Emerging Trends in Business environment Module-1: Theoretical Frame work of Busi

ness Environment. 1. Concept, Significance and Nature of Business Environment 2.

Elements of business environment. 3. Changing dimensions 4. Environmental scann
ing 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, t
he business environment is anything which surrounds the business organization. I
t affects the decisions, strategies, processes and performance of the business.
The micro environment consists of different types of stakeholders - customers, e
mployees, suppliers, board of directors and creditors. The macro environment con
sists of factors which are beyond the control of the business (STEP) - Social, T
echnological, Economical and Political Changes in the macro environment will dir
ectly affect and impinge on the firm's activities. Changes in the macro environm
ent will indirectly affect the business . For example, a change in legislation s
uch as the smoking ban indirectly affects pubs and restaurants.

ETBE-Module-1: Theoretical Framework of Business Environment

Every business operates in a particular environment and each business unit has i
ts own environment. A change in environment presents opportunity to some and thr
eats 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 chan
ge in the Reserve Bank of Indias monetary policy can increase or decrease interes
t 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 env
ironment and reacted accordingly. Azim Premji of Wipro, Narayana Murthy of Infos
ys, 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 environ
ment: Environment is complex, dynamic, and multifaceted; has far reaching impact
on organizations in that the growth and profitability of an organization depend
s critically on the environment in which it exists; may be an opportunity or a t
hreat-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 th

e advantage to acquire companies like Lakme, TOMCO, KISSAN etc. Changes in the e
nvironment can change the competitive scenario and many times difficult to predi
ct with any degree of accuracy. 2. Elements of business environment: These are t
hree as mentioned below Internal Environment Macro Environment and Micro Environm
ent

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 V
alue System: Organizational Culture can be viewed as the system of shared values
and beliefs that shape a companys behavioral norms. A value is an enduring prefe
rence as a mode of conduct or an end state. The value system of the founding fat
hers 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. Str
ucture is concerned with the hierarchical relationship and the relationship betw
een the management of different functional areas like the structure of the top m
anagement 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 an
d methods, marketing and distribution. Macro environment consists of the followi
ng factors(external to the industry). Political environment Regulatory and legal
environment Demographic Socio culture Technological environment Global Environm
ent 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 coun
try. Russian revolution in 1917 transformed the equation of doing business in th
at country. After the change of regime in the early1990s, business equations cha
nged 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. Narasimh
a 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 lega
l environment: The political environment governs the legal and regulatory enviro
nment of the country. The regulatory environment plays a vital role by dictating
the dos and donts of a business. Every country has a different legal environment
. In India we have the Companies Act, the MRTP Act, which restricts monopoly, va
rious laws regarding shares, the Consumer Protection Act, Environmental Acts and
so on. The implementation of GATS has resulted in the implementation of interna
tional 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 et
c. It is the demographic environment which decides the marketing mix for an orga
nization. It decides the type of product the organization comes out with. In Ind
ia a lot of research and efforts are undertaken to reduce the cost of products a
nd to launch products at the cheapest possible rates .e.g. shampoo sachet for ru
pee1/-, cooking oil, tea, biscuits for Rs.2/- in the shapes of sachets and packe
ts to cater to the needs of the lower segment of the market. Demographic data re
veal 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 fo
r 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 effec
t on their personality and behaviour style. The consumers preferences have underg
one a sea change through the 1990s. This has led to the production of more cars,
refrigerators, air conditioners, cell phones and other articles- once considere
d ostentatious and luxurious. Typical patterns of socio-culture dictate the pref
erence of consumers in different regions. For example, when McDonalds and KFC st
arted 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. Technolo
gical advancement may affect an organizations products, services, markets, suppli
ers, distributors, competitors, customers, manufacturing process, marketing prac
tices, financial composition and competitive position. Organizations have to mod
ify products according to the level of technological knowledge of the target cus
tomer, because in developing nations complex household machines that need progra
mming 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 transn
ational, cross cultural level and across the borders. The World is a global villa
ge today. For the sake of business countries are burying their differences and f
orging economic relationships. Former enemies like Russia and America are now fr
iendly and economically cooperating. India and China have friendly economic rela
tionship. India is a signatory of WTO which has a multilateral trade agreement a
mong more than100 nations. Globalization brings along with that the danger of gl
obal competition.

ETBE-Module-1: Theoretical Framework of Business Environment

Economic Environment:
The economic structure of a country, whether it is socialist, mixed or capitalis
t, has great impact on the economy. Economic policies such as foreign trade poli
cy, industrial policy, fiscal policy, GDP growth rate, policy of licensing, mone
tary policy, development of financial institutions, development of money and sto
ck 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 r
elease crores of rupees into the economy that may result in a decrease in intere
st 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 elect
ronics industry is based in Japan. Smart call centers and customized software co
mpanies are wide spread in the Indian landscape.

ETBE-Module-1: Theoretical Framework of Business Environment Michael Porters inte

rnational competitiveness Model:- In a study of national competitive advantage M
ichael Porter identified four

attributes which have important impact on the global competitiveness of companie
s located within that nation. These are: Factor endowments- skilled labor, capit
al, technology and infra structure necessary to compete in a given industry. Hom
e demand for industrys products & services. The presence or absence in a nation o
f supporting industry-supplier industries which are internationally competitive
Firm strategy, structure and rivalry-Conditions in the nation that govern how co
mpanies are created, organized and managed and the nature of domestic rivalry.

ETBE-Module-1: Theoretical Framework of Business Environment ADDITIONAL INFORMAT

ION: 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. GAT
S: General Agreement on Trade in Services- is a treaty of the WORLD TRADE ORGANI
ZATION(WTO) that came into force in January 1995.

ETBE-Module-1: Theoretical Framework of Business Environment

MICRO ENVIRONMENT Micro environment or the competitive environment refers to the
environment which an organization faces In its specific arena. Professor Michae
l Porter of Harvard Business School has identified five forces of competition. T
hese are as follows:i)Threat of competitors-The rivalry among sellers in the mar
ket ii)Threat of new entrants- The potential entry of new competitors iii)Threat
of substitutes-Other industries attempting to win over customers to their subst
itute 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 Bu
yers- competitive pressure stemming from seller-buyer collaboration and bargaini
ng. Now let us get into some details. Threat of competitor: Rivals adopt tactics
to win over customers by cutting prices, adding attractive features, extended c
ustomer service, longer warranties, special promotional offers and introduction
of new products. All these efforts are undertaken to improve market share and pr
ofitability.

ETBE-Module-1: Theoretical Framework of Business Environment Threat of new entra

nts: 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 econo
mies of scale, proprietary product knowledge, patents, favourable access to raw
materials, favourable location, lower borrowing cost and government subsidies. C
ustomers prefer new look products. Distributors are wary of handling new product
s.

ETBE-Module-1: Theoretical Framework of Business Environment Threat of substitut

es: Road transport services compete with the railways, makers of eye glasses com
pete with the makers of contact lenses, scooter producers compete with manufactu
rers 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 e
xpertise; has significant cost advantage, constantly improves the product or fin
ances the buyer.

ETBE-Module-1: Theoretical Framework of Business Environment

Bargaining power of the buyer: Consumer is king; He enjoys significant bargainin
g power when there are many sellers, few buyers and production exceeds demand. T
he buyer can bargain reduction of price, quantity discount, better quality at th
e same price, better after sales service, credit and finance facility. Andrew Gr
ove, the former CEO of Intel argues that Porters model ignores the sixth force; t
he power, vigor and competence of complementors like the demand for personal com
puters 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 consul
tants. Financial institutions like banks and NBFCs (Non Banking Financial Compan
ies) provide finance to the business organizations. Critical success factors are
those areas in which good results will ensure an organizations success against c
ompetition. 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 com
pany (steel or aluminum plant) cost is a Critical Success Factor; for a food cha
in organization like McDonalds, logistics and supply chain management is a CSF.
Critical Success Factors(CSFs)

ETBE-Module-1: Theoretical Framework of Business Environment

3. Changing Dimensions:
Behind every change in environment there is a driving force. To understand and f
orecast future trends it is important to understand the driving force behind the
m. 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 organization:a)Embryonic stag
e b) Growth c)Shakeout d) Maturity e)Decline EMBRYONIC STAGE: Beginning of the i
ndustry; customers know little about the product; high price, and creating aware
ness among consumers for volume sales.

ETBE-Module-1: Theoretical Framework of Business Environment

Stages in Industry Life Cycle
Demand
Embryonic
Growth
Shake out
Maturity
DECLINE

 GROWTH:
ETBE-Module-1: Theoretical Framework of Business Environment
Demands expand rapidly due to new customers entering the market; e.g., cell phon
e, internet. Economies of scale attained, high growth and profit; many competito
rs enter the field; prices fall.
INDUSTRY SHAKE OUT:
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 intro
ducing frequent flier programs.

ETBE-Module-1: Theoretical Framework of Business Environments

DECLINE: Growth becomes negative for various reasons: technology changes-audio a
nd video tape recorders and players are going out of the market; vanaspati, bein
g a saturated fat is not purchased by health conscious customers. Demographic (d
eclining birth rate is hurting baby and child products) ; International competit
ion -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.