Nature of Business Environment

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Nature of Business Environment

Introduction to Business:

Introduction to Business Business is the organized efforts of enterprises to supply consumers with goods and services. Businesses vary in size as measured by number of employees or by sales volume. All businesses share the same purpose to earn Profits . However, the purpose of business goes beyond earning profits. It is an important institution in society and the role of business is crucial. Be it for the supply of goods and services Creation of job opportunities Offer of better quality of life Contributing to the economic growth of the country and putting it on the global map Scope of Business Business included all activities connected with production, trade, banking, insurance, finance, agency, advertising, packaging and numerous other related activities. Businesses include all efforts to comply with legal restrictions and government requirements and discharging obligations to consumers, employees, owners and to other interest groups which have stakes in business directly or indirectly. Society cannot do without business and vice versa.

Characteristics of Today’s Business:

Characteristics of Today’s Business Business Information Competition Change - Transition Opportunities Diversification Globalisation Technology Business during the 21 st Century There is a trend towards mini organizations alongwith large corporations. Existence of flexible, flat and team based structures Business is knowledge based. Processes have become complex. Brain power is in great demand. Information technology will take care of all data management and networked computers handle information. Organisations have become flat. Dispersed ownership, open minded and a transparent environment is encouraged Three types of diversification maybe distinguished : Concentric, horizontal and conglomerate diversification. Concentric diversification refers to the process of adding new, but related products or services. Eg : HLL which as Liril, Pears, Rexona, Lux and Lifebuoy. Horizontal diversification is adding of new, unrelated products or services for present consumer base. Conglomerate diversification refers to adding new and unrelated products or services.

Environment:

Environment Environment refers to all external forces which have a bearing on the functioning of business. ”Environment are largely if not totally external, and beyond the control of individual industrial enterprises and their management. These are essentially the givers within which firms and their managements must operate in a specific country and they vary, from country to country”. However, the term business environment refers to the External Factors. The external environment has two components ie business opportunities and threats to business. Simmilarly, the organisational environment has two components ie. strengths and weaknesses of the organisation. A SWOT analysis is thus the first step in strategy formulation Business Decision Internal Environment External Environment Factors influencing Business Decision

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Business Decision Internal Environment Mission / Objectives Management Structure Internal Power Relationship Physical Assets & facilities Company image Human resources Financial Capabilities Technological Capabilities Marketing Capabilities Financiers Suppliers Customers Competitors Public Mktg Intermediaries Micro Environment Economic Technological Global Demographic Socio-Cultural Political Macro Environment BUSINESS ENVIRONMENT

Internal Environment:

Internal Environment Any business has certain vision, mission and objectives and a strategy to achieve them. Formulation of strategy is defined as establishing a proper firm-environment fit . Indeed the objectives should be based on an assessment of the external environment and the organizational factors (internal environment). Vision Mission Objectives Management Structure Human Resources Financial Factors Company Image and Brand Equity

Macro Environment:

The macro environment consists of factors which are beyond the control of the business. There is a symbiotic relationship between business and the environmental factors, environmental factors are dynamic and a particular business firm, by itself, may not be in a position to change it’s environment . Macro Environment includes : Political Environment Economic Environment Technological Environment Socio-cultural Environment Global Environment. Macro Environment Micro Environment The Micro environment consists of different types of stakeholders - customers, employees, suppliers, marketing intermediaries, competitors. It is also known as the Task Environment and Operating Environment and has a direct bearing on the operations of the firm. Changes in the micro environment will directly affect and impinge on the firm's activities.

Technological Environment:

Technological Environment Technological is the systematic application of scientific or other organized knowledge to practical tasks. Technological environment hold new technological innovation, new products, the state of technology, the utilization of technology for maximum inputs and outputs, the obsolescence of technology and the dynamic changes that frequently occur in technologies which enable firms to get a competitive advantage Technology reaches people through business Helps in increased productivity Business needs to spend on R & D and keep up with the technological advances around them Technology leads to introduction of new products and older products becoming outdated and redundant. Technological advances leads to high expectations of consumers in terms of quality Leads to system complexity Demand for capital

Political Environment:

Political Environment Political Environment refers to the influence exerted by the three political institutions ie. legislature, executive and judiciary in shaping, directing, developing and controlling business activities. The constitution of a country Political Organisation Political Stability Image of the country and its leaders Foreign Policy Laws governing business Flexibility and adaptability of laws The Judicial System

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Economic Environment Economic Environment refers to all forces which have an economic impact on Business. The economic environment consists of the demand dynamics, supply situation, pricing factors, degree of competitiveness, and impact of profitability. It includes the fiscal policy, monetary policy and the taxation policy, the FDI norms, the investment criterion and financing decisions. Economic environment includes: Growth strategy Industry Agriculture Infrastructure Money and Capital Markets Per capita and national income Population New Economic Policy .

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Global Environment : The global environment refers to those factors which are relevant to business, such as the WTO principles and agreements; other international conventions/ treaties / agreements / sentiments in other countries etc. For eg hike in crude oil prices has a global impact etc. World is becoming one market Improving quality Competition from MNCs Capital and technology transfers Deciding which markets to enter and what products to manufacture Adjusting the management process Socio-Cultural Environment: Culture creates people Culture and globalization Culture determines people’s attitude to business and work. Caste system Spirit of collectivism Education Ethics in business Social responsibility Social audit Corporate governance

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External Environmental Analysis Environmental Analysis has three goals: Provides an understanding of current and potential changes taking place Environmental Analysis should provide input for strategic decision making. Facilitate and lead to strategic decisions within an organization. Environmental Analysis and diagnosis give strategists time to anticipate opportunities and to plan to take optional responses to these opportunities. It also helps strategists to develop an early warning system to prevent threats or to develop strategies which can turn a threat to a firm’s advantage”. Firms which systematically analyse and diagnose the environment are more effective than those which do not. Process of Environmental Analysis: The analysis consists of four steps: Scanning : Detect early signals of possible environmental change and detect environmental change already underway. Monitoring : Purpose of monitoring is to assemble sufficient data to discern whether certain trends are emerging, identification of the trends and identification of areas for further scanning. Forecasting : It is concerned with developing projections of the direction, scope and intensity of environmental change. Assessment : To determine implications for the organisation’s current and potential strategy.

Environmental Analysis and Strategic Management:

Environmental Analysis and Strategic Management Defining Business Mission and Objectives SWOT Analysis Environmental Analysis + Self Appraisal Strategic Alternatives and Choice of Strategy Implementation of Strategy Evaluation and Control of Strategy

Competitive Structure of Industries:

Competitive Structure of Industries The competitive structure of industries is a very important business environment. Identification of forces affecting the competitive dynamics of an industry is very useful in formulation of strategies. As per Michael Porter’ well known model of structural analysis of industries, the state of competitions depends on: Porter’s analysis determines the competitive intensity of the industry and the attractiveness of the market. A highly competitive industry is one approaching “Perfect Competition” whereby businesses are only able to earn normal profits. Rivalry among firms Buyers Substitutes New Entrants Suppliers Threat of new entrants Threat of substitutes Bargaining power Bargaining power

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Rivalry among Existing firms: Firms in an industry are mutually dependent – competitive motives of a firm usually affects others and may be retaliated. Factors influencing the intensity of rivalry are: Number of firms and their Relative market share State of Growth of Industry: In stagnant, declining and slow growth industries, a firm is able to increase its sales by increasing the market share. Fixed or storage costs: In case of high fixed costs, strategy of firms is to increase sales which in turn would improve on capacity utilization. Indivisibility of capacity augmentation : Where there are economies of scale, capacity increases would be in large blocks necessitating, efforts to increase sales to achieve capacity utilization norms.

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Rivalry among Existing firms: Product standardization, after sales service: In case of firms which have standardized products; it is price, distribution and after sales service which become the distinguishing factors. Strategic stake: Rivalry becomes more intensive if the firms have high stakes in achieving success there. Exit Barrier: If exit barriers are high, firms would keep competing in the same industry even though it might not be very attractive. Diverse Competition: Competitors with diverse strategies make the industry highly competitive. Switching costs: One time costs that the buyer faces on switching from one supplier’s product to that of another ie cost of new ancillary equipment etc. Expected Retaliation

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Threat of Entry: Potential competition tends to be high if the industry is profitable or critical and entry barriers are low. Some of the common entry barriers are: Government Policy Cost Disadvantages: Cost advantages enjoyed by established firms may discourage entry of new firms such as learning curve, favorable location etc. Product Differentiation: Characterized by brand image, customer loyalty etc. may deter new firms from entering the market. Monopoly Elements Capital Requirements : High capital intensive nature of the industry is an entry barrier to small firms Threat of substitutes An industry which has close substitutes available is highly competitive in nature. Existence of close substitutes increases the propensity of consumers to switch to alternatives in response to price increases. Perceived level of product differentiation in the minds of the consumer is also a highly influential factor.

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Bargaining power of Buyers : Buyers can in turn also be potential competitors as they may integrate backwards or bargain for lower costs, better quality of the product etc. The volume of purchase relative to the total sale of the seller The importance of the product to the buyer in terms of the total cost Extent of standardization or differentiation of the product Switching costs Extent of buyer’s information Bargaining power of sellers: Important determinants of supplier power are the following: Extent of concentration and domination in the supplier industry Importance of the product to the buyer Importance of the buyer to the supplier Extent of substitutability of the product Switching costs Extent of standardization of the product Potential for forward integration by suppliers

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SWOT Analysis SWOT stands for Strengths, Weaknesses, Opportunities and Threats Identification of the threats and opportunities in the external environment and strengths and weaknesses in the internal environment of the firms are the cornerstone of business policy formulation. It is the SWOT analysis which determines the course of action to ensure the growth / survival of the firm.

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Strengths Strengths—internal to the unit; are a unit’s resources and capabilities that can be used as a basis for developing a competitive advantage; strength should be realistic and not modest. Your list of strengths should be able to answer: What are the unit’s advantages? What does the unit do well? What relevant resources do you have access to? What do other people see as your strengths? What would you want to boast about to someone who knows nothing about this organization and its work? Examples: good reputation among customers, resources, assets, people, : experience, knowledge, data, capabilities Think in terms of: capabilities; competitive advantages; resources, assets, people (experience, knowledge); marketing; quality; location; accreditations qualifications, certifications; processes/systems

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Weaknesses Weaknesses—internal force that could serve as a barrier to maintain or achieve a competitive advantage; a limitation, fault or defect of the unit; It should be truthful so that they may be overcome as quickly as possible Your list of weaknesses should be able to answer: What can be improved? What is done poorly? What should be avoided? What are you doing as an organization that you feel could be done more effectively/efficiently? What is this organization NOT doing that you feel it should be doing? If you could change one thing that would help this department function more effectively, what would you change? Examples: gaps in capabilities, financial, deadlines, morale lack of competitive

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Opportunities Opportunities—any favorable situation present now or in the future in the external environment. Examples: unfulfilled customer need, arrival of new technologies, loosening of regulations, global influences, economic boom, demographic shift Where are the good opportunities facing you? What are the interesting trends you are aware of? Think of: market developments; competitor; vulnerabilities; industry/ lifestyle trends;; geographical; partnerships

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Threats External force that could inhibit the maintenance or attainment of a competitive advantage; any unfavorable situation in the external environment that is potentially damaging now or in the future. Examples: shifts in consumer tastes, new regulations, political or legislative effects, environmental effects, new technology, loss of key staff, economic downturn, demographic shifts, competitor intent; market demands; sustaining internal capability; insurmountable weaknesses; financial backing Your list of threats should be able to answer: What obstacles do you face? What is your competition doing? Are the required specifications for your job/services changing? Is changing technology threatening your position? Do you have financial problems? Could any of your weaknesses seriously threaten your unit?

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POSITIVE/ HELPFUL to achieving the goal NEGATIVE/ HARMFUL to achieving the goal INTERNAL Origin facts/ factors of the organization Strengths Things that are good now, maintain them, build on them and use as leverage Weaknesses Things that are bad now, remedy, change or stop them. EXTERNAL Origin facts/ factors of the environment in which the organization operates Opportunities Things that are good for the future, prioritize them, capture them, build on them and optimize Threats Things that are bad for the future, put in plans to manage them or counter them

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SWOT Analysis of Indian Economy Strengths Huge pool of labor force High percentage of cultivable land Diversified nature of the economy Availability of skilled manpower Extensive higher education system High growth rate of economy Rapid growth of IT / ITes Sector Abundance of natural resources Weaknesses High percentage of workforce involved in agriculture Approx a quarter of population below the poverty line High unemployment rate Inequality in prevailing socio economic conditions, rural – urban divide Low productivity Huge population leading to scarcity of resources Low level of mechanization Red tapism, Bureaucracy Low literacy rates Opportunities Scope for entry of private firms in various sectors of business Inflow of FDI Huge foreign exchange prospects in IT / ITeS Investment in R & D Area of infrastructure Huge domestic market : Opportunity for MNCs Huge agricultural resources Threats High fiscal deficit Threat of government intervention in some states Growing import bill Population explosion, rate of growth of population Agriculture excessively dependent on monsoon

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AN ORGANIZATION’S ENVIRONMENT Industry Sector Competitors , Industry size and Characteristics, Related Industries Raw Materials Sector Suppliers, Manufacturers, Real Estate Human Resources Sector Labor Market, Employment Agencies, Universities, Training Schools, Employees in Other Companies, Unionization Financial Resources Sector Stock Markets, Banks, Savings and Loans, Private Investors Market Sector Customers, Clients, Potential Users of Products and Services Technology Sector Techniques of Production, Science, Research Centers, Automation, New Materials Economic Conditions Sector Recession, Unemployment Rate, Inflation rate, Rate of Investment, Economics, Growth Government Sector City, State, Federal Laws and Regulations, Taxes, Services, Court System, Political Processes Socio-Cultural sector Age, Values, Beliefs, Education, Religion, Work Ethic, Urban vs. Rural, Birth Rate ORGANIZATION DOMAIN Task Environment Macro Environment