Unit 1: Introduction and

Framework of Business
Environment
• Introduction of business environment and
its components
• Classification of business environment
• Framework of business environment
• Environmental Scanning: process,
techniques, methods and types
• Emerging business environment in Nepal.
 Introduction of Business
Environment
• Business is a organized human activity that satisfy the
needs of customer by producing and distributing of the
goods and services and accepts the profit as a return.
• Environment refers to conditions and events that
surround the business organization.
• In aggregate, business environment is the combination
of the conditions and events inside and outside of the
business affecting the business operations
significantly.
• “The aggregate of all conditions, events and influences
that surround and affect a business.” - Keith Davis
 Business System
• A Business system is a combination physical, human and
financial resources to fulfil the consumers needs through
organizational activities.
• System involved in transformation of input into output by
process.
• Business accumulates the inputs required from the
environment and transmits its output to the environment.
• There is a constant interaction between the business system
and its environment which prepares the business for change.
Thus the business system is largely affected by the internal
and external environment.
Business system
Components/ Classification of
Business Environment

A. Internal Environment
i. Organizational Goals & Policies
ii. Organizational Resources
 Tangible Resources
 Intangible Resources
iii. Organizational Structure
iv. Organizational Culture
Components/ Classification of
Business Environment
B. External Environment
1. Task Environment/ Operating
i. Consumers
ii. Suppliers
iii. Competitors
iv. Financial Institution
v. Distributors
vi. Media
vii. Labour Market
viii.Pressure Group
 Components/ Classification of
Business Environment
B. External Environment
2. General Environment/ Remote/ Macro
i. Economic Environment- Economic systems
policies, conditions
ii. Political & Legal Environment- political ideology,
Constitution, parties, government, Political risk,
Business law
iii. Socio-Cultural Environment- Attitude, Belief,
Religion, Language, Education, Family structure
and social organization
iv. Technological Environment- Level of Technology,
pace of change, technology transfer, research &
development budget
v. Physical/ Natural Environment- Energy
Consumption Environment Policy, compliance of
environmental laws, Natural Resources
vi. Global Environment- Relevant global market,
International political events, Degree of regional
 Economic Environment

A business is an economic activity. Economic environment

refers to all the economic surroundings that influence business
activities. It consists of economic parameters that together
make or break the climate for the survival and growth of
business. Macro economic factors significantly influence
resource allocation, costs and profits of business organizations.
 Economic Environment

1. Economic System: Free Market, Centrally Planned and

Mixed Economy.
2. Economic Policies : Monetary, Fiscal and Industrial Policy
3. Economic Conditions : Income Distribution, GDP, BOP,
Business Cycle- Depression-recovery-prosperity-recession,
Inflation,
4. Economic Integration- International and Regional
Economic Groups: WTO, SAARC, ASEAN, EU
 Political – Legal environment

Political Environment of business refers to the government actions

which affect the business operations and constitution and laws
related to the business are components of legal environment. The
important political factors that influence business are
1. Political System: It consists of political parties, election
procedures and power centers, etc. A stable, efficient and honest
political system is essential for the growth of business.
 Political – Legal environment
2. Government and its Branches: They consist of legislature, executive and
judiciary.
i) The legislature or parliament enacts laws that guide business activities.
ii) The executive or government implements the decisions of the legislature and lays
down policies, regulations and procedures that influence business activities. It is
represented by the cabinet of ministers.
iii) The judiciary or courts of law serve as watchdog and their rulings influence
business practices. It settles disputes affecting business and also carries out judicial
review. (Constitutionality of legislation).
3. Political Philosophy: They can be democratic or totalitarian. Democracy vests
power in the hands of people. Totalitarian vests power in the hands of the state.
4. Political Risk: Change in policy, terrorism, change in political ideology etc.
 Political – Legal environment

Legal Environment- The law regulates human behavior. It refers

to rule of conduct enforced by the state. It treats all persons
equally.
Legal environment of business refers to all the legal
surroundings that affect business activities. It consists of
Constitution and other acts, rules, regulations, institutions and
processes. It defines what business organizations can and cannot
do. Most aspects of business are regulated by law.
 Socio-cultural environment

• It refers to all the social surroundings that influence

business. It consists of factors related to human
relationships that have a bearing on business.
• Business organizations operate within the society. They
primarily exist to satisfy societal needs. Every business
has social responsibility.
• Social factors influence the policies, practices and
activities of business.
 Socio-cultural
environment
Important social factors in the business environment
consist of
• Demographics: Size, Density, Distribution, & Growth,
Migration, age and gender mix
• Social institutions: Family, Reference Group, Social class
• Pressure groups and
• Social change.
Cultural Environment : Attitude, Values & Beliefs,
Language and Religion
 Technological Environment

• Technical environment refers to all the technological

surroundings that influence business. Technology is the method of
converting resources into products. It consists of skills, methods,
systems and equipment. It includes inventions, and innovations.
• Factors in the technological environment of business consist of:
• Level of technology – manual, mechanized, automated,
computerized or robotized technology
• Pace/Speed of Technological change
• Technology Transfer
• Research & Development Budget
 Natural & Global
Environment
• Energy Consumption
• Environment Policy
• Compliance of Environmental Laws
• Natural Resources
• Global Market
• International Political events
• Degree of regional and Global
Integration
 Features of Business
Environment
• Complex • Interrelatedness
• Dynamics • Reciprocal
• Multi- Faceted • Uncertain
• Long lasting
impact
• Aggregate of
factors
 Environmental Analysis
Environmental Analysis is a process of identifying
the relevant factors that have a direct or indirect
impact on the effective and efficient functioning of
the business.
In other words, Environmental analysis is a strategic
tool. It is a process to identify all the external and
internal elements, which can affect the
organization’s performance.
The analysis entails assessing the level of threat or
opportunity the factors might present. These
evaluations are later translated into the decision-
making process. The analysis helps align strategies
 Environmental Analysis
Process

• Scanning
• Monitoring
• Forecasting
• Assessment
Process of Environmental Analysis
1. Scanning: Scanning the environment to
identify the opportunities and threats.
• Identifies early signs of future environmental changes.
• Detects changes already underway.
2. Monitoring: follow up and deeper analysis of
relevant environmental forces identified
through scanning.
• Specific description of environmental trend and events.
• Identification of trend and events for further
monitoring.
• Identification of areas for forecasting.
 Process of Environmental
Analysis
3. Forecasting: Tracking and estimating
environmental events and trends likely to impact
organization using Delphi technique, Time series
analysis, Judgmental analysis etc.
• Key forces at work in the environment.
• Projection of future alternatives paths available.
4. Assessment: Diagnosis and identifying key
opportunities and threats.
• The competitive position of business.
• Impact of environmental forces in the organization.
• Future strategies required to grab the opportunities and
handle the threats.
 Techniques of
Environmental Analysis
1. PESTLEG Analysis
2. Scenario Planning
3. Porter’s Five Forces Model
 PESTLEG Analysis
• PESTLEG is the acronym for political,
economic, social cultural, technological, legal,
environmental and global factors.
• Under PESTLEG analysis, the following
components of External environment are
analyzed;
 Political, Economic, Socio- Cultural, Technological,
Legal, Environmental, Global Environment
 Scenario Planning
Favorable , Probable and Unfavorable
Scenario
• An industry scenario is probable impact of future societal
forces on key groups in a particular industry.
• Scenario planning is a structured way for organizations to
think about the future. It is used for environmental analysis if
the traditional forecasting techniques fail to predict the
changes in environment.
• It is also called contingency planning. Scenarios are carefully
crafted stories about the future representing a wide variety
of ideas and integrating them in a way that is communicable
and useful.
• Scenarios are the stories about how the future might unfold
and affect the business issues.
 Porter’s Five Forces
Model
• The industry environment has the set of factors that
directly influence a firm and its competitive actions
and competitive responses:
 The threat of new entrants
 The power of suppliers
 The power of buyers
 The threat of product substitutes
 The rivalry among competitors
Compared to the general environment, the industry
environment has a more direct effect on the firm's
strategic competitiveness.
 Porter’s Five Forces
Model

• According to Porter, an industry

environment is composed of the
threat of new entrants, power of
suppliers, power of buyers, threat
of product substitutes, and rivalry
among competitors.
• The interactions among these five
factors determine an industry's
profit potential that eventually
determines the strategic options
of the firms.
• The five forces are also called
Porter's Diamond.
 1. Threats of New Entrants
1. Barriers to Entry : Firms competing in an industry normally try to develop
entry barriers to prevent potential competitors. Following are some of the
factors that create barriers for the competitors.
• Economies of Scale
• Capital Requirement
• Product Differentiation
• Access to distribution channel
• Switching costs
• Government policy
• Cost disadvantage
2. Expected Retaliation: The high level of retaliation by the existing firms
creates entry barrier to the new firms. This is likely when the existing firms
have a major stake in the industry with substantial resources, and the
industry growth is slow or constrained.
 2.Threats of
substitutes
• In general, product substitutes pose a strong threat to a firm when the
switching costs and the price of the substitute products are lower with
similar quality or performance. There are different forms of substitution.
• Product for product Substitution
• Substitution of Needs
• Generic Substitution

• The following are the factors that determine the threats of substitution.
1. Relative price-performance of substitutes: If the substitute product's price is
lower or its quality and performance are equal to or greater, there is always
the possibility of substitution.
2. Switching cost: If the switching cost of the substitutes is relatively low, the
threat of substitution is very high. For example, substitution of NTC by Ncell
and vice versa.
3. Buyers' propensity: If the propensity of the buyers towards the substitutes is
high, there is always a high threat of substitute.
 3. Bargaining power of buyer
Buyers bargain for higher quality, greater levels of service, and lower prices.
Customers or buyers are powerful in the following situations.
1. Big buyer: If the buyers purchase a large portion of an industry's total
output, they become powerful.
2. Large number of suppliers: Buyers get multiple options, if the number of
supplier is high. This increases their bargaining power.
3. Lack of product differentiation: If there is a low or no differentiation in
the product, it provides freedom to the customers making them powerful.
4. Low switching cost: If the switching cost of the existing product is low, it
makes the buyers more powerful.
5. Price sensitive customers: If the buyers are price sensitive, they follow
many suppliers and become more powerful.
6. Backward integration: If the buyers have backward integration, it
increases their bargaining power. For example, acquisition of supplier by
buyers .
 4.Bargaining power of
Supplier
Suppliers exert pressure over firms on prices and quality of the products.
The following are some of the conditions in which the suppliers power is
high.
1. Large and monopoly supplier: If the suppliers are large and enjoy
monopoly, their bargaining power is high.
2. Few substitutes: If the number of substitutes is low, the bargaining
power of the supplier is high.
3. Powerful brand: If the product brand of the suppliers is very strong, it
makes them more powerful.
4. Fragmented buyers: If the customers are not organized and
centralized, they have less bargaining power making the suppliers more
powerful.
5. Forward integration: If the suppliers make forward integration, they
become more powerful. For example, acquisition of buyer by supplier
 5. Competitive rivalry
In an industry, the firms normally compete for the same market and customers.
The following are some of the conditions in which Competitive Rivalry the
competitive rivalry is high.
1. Large number of competitors: If there is a large number of firms, the
competitive rivalry increases.
2. Balance among the competitors: If the size and capability of the firms
in the industry are similar, their level of competition increases.
3. High exit barrier: If there is a high exit barrier for the firms from the
industry, they are forced to stay in the industry and compete.
4. Lack of product differentiation: If there is lack of product
differentiation among the competitors, competitive rivalry increases.
5. Global customer: If the customers are global, the firms compete with
better resources and strategy to gain market. It increases the competition
at global level.
 Environmental
Scanning
• Environmental scanning may be defined as the process
by which organizations monitor their relevant
environment to identify opportunities and threats
affecting their business for the purpose of taking
strategic decisions.
• Environmental scanning is a process of obtaining
information from the environment. It helps prepare an
organization to exploit the business opportunities by
developing a sound resource base.
• It involves monitoring changes and developments in the
environment. Further, it also assists in preparing
scenarios and adjust with changes.
Approaches to Environmental
Scanning
i. Systematic Approach - Information about the
environmental factors having direct impact on the
organization is collected regularly.

ii. Ad-hoc approach - conducts special surveys and

studies to understand trends in the environment
from time to time.

iii. Processed form approach – Secondary data or

information in a processed form available from
various sources both inside and outside the
organization.
 Concentrated vs Comprehensive
Environmental Scanning

• Only selected elements • All the environmental

are scanned in elements are scanned in
concentrated comprehensive
environmental scanning. environmental scanning.
• It is more specific but • It is detailed and scans
scans limited elements all the elements of the
of the environment. environments.
• It is cost effective and • It is costly but provides
useful to collect the detailed information of
specific environmental the environmental
element. elements.
Environmental Scanning
Process
• Study the Nature of Environment
• Determine the Source of Information
• Internal Sources
• External Agencies
• Media
• Secondary Sources
• Formal Research
• Determine the Techniques of Environmental
Scanning
• Scan and Access the Opportunity & Threat
 Techniques/ Methods of Environmental
Scanning
1. Executive opinion method: It is also called executive
judgment method. Under this environment is forecasted on
the basis of opinion and views of top executives. A panel of
these executives is formed.
2. Expert opinion method: Under this environment forecasting
is based an opinion of outside experts or specialist. The
experts have better knowledge about market conditions and
customer taste and preferences. This method is similar to
executive opinion method. However, it uses external experts.
3. Extrapolating method: Under this method, past information
is used to predict the future. Different methods used to
extrapolate the future are time series, trend analysis and
regression analysis.
 Techniques/ Methods of Environmental
Scanning
4. Delphi method: This method is the extension of expert
opinion method. It involves forming a panel of experts
and questioning each member of the panel about the
environmental trend. Later, the responses are
summarized and returned to the members for
assessment. This process continues till the acceptable
consensus is achieved.
5. Historical analogy: It is a judgmental forecasting
technique. Under this, the environmental trends are
analyzed with the help of other trends which are
parallel to historical trend. For example, sales history
of similar product
 Techniques/ Methods of Environmental
Scanning
6. Intuitive reasoning: Under this, rational and unbiased
intuition is used for environmental scanning. Environmental
dynamism are guessed on individual judgment. Reliability of
this method is questionable.
7. Scenario building: Scenarios are the pictures of possible
future. They are built on the basis of time ordered sequence of
events that have logical cause and effect relationship with each
other. Scenarios are built to address future contingencies.
8. Cross-impact matrix: Under this, environmental forecasts
through various methods are combined to form an integrated
and consistent description of future, Cross-impact matrix is
used to assess the internal consistency of the forecasts.
 Emerging Business
Environment in Nepal
• Emergence of Open Market Economy
• Increasing Role of Private Sectors
• Private Investment in Infrastructure Development
• Emergence of Multinational Companies
• Growth of Service Sectors
• Development of IT Economy
• Emergence of Consumerism
• Workforce Diversity
• Increasing E-commerce Business
Thank You…