Environment means the surroundings, external objects, influences or circumstances under which someone or something exists. The environment of any organisation is the aggregate of all conditions, events & influences that surround & affect it.

Purchase decision: Automobile Supplier of raw materials Manufacturer Dealer Advertising agency Banker Insurance agent

Business- economic activity Business firm- economic unit Business decision making- economic in

nature

Business achieve objectives by using resources optimally

Decisions taken in the presence of environmental factors

Business firm is micro economic unit Business environment furnishes macro

economic context for its operation

Environment in which business operates Includes conditions, events, factors that

influence the working of business

Classification: Time: past, present & future environment of

business Space: local, regional, national , international

environment of business Forces: forces of market like demand, supply Factors: economic & non-economic

The classification of relevant environment into components helps the organisation to cope with its complexity, comprehend the different influences operating & relating the environmental changes to its strategic management process.

Business firms: adaptability & adoptability to environment

Managers: capability & copability to deal with environment

BUSINESS DECISIONSINTERNAL ENVIRONMENT

EXTERNALENVIRONMENT

Richman & Copen…………

Environment factors or constraints are largely, if not totally, external and beyond the control of individual industrial enterprises & their managements. These are essentially the ‘givers’ within which the firms & their managements must operate in a specific country & they vary often greatly from country to country.

Business environment for a firm- multi layered structure.Layers:

favourable/ adverse exhibit different characteristics affect adjoining layer over a period of time Closeness of interaction & interrelationship diff

at diff levels

Example: changes in global business environment may effect the domestic growth environment significantly

INTERNALENVRNMNT

EXTERNAL

RIVAL

FINANCIERS

CUSTOMR

INPUTPRVIDER

DOMESTIC MACRO ECNMC ENVRNMNT

NON ECNMC MACRO ENVRNMNT

SOCIALCULTRL

ECMNCSTBLTY

ECNMCSYSTM

GRWTH&DIST

ECOPOLICY

DEMGRPHC

INTRNTNL ENVRNMT

INTRNTNL ENVRNMT

GOVT

CONTD……

Change in environment presents opportunity to some & threat to others

Examples: General agreement on trade & services (GATS)

implemented in India on Jan 1, 2005: opportunity for research based pharmaceutical cos like Ranbaxy but threat to smaller companies.

HUL took advantage of new takeover & merger codes: acquired Kissan from UB group, Lakme from Tata, Modern foods from government.

Regarded as controllable factors: companies have control over them

Internal economy: some internal factors contribute increase in productivity

Mission & vision of the organisation Management strategy Industrial relations Corporate culture & values Line & staff relations Quality control system Team spirit among employees Work culture Compensation system Career progression of employees

Conflict b/w different owner groups Conflicts b/w workers & managers Inter departmental conflicts Unhealthy competition & conflict among

employees Office politics Discrimination at work place Absenteeism

Regarded as uncontrollable factors: by and large beyond the control of company.

External economy: some external factors contribute to the growth of the company.

Suppliers Customers Competitors Financiers Society

BUSINESS

POLITICALLEGAL

ECONOMIC

SOCIAL

CULTURAL

TECHNOLOGICAL

GLOBAL

NATURAL

Economic system

Growth & distribution environment

Macro economic stability (price level, exchange rate, interest rate, money supply, aggregate demand, BOP, employment rate)

Economic policy (monetary policy, fiscal policy, industrial policy, trade policy)

Political environment Social / cultural environment Demographic environment Technological environment Natural environment Historical environment

State of world economy International economic cooperation Role of multilateral economic institutions International economic laws, agreements, codes Political condition & system in different countries Cultural factors across countries Growth & spread of MNCs Technology growth & transfer International market structure & competition Barriers to international trade & investment

(I) POLITICAL ENVIRONMENT

Political stability- changes in the form & structure of government administration

Political organisation- ideology of ruling government; influence of premier groups; conflicting role of public & private sector

Example: Nehru: transformation of agrarian economy

into industrialised economy

Indira Gandhi: state became active in agriculture sector (subsidised fertilisers, expansion of institutional credit); tightening of state control over industrial finance, foreign investment, trade

Since 1990-91, political environment changed- economy increasingly being liberalised

Example:

In 1977, Janata govt came to power: Coca cola, IBM had to leave country. All liquor cos had to close operations.

1991 new economic order presented new opportunities for business & also threat to inefficient organizations.

(II) REGULATORY & LEGAL ENVIRONMENT

Legal policies- formulation & implementation Economic legislations- facilitator and/ or

restrictor Playa a vital role- dictating dos & don’ts of

business Flexibility & adaptability of law- constitutional

amendments Foreign policy- tariffs, custom unions etc

(III) SOCIO- CULTURAL ENVIRONMENT

SOCIAL ENVIRONMENT Made up of attitude, desires, expectations,

education, beliefs & customs of people Changes gradually To forecast a change is difficult

CULTURAL ENVIRONMENT

Organisational culture is the customary or traditional ways on thinking & doing things, which are shared to a greater or lesser extent by all the members of the organisation, which new members must learn & at least partially accept in order to be accepted into the service of the firm.

A firm wanting to market its product in various regions with diversified cultures will have to carefully study the existing consumption pattern & scope for creating demand for new products & will have to adjust their marketing communication to cultural characteristics.

If the society is multi- cultural, then the firm can not meet the demands of different groups with a uniform product. To be successful in a multi cultural society, the firm will have to carefully study the consumption behaviour of different groups.

Example:

Companies have to change their product portfolio because of cultural differences as McDonald and KFC did when they launched their restaurant chain in India.

(IV) DEMOGRAPHIC ENVIRONMENT

(a) Size & growth rate of population

Growing population: boon• Increase in productive forces• Bigger market for products

Growing population: bane Adverse impact on per capita income &

standard of living Adverse impact on savings: unfavourable

impact on capital formation Adverse impact on employment situation Increasing pressure on agriculture

(b) age structure of population

It determines: Productivity level Demand pattern

Young population: PTC highElderly population: high savings

(c) urban- rural population

Proportion of urban rural population increasing

Reasons

Pull factors: Better employment opportunities in urban

areas Better income Better education Better health facilities

Push factors: Low level of agriculture productivity Disguised unemployment Wide disparity between urban & rural levels

of living

In India, urban population increased from 17.3% of total population in 1951 to 27.78% of total population in 2001 (Source: Economic Survey 2003-04)

Example:

Demographic environment decides the marketing mix for an organisation. A one rupee sachet of shampoo or a five rupee ice-cream cone are some examples.

(V) TECHNOLOGICAL ENVIRONMENT

Refers to body of skills, knowledge & procedures for making, using & doing useful things

Positive effects of technology: Increased productivity Spread effects Production of new & better goods of

standardised quality with more efficient use of raw materials

Basis for fast growing urban & industrial system

Negative effects of technology: Displacement of labour Environmental pollution Switching over might be costly

Example:

FIAT was using old technology but MUL had no option than to go for superior technology.

(VI) NATURAL ENVIRONMENT Industrial activity not entirely independent of

nature Industrial units using weight losing inputs to

be set up at sources of these inputs Externalities

(VII) EDUCATIONAL ENVIRONMENT Attitude towards education & acquisition of

knowledge Types of education- formal or informal Literacy level Educational match with skill requirement

(VII) HISTORICAL ENVIRONMENT

Historical events & ideologies have a strong impact on the current state of business

Example: business environment in a number of newly independent nation states has been determined by the colonial status that these countries had.

Dynamic Uncertain Element of Risk Opportunities & threats Internal & external factors Economic & non-economic factors

Facilitates operations of the organisation Forms the basis of long term policies, plans,

strategies of organisation Helps organisation in identifying &

understanding its competitors Helps the firm to expand & grow

CORPORATE RESPONSE & ADJUSTMENT TO SPECIFIC CHANGES IN BUSINESS ENVIRONMENT

Competitive environment

Marketing strategy Developing new product Satisfying customers Measures for realisation of economies of

scale & scope

Technological environment

R & D Foreign technical collaborations Choice of technology Capital labour ratio

Labour environment

Productivity Employee motivation Employees’ turnover rate Working conditions Compensation

Legal environment

Procedures & documentation Ethical practices Intellectual property protection Credibility

Social environment

Social responsibility Welfare expenditure

And so on………….

Environmental changes:

Liberalisation era forced businessmen to think of core competencies

Reckless diversifications made during pre liberalisation era became liabilities

Strategic responses:

Restructuring business

Internationally to consolidate strength in brewing & distilling

In India to focus on engineering, services, health care, brewing & distilling

Hiving of non core business like pharmaceuticals

Consequences:

With the excess baggage being shed, UB group looks slim & vibrant

Firms that are able to make appropriate adjustment to business environment changes reduce risk & uncertainty & gain competitive edge over others. Failure in making timely adjustment may erode profitability, competitiveness & market share.

Legal risk: arising from legal challenges or changes in laws

Regulatory risk: arising from regulatory design & its changes

Political risk: arising from political changes

Social risk: originating from social attitudes, perceptions

Natural risk: associated with natural calamities

Studies interaction, interdependence, interlocking of various environmental factors

Economic environment is both- endogenous & exogenous- it is determined as well as determining

Non EcoEnvrnmt 

Eco. Sys.

Eco. Stru

Fnctng of the Eco

Eco plng

Eco. prgrm

Eco. Policies

Eco.contls & rgultions

Eco.gwth & dvt

Sociological + + + + + + + +

Educational + + + + + + + +

Political + + + + + + + +

Historical + + + + + + + +

EcoEnvrnmt

NON

PRESENT

ENVRNMT

PRESENT

ECO

ENVRNMT

(1)

PRESENT

NON- ECO

ENVRNMT

(2)

PAST ECONOMIC (1)

+ +

NON ECONOMIC

(2)

+ +

FUTURE ECONOMIC

(3)

+ +

NON ECONOMIC

(4)

+ +

PRESENTENVRNMNT

Wiliam & Lawrence……..

Environmental analysis & diagnosis give strategists time to anticipate opportunities & to plan to take optional responses to these opportunities. Its also helps strategists to develop an early warning system to prevent threats & to develop strategies which can turn a threat to the firm’s advantage

Scanning: general surveillance of environmental factors & their interactions

Monitoring: tracking environmental trends, events

Forecasting: developing plausible projections of direction, scope & intensity of environmental change

Assessment: identifying & evaluating how & why current & projected environmental changes will affect strategic management of organisation

Strategic planning in which managers try to determine best fit b/w organisation & its external environment

Important step towards corporate planning & business policy decisions

Aimed at continuous improvement of the company, its policies & programs.

INTERNAL SCANNING: acquisition, analysis, use of information from within the organisation that will help the management in determining future course of action of business

EXTERNAL SCANNING: acquisition, analysis, use of information about events & establishing the relationship of business with its external environmental variables

Corporate managers analyse the Strengths (S), Weakness (W), opportunity (O) & Threat (T) that exist for their organisation in the context of its environment.

O & T are external to the firm. With S the firm can seize the O & captilise on it & because of its W it becomes the victim of T in the environment

MONITORING

SCANNING FORECASTING

ASSESSMENT

To provide economic logic & perspective for managerial decision making

Integrating economic theory with practical business situations

Monitoring, scanning, careful analysis & interpretations of business environment

Forecasting, future panning & formulating future business strategy