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Emerging Trends in Business environment

Module-1: Theoretical Frame work of

Business Environment.

1. Concept, Significance and Nature of

Business Environment

2. Elements of business environment.

3. Changing dimensions

4. Environmental scanning and monitoring

ETBE-Module-1: Theoretical Framework of
Business Environment

1. Concept, Significance and nature

An environment can be defined as anything which
surrounds a system. Therefore, the business environment
is anything which surrounds the business organization. It
affects the decisions, strategies, processes and
performance of the business. The micro environment
consists of different types of stakeholders - customers,
employees, suppliers, board of directors and creditors.
The macro environment consists of factors which are
beyond the control of the business (STEP) - Social,
Technological, Economical and Political Changes in the
macro environment will directly affect and impinge on
the firm's activities. Changes in the macro environment
will indirectly affect the business . For example, a
change in legislation such as the smoking ban indirectly
affects pubs and restaurants.
ETBE-Module-1: Theoretical Framework of Business

Every business operates in a particular

environment and each business unit has its
own environment. A change in environment
presents opportunity to some and threats to
others. The recent changes in tariff rates
have changed the toy industry of India with
the market now being dominated by Chinese
products. A slight change in the Reserve
Bank of India’s monetary policy can increase
or decrease interest rates in the market.
ETBE-Module-1: Theoretical Framework of
Business Environment

• The new barons of Indian business are those who

predicted the changes in the environment and reacted
accordingly. Azim Premji of Wipro, Narayana Murthy
of Infosys, Subhash Goyal of ZEE, the Ambanis of
Reliance, L.N.Mittal of Arcelor Mittal, and Sunil Mittal
of Bharti Telecom are some of them.
• Characteristics of environment: Environment is
complex, dynamic, and multifaceted; has far reaching
impact on organizations in that the growth and
profitability of an organization depends critically on the
environment in which it exists; may be an opportunity
or a threat-e.g. liberalization in 1991 opened lot of
opportunities for companies like Hindustan Uniliver.
ETBE-Module-1: Theoretical Framework of
Business Environment

• The company took the advantage to acquire

companies like Lakme, TOMCO, KISSAN etc.
Changes in the environment can change the
competitive scenario and many times difficult
to predict with any degree of accuracy.
2. Elements of business environment: These are
three as mentioned below-
• Internal Environment
• Macro Environment and
• Micro Environment
ETBE-Module-1: Theoretical Framework of
Business Environment

• Now let us discuss these three one by one:

 Internal Environment: refers to that of the
organization and is controllable. Some internal
factors are:-
• Culture and Value System: Organizational
Culture can be viewed as the system of shared
values and beliefs that shape a company’s
behavioral norms. A value is an enduring
preference as a mode of conduct or an end
state. The value system of the founding
fathers of the organization has a lasting
impact on it.
ETBE-Module-1: Theoretical Framework of
Business Environment

• Mission and Objectives: Guide the

priorities, direction of development,
business philosophy and business policy.
• Management Structure and nature :
Structure is the manner in which the tasks
and sub-tasks of the organization are
related. Structure is concerned with the
hierarchical relationship and the
relationship between the management of
different functional areas like the structure
of the top management and the pattern of
share holding.
ETBE-Module-1: Theoretical Framework of
Business Environment
• Human Resource: Man power planning,
recruitment and Selection, compensation,
communication and appraisal, corporate
resources, production of goods and services,
financing and accounting systems and methods,
marketing and distribution.
• Macro environment consists of the following
factors(external to the industry).
• Political environment
• Regulatory and legal environment
• Demographic
• Socio culture
• Technological environment
• Global Environment
• Economic Environment
• National Competitive Advantage
ETBE-Module-1: Theoretical Framework of
Business Environment

 Political Environment: Political

environment of the country decides the fortune of
businesses in a country. Russian revolution in
1917 transformed the equation of doing business
in that country. After the change of regime in the
early1990s, business equations changed once
again in Russia. In India in 1977, the Janata
government came to power because of which
Coca Cola and IBM had to leave the country.
When P.V. Narasimha Rao came to power in 1991,
a new industrial policy was put in place. This new
policy brought in liberalisation, privatisation and
globalisation in the Indian economy and opened
up new opportunities for the Indian business.
ETBE-Module-1: Theoretical Framework of
Business Environment
 Regulatory and legal environment:
• The political environment governs the legal
and regulatory environment of the country.
The regulatory environment plays a vital role
by dictating the dos and don’ts of a business.
Every country has a different legal
environment. In India we have the Companies
Act, the MRTP Act, which restricts monopoly,
various laws regarding shares, the Consumer
Protection Act, Environmental Acts and so on.
The implementation of GATS has resulted in
the implementation of international laws
regarding patents.
ETBE-Module-1: Theoretical Framework of
Business Environment
 Demographic: Demography is the study of
the structure of human populations using
statistics of births, deaths, wealth etc. It is the
demographic environment which decides the
marketing mix for an organization. It decides the
type of product the organization comes out with.
In India a lot of research and efforts are
undertaken to reduce the cost of products and to
launch products at the cheapest possible rates
.e.g. shampoo sachet for rupee1/-, cooking oil,
tea, biscuits for Rs.2/- in the shapes of sachets
and packets to cater to the needs of the lower
segment of the market. Demographic data reveal
that 70%of our population live in the villages; of
these 70% are youths and this is the reason why
every business organization is launching new
products for rural markets.
ETBE-Module-1: Theoretical Framework of
Business Environment

 Socio-culture
• :Socio culture variables like the beliefs, value
system, attitudes of people and their demographic
composition have a major effect on their personality
and behaviour style. The consumer’s preferences
have undergone a sea change through the 1990s.
This has led to the production of more cars,
refrigerators, air conditioners, cell phones and other
articles- once considered ostentatious and
luxurious. Typical patterns of socio-culture dictate
the preference of consumers in different regions.
For example, when McDonalds and KFC started
restaurants in India they had to make adjustments
in their menu for North and South India.
ETBE-Module-1: Theoretical Framework of
Business Environment

 Technological: Technological forces

present a wide range of opportunities and threats.
Technological advancement may affect an
organization’s products, services, markets,
suppliers, distributors, competitors, customers,
manufacturing process, marketing practices,
financial composition and competitive position.
Organizations have to modify products according
to the level of technological knowledge of the
target customer, because in developing nations
complex household machines that need
programming will not work. So, they have to be
technologically more and more focused.
ETBE-Module-1: Theoretical Framework of
Business Environment

 Global Environment: The

international environment consists of all
factors that operate at the transnational,
cross –cultural level and across the borders.
The World is a global village today. For the
sake of business countries are burying their
differences and forging economic
relationships. Former enemies like Russia and
America are now friendly and economically
cooperating. India and China have friendly
economic relationship. India is a signatory of
WTO which has a multilateral trade
agreement among more than100 nations.
Globalization brings along with that the
danger of global competition.
ETBE-Module-1: Theoretical Framework of
Business Environment
 Economic Environment: The economic
structure of a country, whether it is socialist,
mixed or capitalist, has great impact on the
economy. Economic policies such as foreign trade
policy, industrial policy, fiscal policy, GDP growth
rate, policy of licensing, monetary policy,
development of financial institutions,
development of money and stock market and the
extent of globalization are some of the aspects of
an economy that reflect on business in an
economy. A slight change in monetary policy can
release crores of rupees into the economy that
may result in a decrease in interest rate, which
further increases investment as well as inflation.
ETBE-Module-1: Theoretical Framework of
Business Environment

 National competitive
Advantage: Despite globalization,
industrialization is clustered in a small and
specific number of countries. Most successful
computer and biotechnology firms are based
in the US, the successful chemical and
engineering industries are based in Germany
and the cream of electronics industry is
based in Japan. Smart call centers and
customized software companies are wide
spread in the Indian landscape.
ETBE-Module-1: Theoretical Framework of
Business Environment
• Michael Porter’s international competitiveness
Model:- In a study of national competitive
advantage Michael Porter identified four
attributes which have important impact on the
global competitiveness of companies located
within that nation. These are:
• Factor endowments- skilled labor, capital,
technology and infra structure necessary to
compete in a given industry.
• Home demand for industry’s products & services.
• The presence or absence in a nation of supporting
industry-supplier industries which are
internationally competitive
• Firm strategy, structure and rivalry-Conditions in
the nation that govern how companies are created,
organized and managed and the nature of domestic
ETBE-Module-1: Theoretical Framework of
Business Environment

• 1.MRTP Act. Monopolistic and Restrictive
Trade Practices Act. 1969. Applies to the
whole of India except J&K(now replaced by
Competition Act, 2000).
• 2. GATS: General Agreement on Trade in
Services- is a treaty of the WORLD TRADE
ORGANIZATION(WTO) that came into force in
January 1995.
ETBE-Module-1: Theoretical Framework of
Business Environment

Micro environment or the competitive
environment refers to the environment which an
organization faces In its specific arena. Professor
Michael Porter of Harvard Business School has
identified five forces of competition. These are as
i)Threat of competitors-The rivalry among sellers
in the market
ii)Threat of new entrants- The potential entry of
new competitors
iii)Threat of substitutes-Other industries
attempting to win over customers to their
substitute products
ETBE-Module-1: Theoretical Framework of
Business Environment

iv)Bargaining power of Suppliers-competitive pressure

building up as a result of supplier-seller collaboration
and resultant bargaining
v)Bargaining power of Buyers- competitive pressure
stemming from seller-buyer collaboration and
Now let us get into some details.
• Threat of competitor: Rivals adopt tactics to win over
customers by cutting prices, adding attractive
features, extended customer service, longer
warranties, special promotional offers and
introduction of new products. All these efforts are
undertaken to improve market share and profitability.
ETBE-Module-1: Theoretical Framework of
Business Environment

• Threat of new entrants: New entrant poses a

threat to the incumbents because he adds
new capacity. However, the new entrants
have to face lot of challenges; incumbents
enjoy economies of scale, proprietary product
knowledge, patents, favourable access to raw
materials, favourable location, lower
borrowing cost and government subsidies.
Customers prefer new look products.
Distributors are wary of handling new
ETBE-Module-1: Theoretical Framework of
Business Environment
• Threat of substitutes: Road transport services
compete with the railways, makers of eye
glasses compete with the makers of contact
lenses, scooter producers compete with
manufacturers of motor cycles and so on.
• Bargaining power of suppliers: Suppliers have no
bargaining power when there are many suppliers
and when supply exceeds demand. Bargaining
power is high when it comes to high technology
and the supplier has expertise; has significant
cost advantage, constantly improves the
product or finances the buyer.
ETBE-Module-1: Theoretical Framework of
Business Environment

• Bargaining power of the buyer: Consumer is king; He

enjoys significant bargaining power when there are
many sellers, few buyers and production exceeds
demand. The buyer can bargain reduction of price,
quantity discount, better quality at the same price,
better after sales service, credit and finance facility.
Andrew Grove, the former CEO of Intel argues that
Porter’s model ignores the sixth force; the power,
vigor and competence of complementors like the
demand for personal computers depends on the
availability of user friendly software.
ETBE-Module-1: Theoretical Framework of
Business Environment

• We should also be aware of the roles played by Marketing

intermediaries such as distributors, promoters of products,
sellers of products and services and consultants. Financial
institutions like banks and NBFCs (Non Banking Financial
Companies) provide finance to the business organizations.
Critical Success Factors(CSFs)
• Critical success factors are those areas in which good
results will ensure an organization’s success against
competition. CSFs are determined by a variety of
environmental and firm specific considerations. For an
FMCG, distribution network is a critical success factor; for a
pharmaceutical company, it is R&D; for a generic product
manufacturing company (steel or aluminum plant) cost is a
Critical Success Factor; for a food chain organization like
McDonalds, logistics and supply chain management is a CSF.
ETBE-Module-1: Theoretical Framework
of Business Environment

3. Changing Dimensions: Behind every

change in environment there is a driving
force. To understand and forecast future
trends it is important to understand the
driving force behind them. Industry Life Cycle
model identifies five sequential stages in the
evolution of an industry. Now we will discuss
the various stages.
ETBE-Module-1: Theoretical Framework of
Business Environment
• Industry Life Cycle analysis: consists of
the following stages in the life of an
• a)Embryonic stage
• b) Growth
• c)Shakeout
• d) Maturity
• e)Decline
• Beginning of the industry; customers know
little about the product; high price, and
creating awareness among consumers for
volume sales.
ETBE-Module-1: Theoretical Framework
of Business Environment

Stages in Industry Life Cycle


Embryonic Growth Shake Maturity

ETBE-Module-1: Theoretical Framework
of Business Environment
Demands expand rapidly due to new customers
entering the market; e.g., cell phone, internet.
Economies of scale attained, high growth and
profit; many competitors enter the field; prices
Demand reaches saturation level, mainly for
replacement; rivalry becomes intense and
inefficient companies are driven to bankruptcy.
No new entrants venture in this field.
• MATURITY : Here the market is saturated,
growth is very low or nil. Firms reduce prices and
resort to sales promotion campaigns; e.g. Airlines
introducing frequent flier programs.
ETBE-Module-1: Theoretical Framework of
Business Environments

• DECLINE: Growth becomes negative for various reasons: technology changes-audio

and video tape recorders and players are going out of the market; vanaspati, being a
saturated fat is not purchased by health conscious customers. Demographic (declining
birth rate is hurting baby and child products) ; International competition -Cheap Chinese
toys and electronic goods and components push Indian products towards decline.

ETBE-Module-1: Theoretical Framework
of Business Environments

4.Environmental analysis-Scanning and

Monitoring: The first step in environmental
analysis is collection of information.