OVERVIEW OF BUSINESS ENVIRONMENT 1 BUSINESS ENVIRONMENT DEFINED

OVERVIEW OF BUSINESS ENVIRONMENT

1. BUSINESS ENVIRONMENT DEFINED § All those internal & external factors which affect the function and performance of firm and its decision making particularly strategies. § In a broad sense, business environment includes internal and external factors. 1. 1 Business Ecology § Refers to the interplay between internal and external environment § Internal environment anlyis involves two factos-strengths and weaknesses. § External environment includes analysis of two factorsopportunities and threats

Schematic representation Business Internal environment Decision External environment Business decision depends on effective interplay of internal & external environment

SWOT analysis § § § An interplay of internal and external environment implies a SWOT analysis The key elements in a SWOT analysis are Strengths- what are my key strengths or core competence. Internal analysis Weakness: What are my major weaknesses Opportunities- opportunities available for growth Threats. What are the growth inhibiting factors external analysis The firm needs to identify its core competence, say human resources, scale advantage, strategic location etc, weakness, like, attrition etc, weak supply links , opportunities for growth like organic route(own expansion) or inorganic (acquisitions) and threats like competitors, regualtory regimes, geopolitical tensions etc.

Types of environment- in detail § § § Internal environment defined: Internal factors are regarded as controllable factors. This refer to factors which are within the control of the firm and can be altered. For instance, the rate of attrition. HR policies etc. External environment –(Micro & macro environment) These are factors which are outside the firm’s control and is difficult to alter. For instance, economic factors, socio-cultural factors, geo-political factors, Further divided into micro & macro environment. Micro environment refers to those external factors which have a direct and immediate impact on the firm, such as suppliers and distributors. Also known as task environment or operating environment. Macro environment refers to those factors which affect the indstry generally such as socio politcal and demographic factors.

INTERANL ENVIRONMENT Ø These include the value system of the organisation, its vision and mission, strategies etc. Ø Vision & mission statements are an integral part and are used to communicate the strategies and desires of the firm to the stakeholders. Also communicates business domain of the company, priorities, directions, business philosophy etc. Ø Management structure & nature: The organizational structure, composition of Board of Directors, extent of professionalism of management are also important factors. Quality of Board is a determining factor. • recent issues in this regard- PSBs- focus on Board competence, splitting Chairman & MD posts. • Internal power relations-amount of support from employees. HR-quality of human relations- skill levels • Brand equity is important while raising equity. For instance AAA rated corporates have an advantage in raising low cost finance

INTERNAL ENVIRONMENT CONTD…. Other factors v Physical assets and facilities like the technology, production capacity, logistics etc. v R& D and technological capabilities v Marketing resources, quality of marketing team, brand equity etc v Financial factors like financial policies, financial position, capital structure etc.

EXTERNAL ENVIRONMENT 1. Micro environment: This consists of factors which affect the company’s immediate environment such as suppliers, customers, marketing intermediaries, competitors etc. Micro environment has the following constituents. 1. Suppliers: An important source is suppliers, or those who supply inputs and raw materials to the company. Uncertainty regarding supply leads to high inventories For instance, factories in India maintain stocks for 3 -4 months and imported stocks for 9 months as against an average of a few hours to 2 weeks in Japan. Many companies resort to vertical integration to solve this problem ie establishing captive capacities- good vendor management is essential. SMEs face this problem. For efficient supply chain management companies resort to relationship marketing

EXTERNAL ENVIRONMENT CONTD. . 2. Customers: Customer is the king, that should be the motto. The emphasis should be caveat vendittor’ rather than ‘caveat emptor’Caeat venditor means sellers beware, In a competitive amrket, poor quality would be punished. Corproates should also take care to diversify customer base. 3. Competitors: This is a widely defined term and not restricted to other firms supplying same product but also include all industries competing for the customers’ discretionary income. We may loosely define monopolistic competition as the real competition existing in the world market. This may be called desire competition and is usually found in countries with limited disposable income. Competition among alternative product categories offering similar level of utility is termed generic competition. As in pharma industry.

External environment contd Product competition: This implies the choice as to which particular format is to be chosen. For instance a choice between black and white and color TVs. Brand competition: This implies the choice as to which brand to choose from among competing brands. 4. Marketing intermediaries: This include other firms that aid the concerned firms in marketing and distributing their produce to the final buyer. These include middlemen, warehousing firms, transportation firms, media agencies, advertising agencies, financial intermediaries etc. They are the vital link between the company and final consumer. 5. Financiers: They are another important factor. 6. Public groups/pressure groups are other agents. They may include Citizen Forums, media groups, NGOs etc. However, not all pressure groups are bad and some can be used to disseminate useful information about the company.

MACRO ENVIRONMENT • Macro environment also known as general or remote environment refer to factors which affect the firm in general. Macro environment is generally more uncontrollable than micro environment and the company has top adapt to the environment to be successful. • Some of the important macro environmental factors are 1. Economic environment 2. Political and regulatory environment 3. Social/cultural environment 4. Demographic environment 5. Technological environment 6. Global environment

MACRO ENVIRONMENT CONTD 1. Economic environment: This include performnce of global financial systems suchn as the U. S, European Union, China etc. For instance, subdued and muted growth in these regions adversely impacts India’s exports with concomitant impact on other areas. 2. Political/regulatory environment Policies pursued by various regimes impact domestic corporations. For instance, the U. S immigration Bill and cap on visas has the potential to adversely impact IT companies. 3. Social/cultural environment also has an impact. The sicla value system and culture impact corporates. For instance, Mc Donalds’ find it difficult to penetrate Chennai since there is a strong favour for South Indian dishes

MACRO ENVIRONMENT CONTD 4. Demographic environment: This is a major factor. In the present age, every company ahs to design [products that suit customer demographics. The tastes and aspirations of customers in different demographics segments vary and products have to be attuned to suit those needs. 5. Technological environment: Keeping abreast with technology is of utmost importance. In the present er, technology is changing very fast. A company which does not keep updated with latest technological developments will be at a loss. 6. Global environment: This is an extremely important variable. Variosu developments in the global sphere such as rules framed by WTO, bilateral treaties entered into by nations etc profoundly impact global environment India’s recent stance at WTO regarding food subsidies.

COMPETITIVE STRUCTURE OF INDUSTRIES The sate of competition can be explained using Michael Porters’five forces model. They are 1. Rivalry among existing firms 2. Threat of new entrants 3. Threat of substitutes 4. Bargaining power of suppliers 5. Bargaining power of buyers Some of the common entry barriers are the following 1. Government policy- a good example is the situation before and after liberalization 2. Economies of scale- This is size advantage and threatens entry 3. Cost advantage, both due to economies of scale and also due to other factors such as proprietary know how.

COMPETITIVE STRUCTURE OF INDUSTRIES 4. Product differentiation characterized by brand image, customer loyalty, product attributes etc. 5. Monopoly power; The MRTP being replaced by CCI has reduced this barrier to a certain extent. 6. Capital requirements: High capital intensive nature of the industry. Porters model in detail 1. Rivalry among existing companies: factors influencing rivalry among existing companies Are the following. Ø No of firms and their relative market share Ø State of industry growth Ø Fixed and storage costs Ø High exit barriers leading to enhanced competition Ø Diversity of competitors

2. 2. Threat of substitutes Substitutes limit the pricing power and potential returns by imposing a ceiling on the price level. The earlier instance of monopolistic competition is a good example for this. Substitutes might be close or perfect substitutes though perfect substitutes are not in practice. 3. Bargaining power of buyers: By virtue of their bargaining power, buyers can force changes in price levels. Major factors impacting buyers’ bargaining power are the following. 1. 2. 3. 4. 5. Volume of purchase relative to the total sale Importance of the product to the buyer Degree of standardisation or differentiation Switching costs Buyers’ profits ( low buyer profits forces price down)

Bargaining power of suppliers 1. Extent of domination in the supplier industry 2. Importance of the product to the buyer 3. Importance of the buyer to the supplier 4. Substitutabiloity of the product 5. Switching costs 6. Extent of differentiation or standardisation

STRATEGIC GROUPS • Strategic groups These are groups of firms within an industry following the same or similar set of rules within an industry. These group help point out the differences among firms within an industry. Some time each firms may be a strategic group. In the U. S for eg, there are two strategic groups in pharma industry. One manufacturing patented drugs focusing on R&D and the other on generic products that is off patented drugs. In India , for instance, there are both organized and unorganized players in various market segments and within each of these categories there may be strategic groups.

Implications of strategic groups 1. The concept has implications for industry analysis and identification of opportunities an d threats. A company’s competitors are firms within the same strategic group. 2. The nature and intensity of competition and business prospects vary from one strategic group to another. 3. High mobility barriers ensure profitability of firms in the group are high. 4. If mobility barriers change, firms in one strategy group might migrate to another strategy group and this can even change the very nature of a strategy group 5. The competitive standing of different strategy group would be different with respect to each of the five competitive forces. For instance, patented drugs has less threat from new entrants.

Limitation of Porters Five Forces model The model did not initially recognized the impact of innovation. However, Porter himself recognized it at a later stage. For instance, he says that after innovation, a new system can emerge and ultimately it can again settle down. This period when there is a disruption created due to innovation is termed as punctuated equilibrium. Thus, there is an unfreezing and refreezing process.

Competitor analysis encompasses goals , strategies, capabilities and perceptions (Porter). Competitor analysis is important for the formation of the right strategies. It seeks to find answers to certain basic questions such as 1. Who are the competitors 2. What are the current strategies of the competitors 3. What are their future goals and likely strategies? 4. What drives the competitor 5. Where is he vulnerable 6. How competitors respond to others strategies? An analysis of these forces will help formulate the competitor response profile.

Future goals: Analysis of future goals help to identify the future strategies and whether they re satisfied with the current position. Ø Knowledge of competitor goals may help to reaction to strategic changes Ø Future goals of the parent and the business unit needs to be examined. It is also essential to understand 1. The competitors assumptions about itself 2. The competitors assumptions about the industry and other companies. 3. Identification of the current strategy of competitor is a very useful element in competitor analysis.

Value chain: A firms value chain is an important determinant of competitor advantage. Value is the amount customer pays a firm. A firm must strive to create value for buyers that exceed the cost of doing so. There are two types of value activities-primary and support Primary activities include 1. Inbound logistics 2. Operations (processing etc) 3. Marketing and sales 4. Services

Support activities include 1. Procurement 2. Technology development 3. Human resource management 4. Firm infrastructure

Structural analysis Purpose of structural analysis is to diagonise the competitive forces and to identify the strengths and weakness of the firm vis-à-vis the industry and help formulate and effective strategy Structural analysis enables the firm to answer the following questions such as 1. Howa re the entry barriers? 2. Threat of substitutes 3. Nature of supplier power 4. Power of buyers 5. SWOT analysis of established competitors

ENVIRONMENTAL ANALYSIS AND STRATEGIC MANAGEMENT Strategic management defined: Strategic management is defined as the set of decisions and actions that lead to the development of an effective strategy to help achieve corporate objectives Strategic management involves the decision making and activities which 1. Have wide ramifications 2. Have a long time perspective and which 3. Use critical resources towards perceived opportunities and threats

Elements in strategic management 1. Formulation of mission and objectives: Mission and objectives define the philosophy, scope and task of an organization. Objectives must be appropriate to the environment. It should answer two questions- what is the business and what should be business be and if the two are different then there is need to reorient. 2. SWOT analysis-whether the company ahs the competence to survive in the environment. Liberalization of indian economy has provided great impotence to strategic management. New forms of competition has emerged. Changes in business environment might change the scenario. For instance, US, which once used to export electronic goods now imports the same from Japan and Korea due to lack of copmparative advantage.

Strategic alternatives A company may be facd with severasl alternatives such as 1. Should they be involved in the same line of business? 2. If it continues, should it do so through organic or inorganic mode? 3. Should it diversify or grow by vertical integration etc A company wishing to penetrate foreign market has the followig alternatives 1. Manufacture at home and export 2. Manufacturig in areas such as EEZ or SEZ 3. Do the entire manufacturing abroad 4. Manufacture at home and assemble abroad 5. Contract manufacturing and do only marketing 6. Establish a JV abroad

In a multi unit business, formulation of strategies are essential. There are 3 levels of strategies 1. Corporate level strategy which is the master strategy aimed at the organization as a whole 2. SBU level strategy which is aimed at various business units 3. Functional level strategy: Effectiveness of business strategy depends on its translation into functions such as R&D, 4. Implementation in involves mobilization and deployment of resources Evaluation of strategy is essential. A strategy m, ay fail because of the following. Improper implementation Environmental changes Inappropriate strategy

Strategy management Evaluation & control Mission Objectives Implementa tion SWOT analysis Choice of strategy Strategic alternativess