Model as a tool to analyze the level of
competition for a business in the industry. It helps companies understand the competitor's
strengths and the competitive environment in the industry. We can see the strength of this
tool with an example of Netflix porter's five forces model. There are five forces in
Michael E. Porter's model that contribute to this industry analysis .

Background of netflix
Netflix Inc. started as a DVD rental and selling service in 1997. However,
Netflix came to the limelight in 2010 when they redesigned their business
model and ventured into Video on Demand Streaming. With this new operation,
they expanded exponentially in over 190 countries and were listed at New York
Stock Exchange (NYSE) with a market cap of 65.41B USD.
 3-47
netflix Porter's Five Forces

❑Competitive rivalry or competition( Strong Force)

❑The threat of new entrants (strong force)
❑The bargaining power of suppliers(strong force)
❑The bargaining power of customers(strong force)
❑Threat of substitute products or services(moderate force )
 3-48

Competition in the industry (Strong force)

Netflix competitor's analysis shows that competition in the content industry is a

strong force. New entrants have noticeable barriers because of the costs and low
profitability. However, it is fairly easy for companies already playing in the field
like Amazon or HBO, who are also venturing into this operating model. So,
competitors with more additional services and more control over content are real
threats.

The threat of new entrants (strong force)

A variety of barriers exist for the new entrants in the consumer food industry. Just a
few entrants are successful in this industry as there is a need to comprehend the
consumer requirement, which requires time. At the same time, current rivals are well
aware and have progressed with the customer commitment over their items with
time. There is a low threat of new entrants to Netflix 2000 as it has quite a big
network of circulation internationally, controlling with a well-reputed image .
 3-49
The bargaining power of suppliers(strong force)
Since Netflix deals with content that is an expensive commodity to produce, there
are few suppliers. Since the suppliers are few, they have a dominant effect on the
market. Now that even the suppliers are entering the consumer or VOD market, you
can understand that they want to brand their content for their business. A recent
example is removing the Friends show from Netflix in favor of HBO.

The bargaining power of customers (Strong force)

There is very less switching cost for customers with almost all services offered at a
very less price difference. So, the main factor here is not the price but the quality of
content. Also, the customers are paying every month, so Netflix's five forces model
cannot rely on annual contracts. All these factors make the bargaining power of
customers in Netflix porter's five forces a strong force.
 3-50
Threat of substitute products or services(moderate force)
There are very few substitutes available for the content in the industry. So, the
threat of substitute services in Netflix porter's five forces is moderate. Netflix has
this threat from companies producing the same content on DVDs or streaming. But
the bigger threat is the availability of other leisure activities and entertainment
opportunities.

Strategies for Success

Netflix has successfully changed how content transmission was perceived a few
years back with great technological innovations, including digital streaming and
machine learning. Netflix's five forces model clearly shows that it has never been a
stagnant model and cannot afford to be one. So, let us analyse the strategies for
Netflix's success in detail.
❑Cost leadership
❑Differentiation
❑Focus
 3-51

Cost leadership
Netflix Inc. used cost leadership for competitive advantage in the form of
minimized costs and minimized selling prices. This competitive advantage is based
on low costs and the ability to sell at affordable prices but not necessarily a best-
cost provider. Since Netflix also enjoys the competitive advantage of reaching
more customers in the international market.

Differentiation
This differentiation growth strategy aims to grow the business by exploring more
operations outside the current model. This is a suitable intensive growth strategy
for Netflix because of the traditional approach of Netflix and the flexibility of its
business model. Netflix can explore more video publishing platforms or more
content creation options.
 3-52

Focus
Focus strategy focused on a narrow and specific segment in the market. Netflix's
focus strategy will develop, market, and sell its products to a specific group of
customers. Netflix's focus is primarily on the original content and quality, and the
company is expanding its collection of original movies and shows.
3-53
 3-54
Amazon.com Inc.’s Generic
Strategy, Intensive Growth
Strategies
●Amazon uses cost leadership as its
generic strategy for competitive advantage.
Minimization of operational costs is the
objective in this generic competitive strategy.
●Amazon.com’s Intensive Strategies
(Intensive Growth Strategies)
●Market Development.
●Market Penetration.
●Product Development.
●Diversification.
 3-55

Thank you…..