Understanding the Complexities of Business Environment
Business environment encompasses various factors impacting operations, such as social, economic, legal, and cultural elements. This dynamic and uncertain environment presents challenges and opportunities for businesses worldwide, with interdependencies and relativity influencing outcomes.
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Learning Objective What is Business What is Environment Business Environment- Nature, Objective Types of Business Environment Interaction between Internal and External Environment Importance of Business Environment
Business: Business is a human activity carried out by the unified efforts of different categories of people, to produce the wealth through production and distribution of the goods and services. According to Malvin Anshen : Business is the way by which men make their living. According to Bayard O Wheeler : Business is an institution organized and operated to provide goods and services to society under the incentive of private gain.
Environment: The birth, growth and continuous development of organization are influenced by a wide range of variables like employees, customers, suppliers, producers, competition etc.
Business Environment: Business Environment refers to those aspects of the surroundings of business enterprise, which affect or influence its operations and determine its effectiveness. According to Keith Davis: Business environment is the aggregate of all conditions, events and influence that surrounds and affects it
Nature of Business Environment Complex: Environment consists of a number of factors, events, conditions arising from different sources which impact business thus making the business complex. Interdependence : Factors affecting business environment like social, economic, legal, cultural etc are inter dependent. E.g. A rich country can make sufficient expenditure on the research and development. Dynamic: Business environment is dynamic as it keeps on changing in terms of technological improvement, changes in consumer preferences, entry of new competitors.
Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings. Relativity: Business environment is a relative concept as it differs from country to country and region to region. e.g. Demand of saree is high in India comparative to other countries. Specific and General forces: Specific forces affects individual enterprises directly and immediately whereas general forces have impact on all business enterprises. Forecasting is not possible for all developments: Many developments such as interest rate fluctuations, the rate of inflation etc are difficult to predict on log term basis which makes difficult to maintain business environment.
Objectives of Business Environment Knowledge of Information: Every businessman should be aware about the current environment of the business to change accordingly. Basis of Decision: It contains all the information which is needed for taking good decision. e.g. If a business knows about its competitors, suppliers and customers they take decision about price, purchase, salary etc. Helpful in making of policies: For making good business policies one needs to know and scan business through business environment.
Technological Planning: In today's environment it is really important for the business houses to keep themselves changing according to the technological changes in the market. Survive in the business: Sometimes industry may face recession. In such condition only those business will survive who estimate this entire situation in advance through business environment study.
Types of Business Environment Internal Environment External Environment Financial Resources Physical and human Resources Objectives of Business Work Environment Corporate Image Labour management Relationship 7) Technological Capabilities Micro Environment Macro Environment
Internal Environment: Internal environment refers to factors existing within a business firm.These factors are generally regarded as controllable factors because the company has control over these factors. Financial Factors: Factors like financial policies, financial procedures and capital structure are also important internal environment affecting business performance, strategies and decisions. Physical and Human Resources: The characteristics of the human resources like skill, quality, moral, commitment etc., contribute to the strength and weakness of an organization. Objectives of Business: The business domain of the company, direction of development, business policy etc., are guided by the objectives of the company
Work Environment: The organisational structure, company policies, extent of professionalism in management etc., are important factors influencing business decisions. Company Image and Brand: The image of the company matters while raising finance, forming joint ventures, entering purchase or sales contract etc. Labour Management Relationship: Factors like the amount of support top management enjoys from different level of employees, and other participants influences company decisions and their implementations. R&D and Technological Capabilities: It determines a company s ability to innovate and compete.
External Environment The external environment refers to the factors existing outside the business firm. The external factors are beyond the control of a company, hence its success depends to the adaptability of the environment. Again external environment is divided in two parts: 1)Micro Environment 2)Macro Environment
Micro Environment The factors which are close to the company and affects its ability to work constitutes micro environment. It is known as the operating environment of business. When competing form in the industry have the same micro elements, the success of the firm depends on their relative effectiveness in dealing with these elements. Suppliers: Suppliers are those who supply the inputs like raw material and components to the company. Uncertainties regarding the supply constraints the company to maintain high inventories causing cost increase. Customers: Success of any business depends upon identifying customers, their needs, likes etc., and enhancing the level of customer satisfaction. The major task of a business is to create and sustain customers.
Competitors: Competitors mans other business units which are marketing or producing similar products or a very close substitute of our product. Business has to adjust its various activities according to the action and reactions of competitors. Marketing Intermediaries: These are the firms that aid the company in promoting , selling and distributing its goods to final buyers. They are the vital links between the company and the final consumers. Public: A public is any group that has an actual or potential interest in or impact on an organization's ability to achieve its interest. Some companies are seriously affected by such public. E.g. Media
Macro Environment Macro environment means general environment of business. Macro forces are uncontrollable in comparison to the micro forces of environment. The growth and survival of business depends upon its adaptability to macro environmental factors. The important macro environment are: 1)Economic Environment 2) Non Economic Environment Economic Environment: To know the economic environment of a country or a business one has to understand the economic policies of the nation. These policies put direct impact on the working and success of the business. Economic conditions, economic policies (Industrial policies, monetary and fiscal policy etc) and the economic system are the important factors that constitute economic environment of the business.
Non Economic Environment Socio cultural Environment: The socio-cultural environmental factors consist of human relationship and the development. Some of the important factors in the social environment are the buying and consumption habit of people, their languages, beliefs and values, custom and traditions, etc that effeccts the business. Legal Environment: Every country follows its own system of law. The companies operatiing in the global market have to take into account the provisions with rspect to the legal environment prevalent in the countries which thy do business. These law and regulations affect the day-to-day operations of business. International Environment: The international environment is particularly important for industries directly depending on imports or exports. E.g. Import export policies of various countries.
Political Environment: The political environment consists of factors related to the management of public affairs that have a considerable impact on the business of an organization. It impacts the legislations and government rules and regulations under which business organizations operates in a country. Technological Environment: Technological environment comprises both machines (hard technology) and scientific thinking (soft technology) used to solve problems and promote progress. It also represents the degree of advancement of goods and services that are prevalent in a country or a region. Natural Environment: Geographical factors such as natural resources endowments, weather and climatic conditions, location aspects in the global context, port facilities etc., are all relevant to business.
Significance of Business Environment First Mover Advantage: Awareness of environment helps an enterprise to take advantage of early opportunities instead of loosing them to competitors. E.g. Maruti Udyog became leader in small car Early Warning Signal: Environmental awareness serves as an early warning signal. It makes a firm aware of the future threats or crisis so that the firm can take timely action to minimize the adverse effects. Customer Focus: Environmental understanding makes the management sensitive to the changing needs and expectations of the consumers. E.g. Apps in mobile
Strategy Formulation: Environmental monitoring provieds relevant information about the business opportunities on the basis of which firms makes their stratrgies. e.g. ITC in travel and tourism sector Public Image: A business firm can improve its imageby showing that it is sensitive to its environment and responsiveas per the need of customers. Continuous Learning: Environmental analysis serves as broad and ongoing education for business executive so that they can react in an appropriate manner to the changing scenario and therby increase the success of their organization.
Environment Scanning The word scanning means to look carefully into or to examine. The term Environmental Scanning in business means to Carefully analyze the various factors influencing the business . Environmental Scanning is a continuous process. It is a process by which the organizations monitor their relevant environment to identify opportunities and threats affecting their business. According to B.W.Denning The advocates of systematic corporate planning (strategic management process) base their case on the view that the determination of the future can be improved by a systematic analytical approach which reviews the business as a whole in relation to the environment.
Need of Environment Scanning Effective Utilization of Resources: The key to business success is the most effective utilization of resources. Companies which fails to do so are doomed to failure. Helps in Converting threats into Opportunities: Environmental scanning allows the strategies to anticipate opportunities and plan alternative responses to these opportunities. Environmental scanning helps in preventing the threats or develop strategies that can turn threats to opportunities for the benefits of organization. If all the companies were able to do that, then every company would have earned good profits, growth and reputation. Useful for the managers: A business manger should be able analyze the environment to grasp the
Strategic Management Starts with Environmental Scanning: Environmental scanning is the starting point of strategic management. strategy formulation and strategy implementation are the outcome of environment scanning. To implement the strategy, the first thing is formulation of strategy. Again this strategy formulation is based on what impact the environment has on organization in terms of opportunities and threats. Constant Monitoring of the Environment: Environmental scanning provides a clear idea about the existing environment. Without environment scanning it would not be possible to know the change in customers tastes=, preferences, competitors moves, latest policies etc. opportunities or face the threats. Narrowing Down the Opportunities: An in-depth and meaningful environmental scanning assists the strategists to reduce the range of available alternatives and eliminate options that are totally inconsisten with the forecast opportunities or threats. Of these alternatives and options, which is the viable and promising has to be traced out.
Process of Environment Scanning Identifying Environmental Factors Scanning & Selecting Relevant & Key Factors Defining Variables forAnalysis Using Different Methods, Techniques & Tools Forecasting Environmental Factors Designing Profiles Strategic position and Report Writing
Environmental analysis process is not static but a dynamic process. It may differ depending on the situation. However general process with few common steps can be identified as the process of environmental analysis they are: Identifying Environmental Factors: All strategist should identify all the relevant factors that might affect their business. In this process, one should first know what the internal areas (internal structure, culture, labour management) of the business are. Similarly, a business daily interacts with the close environmental components outside the business such as customers, competitors. Furthermore, general factors such as political, legal, economic etc. are to be identified. Scanning and Selecting Relevant Key Factors: Out of all the business environmental factors, a strategist should focus on the relevant factors for analysis. This step basically avoids the overload of unnecessary information.
Defining Variables for Analysis: Selected environmental factors are to be further specified into the variables. For example, political situation can be measured using few variables such as instability, reliability and long term effect. Economic environment might cover many variables such as per capita, GDP etc. Using Different Methods, Techniques and Tools: Some of the major methods of analysis can be Scenario building, Benchmarking, Network methods. Scenario presents overall picture of its total system with affecting factors. Benchmarking is to find the best standard in an industry and to compare the one s strength and weakness wit the standard. Network method is to assess organizational system and its outside environment to find out the SWOT of an organization. Some of the techniques are Survey, Brainstorming, Historical Enquiry. Analysis tools can be statistical such as general descriptive tools as mean, median, mode, frequency. Finance & accounting use mostly profitability, leverages and other similar financial tools for analysis.
Forecasting Environmental Factors: Collecting relevant information and to identify the variables are basics of analysis. Analyzing the past information to predict the future is the main objective of this step. Designing Profile: After analyzing the environmental factors they are recorded into the profiles. Such profile record each component or variable into left side and their positive, negative or neutral indicators including their statement in the right side. Internal areas are recorded in Strategic Advantage Profile (SAP) and external areas are recorded in Environmental Threat and Opportunity Profile (ETOP). Strength, Weakness, Opportunity and Threat (SWOT) profile can be designed combining both of these two profiles into one.
Strategic Position and Report Writing: After preparing the profiles strategists prepare formal report that describes the business environment. The report might present issues and best strength of business environment. Based on this report future strategies can be made effectively.
SWOT Analysis A SWOT analysis is structured planning method used to evaluate the strengths, weaknesses, opportunities and threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective.
