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Transcript of Business Environment u1
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BUSINESS ENVIRONMENT
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What is a business?The activity of buying and selling goods and
services to earn money.
A commercial or industrial enterprise and
people who constitute it.
What is Environment?
The condition that we live in and the way
they influence us.Business Environment consists of all those
factors that have a bearing on the business.
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Just as the survival and success of an individual
depend on:
I. Innate capability (psychological and physiological factors)II. Conduciveness of environment*
Similarly, the survival and success of a business
firm depend on:I. Its innate strength (resources, skills, organization)
II. Favorableness of the environment*
Thus, the 1st
is called the internal factors the internalenvironment and
2nd is called external factors the external environment.
SIMULATION EXERCISE:*
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The external environment has, broadly, two
components:I. Business opportunities
II. Threats to business
Similarly, the organizational environment has
two components:I. Strengths
II. Weakness
INTERNAL
ENVIRONMENT
EXTERNAL
ENVIRONMENT
BUSINESS
DECISION
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Business dynamics to a large extent, is a dependent
factor it depends on, inter alia, the environmental
dynamics.
TYPES OF ENVIRONMENT:
We generally consider the business environment at
three levels:
1. Internal environment2. Micro / Task / Operating environment
3. Macro / General / Remote environment
Although BE consists of both the internal and external
environments, they generally confine the term to
the external environment of business.
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INTERNAL ENVIRONMENT The key internal factors which have a bearing on
the strategy and other decisions are:
1. Value System*
2. Mission and Objectives
3. Management Structure and Nature
4. Internal Power Relationship
5. Human Resources
6. Company Image and Brand Equity
7. Miscellaneous Factorsi. Physical assets and facilities
ii. R & D and Technological Capabilities
iii. Marketing Resources & Financial Factors
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EXTERNAL ENVIRONMENT MICRO ENVIRONMENT:
1. Suppliers
2. Customers
3. Competitors
4. Marketing intermediaries
5. Financiers6. Publics
MACRO ENVIRONMENT:
1. Political Environment
2. Legal Environment3. Global Environment
4. Demographic Environment
5. Socio-cultural Environment
6. Technological Environment
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COMPETITIVE STRUCTURE OF INDUSTRIES
Identification of forces affecting competitive
dynamics of an industry is very useful informulating strategies.
According to Michael Porters model ofstructural analysis of industries, the state ofcompetition in an industry depends on:
1. Rivalry among existing firms
2. Threat of new entrants
3. Threats of substitutes
4. Bargaining power of suppliers
5. Bargaining power of buyers
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COMPETITIVE STRUCTURE OF INDUSTRIES
1. Threat of entry: The following are some of the
important common entry barriers:I. Government policy: Industry licensing, import
restrictions, deposits etc.
II. Economies of scaleIII. Cost disadvantages independent of scale:
Propriety product technology, experiencecurve, favorable location etc.
IV. Product differentiation
V. Monopoly elements
VI. Capital requirements
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COMPETITIVE STRUCTURE OF INDUSTRIES
2. Rivalry among existing firms: As because the firmsin an industry are mutually dependent,
competitive moves of a firm usually affects others. Common competitive actions include price
changes, promotional measures, customerservice, warranties, product improvements, new
product introduction etc. The following factors influence the intensity of
rivalry:
I. Number of firms and their relative market share,
strengths etc.II. State of growth of industry
III. Fixed or storage cost
IV. Indivisibility of capacity augmentation
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COMPETITIVE STRUCTURE OF INDUSTRIES
V. Product standardization and switching costs:
VI. Strategic stakeVII.Exit barrier
VIII.Diverse competitors
IX. Expected retaliation3. Threat of substitutes: Power of substitutes is
an important force of competition.
Substitutes limit the potential returns in anindustry by placing a lid on the price.
Threats of competition can be posed fromthose marketing close or distant substitutes.
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COMPETITIVE STRUCTURE OF INDUSTRIES
4. Bargaining power of buyers: For severalindustries buyers are potential competitors they may integrate backward.
Besides, they have different degrees ofbargaining power.
Important determinants of the buyer power,explained by Porter are:
I. The volume of purchase relative to total sales
II. Importance of the product in terms of total costIII. The extent of standardization or differentiation
of a product
IV. Switching cost
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COMPETITIVE STRUCTURE OF INDUSTRIES
V. Profitability of the buyer
VI. Potential for backward integration
VII.Quality expectations
VIII.Extent ofbuyers information
5. Bargaining power of suppliers:
The important determinants of supplier power are
the following:
I. Extent of concentration and domination in the
supplier industry
II. Importance of the product to the buyer
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COMPETITIVE STRUCTURE OF INDUSTRIES
III. Importance of the buyer to the supplier
IV. Extent of substitutability of the productV. Switching costs
VI. Potential for forward integration by suppliers
Porters analysis thus shows that:
a. Knowledge of the competitive forces highlightsthe critical strengths and weaknesses of thecompany.
b. Animates its positioning in its industry
c. Clarifies the areas requiring strategic changes
d. Highlights the areas of opportunities and
strengths.
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MACRO ENVIRONMENTGLOBAL BUSINESS ENVIRONMENT:
What is Globalization?
Globalization refers to the process of integration ofthe world into one huge market.
Such unification calls for the removal of trade
barriers among countries. Even political and geographical barriers become
irrelevant.
Global business environment can be defined as theenvironment in different sovereign countries, withfactors exogenous to the home environment of theorganization, influencing decision making onresource use and capabilities.
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MACRO ENVIRONMENTECONOMIC ENVIRONMENT AN OVERVIEW
The Economic Environment includes the stature
and nature of the economy, its stage ofdevelopment, economic resources, the level ofincome, the distribution of income and assets,
global economic linkages, economic policies etc.NATURE OF THE ECONOMY:
The general level of development of the economyhas lot of implications for business (LPG).
Countries, and even different regions within acountry, show great differences in the level andpattern of economic development.
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MACRO ENVIRONMENTA widely used method of classification of the
economies is on the basis of per capita income.
Accordingly, countries are broadly classified as low
income, middle income and high income
economies.
1. Low income economies: are economies with
very low level of per capita income.
All economies with per capita GNP of $755 or
less in 2000 are regarded as low income
economies.
There were 63 low income economies in 2000.
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MACRO ENVIRONMENT2. High Income Economies: are countries with very
rich per capita income.
Those with a per capita GNP of $9266 or above in2000 fall in this category.
There were 53 HIEs in 2000.
There are mainly two categories of HIEs, namely,
Industrial economies and oil exporters.3. Middle Income Economies: are subdivided into
lower middle income and upper middle income.
Those with a per capita GNP between $756 and
$2995 in 2000 fall in lower middle income. Those with a per capita GNP between $2996 and
$9265 in 2000 fall in lower middle income.
There were 54 lower middle income and 38 upper
middle income economies in 2000.
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MACRO ENVIRONMENTThe low income economies are sometimes referred
to as the third worldeconomies.
The high income and middle income economies
representing thefirstand secondworlds.
However, the point worth noting is that the
differences in income levels between countries
fail to reflect true purchasing power or living
standards of people. Why?
- Purchasing power of national currencies vary.
- Further, exchange rate often give misleading
picture of the economic position of the country.
O O
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MACRO ENVIRONMENTDeveloping and Developed Economies is an often
used classification of countries.
Low income and middle income economies aredeveloping economies.
The use of the term underdevelopedto refer to thedeveloping countries is also common.
In developing economies, the distribution of incomeis very high resulting into rife abject poverty.
They are characterized by high birth and population
growth rates. Death rates are also higher than in developed
countries.
Prevalence of rudimentary and traditional methodsand obsolete technology is dominant.
MACRO ENVIRONMENT
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MACRO ENVIRONMENTThe Developed Economies as a group are sometimes
referred to as the North.
In the group of the high income economies,the industrial
economies are developed economies; all the oil exportersare not developed economies.
Developed economies are characterized by:
o widespread use of modern and sophisticated technology.
o Continuous innovationso Fast diffusion of new ideas and technology
o Low share of the primary sector (mainly agriculture) anddominance of tertiary and secondary sector in the income
and employment generation.o Market friendly economic policies.
o Comparatively open trade and investment policies.
o Democratic rights
o Competition and consumer choice etc.
MACRO ENVIRONMENT
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MACRO ENVIRONMENTECONOMIC POLICIES:
There are several economic policies which can have
a great impact on business.
Important economic policies are:
1. Industrial Policy
2. Trade Policy
3. Foreign Exchange policy
4. Foreign Investment and Technology Policy5. Fiscal Policy
6. Monetary Policy
MACRO ENVIRONMENT
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MACRO ENVIRONMENTPOLITICAL AND GOVERNMENT ENVIRONMENT:
The fact that it is often politics that determines
economic and business policies highlights the
critical importance of the political environment.
Major economic policy decisions often have
political underpinnings.
Adoption of socialist pattern of society by the
congress party was mainly responsible for public
sector dominated development strategy.
Impact of political environment of USSR and East
European countries spawned economic reforms
in India.
MACRO ENVIRONMENT
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MACRO ENVIRONMENTClassification of Functions of State:
Functions of the state varies from basic minimum
requirements to active participation in several othersectors.
The basic functions include the pure public goods suchas the provision of property rights, macroeconomic
stability, control of infectious diseases, safe water,roads and protection of the destitute.
The intermediary functions include management ofexternalities, regulation of monopolies, and theprovision of social insurance.
The activist functions include coordinating privateactivity (fostering markets, cluster initiatives) and
redistribution.
MACRO ENVIRONMENT
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MACRO ENVIRONMENTEconomic roles of government:Government normally plays four important roles in an economy,
viz., regulation, promotion, entrepreneurship and planning:
Regulatory role:
Reservation of industries to small scale, public and co-operative sectors, licensing system etc. regulate the entry.
Regulation of product mix, promotional activities etc.
Regulation of business operations by measures such asceilings on profit margins, dividend etc.
The state may also regulate the relationship betweenenterprises.
Government regulates the economy through direct andindirect controls.
Indirect controls are exercised through fiscal and monetaryincentives, disincentives and penalty.
The direct administrative or physical controls are more drasticin their effect. E.g. trend of deregulation.
MACRO ENVIRONMENT
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MACRO ENVIRONMENTPromotional role:
To build up and strengthen the necessary
infrastructure, power, transport, finance,marketing, institutions for training and guidanceetc.
Entrepreneurial role: Establishing and operating business enterprises
and bearing the risks.
Planning role:
Importance of planning to a less developedeconomy was often emphasized by JawaharlalNehru, the chief architect of development
planning in India.
MACRO ENVIRONMENT
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MACRO ENVIRONMENTNatural and Technological Environment:
To some extent the ecology and technology are
interdependent.
NATURAL ENVIRONMENT:
The natural environment ultimately is the sourceand support of everything used by businesses
every raw material, every energy source, every
life sustaining factor, even waste disposal site.
Resource availability is the fundamental factor in
the development of business in societies.
Climatic and weather conditions affect the location
of industries and demand for roduct.
MACRO ENVIRONMENT
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MACRO ENVIRONMENTTECHNOLOGICAL ENVIRONMENT:
Technology includes the tools both hard and soft
available to solve problems and promote
progress among societies.
MNCs are often in a particularly advantageous
position with regard to soft technology.
The 1999 Global competitiveness report of the
world economic forum emphasized sharply on
the usage of information technology.
The three aspects i.e. e-mails, internet and e-
commerce have been liberally extolled.
MACRO ENVIRONMENT
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MACRO ENVIRONMENTINNOVATION:
Innovation is a very important factor that provides
competitive advantage and consequently
determines success.
Innovation may take place in any of the following
form:
Introduction of a new product
Use of a new method of production
Opening of a new market
Conquest of a new source of raw material supply
Reorientation of an industry
MACRO ENVIRONMENT
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MACRO ENVIRONMENTINNOVATION:
Innovations can be classified into the following types:
1. Radical innovation
2. Incremental innovation
3. Next-generation technology innovation
TECHNOLOGICAL LEADERSHIP & FOLLOWERSHIP:
According to technological leadership, a firm seeks to
be the first to introduce technological changes that
support its generic strategy.
Technological followership refers to a conscious and
active strategy in which a firm explicitly chooses not
be first on innovations.
MACRO ENVIRONMENT
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MACRO ENVIRONMENTINNOVATION:
According to porter, technological change by a firm
will lead to sustainable competitive advantageunder the following circumstances:
The technological change itself lowers cost or
enhances differentiation. The technological change shifts costs or
uniqueness drivers in favor of a firm.
Pioneering the technological change translatesinto first mover advantages besides thoseinherent in the technology itself.
The technological change improves overall
industry structure.
MACRO ENVIRONMENT
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MACRO ENVIRONMENTSOURCES OF TECHNOLOGICAL DYNAMICS
1. Innovative drive of the company
2. Customer needs/expectations
3. Demand conditions
4. Suppliers offerings5. Competitive dynamics
6. Substitutes
7. Social forces8. Research organizations/Technical facilities
9. Government policy
MACRO ENVIRONMENT
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MACRO ENVIRONMENTInformation and Communication Technology:
ICT has been significantly transforming the distributionsystem. Effective use of ICT in distribution can helpcompanies:
Reduce inventories
Reduce delivery time Respond faster to market changes
Reduce rush orders
Cut down overproduction Reduce unnecessary movement
Reduce paper-work and wasteful processing
Plan production better
MACRO ENVIRONMENT
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MACRO ENVIRONMENT
FROM TO
Fragmented ConsolidatedLocal Global
Low technology use High technology use
Owner-operated Systems-driven
Traders Retail brand managers
Mass marketing Individualized relationship customization
Market place Market space
Retail Revolution
Transfer of Technology:
TT is the process by which commercial technology is disseminated.There are four levels of TT:
Operational level
Duplicative level
Adaptive level
Innovative level
MACRO ENVIRONMENT
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MACRO ENVIRONMENTChannels of Technology flow:
The most important channels for the flow oftechnology are:
o Foreign Investment
o Technology license agreements and joint ventures
Methods of Technology Transfer:
1. Training or Employment of technical expert
2. Contracts for supply of machinery and equipment3. Licensing agreements
4. Trunkey contracts