Everything you need to know about the components of business environment. Business environment refers to those aspects of the surroundings of business enterprise which affect or influence its operations and determine its effectiveness.
Andrews has also rightly defined the environment of a company as the pattern of all external influences that affect its life and development. Keith Davis too has also observed that business environment is the aggregate of all conditions, events and influences that surround and affect it.
The business environment is always changing and is uncertain. It is because of this that it is said that the business environment is the sum of all the factors outside the control of management of a company—the factors which are constantly changing and they carry with them both opportunities and risks or uncertainties which can make or mar the future of business.
Some of the components of business environment are as follows:-
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A. Internal Environment – 1. Financial Capability 2. Marketing Capability 3. Operations Capability 4. Personnel Capability 5. General Management Capability B. External Environment – 1. Micro Environment 2. Macro Environment.
Additionally, also learn about the other components of business environment:-
1. Economic Environment 2. Technological Environment 3. Social Environment 4. Demographic Environment 5. Political and Legal Environment 6. Global Environment.
Components of Business Environment: Internal and External Environment
Components of Business Environment – 2 Major Components: Internal Environment and External Environment
Component # 1. Internal Environment:
It refers to all the factors within an organization which affect its functioning. These factors are generally regarded as controllable i.e. the organization can alter or modify such factors.
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Some of the important internal factors are:
Financial capability factors relate to the availability, usage and management of funds and all allied aspects that have a bearing on an organization’s capacity and its ability to implement its strategies.
Some of the important factors which influence the financial capability of any organization are as follows:
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(a) Factors related to the sources of funds like capital structure, procurement of capital, financing pattern, working capital availability, borrowings, capital and credit availability, reserves and surplus and relationship with banks and financial institutions.
(b) Factors related to uses of funds such as capital investment, fixed assets acquisition, current assets, loans and advances, dividend distribution and relationship with shareholders.
(c) Factors related to management of funds like financial accounting and budgeting, management control system, state of financial health, cash, inflation, credit, return and risk management, cost reduction and control and tax planning and control.
Marketing capability factors relate to the pricing, promotion and distribution of products or services and all the allied aspects that have a bearing on an organization’s capacity and ability to implement its strategies.
Some of these important factors which influence this marketing capability of an organization are as follows:
(a) Product related factors like variety, differentiation, mixed quality, positioning packaging, etc.
(b) Price related factors like pricing objectives, policies, changes, protection advantages, etc.
(c) Promotion related factors like promotional tools, sales promotion, advertising, public relations etc.
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(d) integrative and systematic factors like marketing mix, distribution system, market standing, company image, marketing organization, marketing system, marketing management, information system, etc.
Operations capability factors relate to the production of the products or services, use of material resources and all allied aspects that have a bearing on organization’s capacity and ability to implement its strategies.
Some of the important factors which influence operations capability of an organization are as follows:
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(a) Factors related to the production system like capacity, location, layout, service, design, work system, degree of automation, extent of vertical integration, etc.
(b) Factors related to the operation and control system like aggregate production planning, material supply, inventory, cost and quality control, maintenance system and procedure, etc.
(c) Factors related to the R & D system like personnel facilities, product development, patent right, level of technology used, technical collaboration and support etc.
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Personnel capability factors relate to the existence and use of human resources and skills and all allied aspects that have a bearing of an organization’s capability and capacity to implement its strategies.
Some of the important factors which influence the personnel capability of an organization are as follows:
(a) Factors related to the personnel system like system for manpower planning selection, development, compensation, communication and appraisal, position of the personnel department within the organization, procedures and standards etc.
(b) Factors related to organization and employee characteristics like corporate image, quality of managers, staff and workers, perception about the image of the organization as an employer, availability of developmental opportunities for employees, working conditions, etc.
(c) Factors related to industrial relations like union – management relationship, collective bargaining, safety, welfare and security, employee satisfaction and morale, etc.
v. General Management Capability:
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General management capability relates to the integration, coordination and direction of the functional capabilities towards common goals and all allied aspects that have a bearing on an organization’s ability to implement its strategies.
Some of the important factors which influence the general management capability of an organization are as follows:
(a) Factors related to the general management system like strategic management system, process related to mission, purpose and objective setting, strategy formulation and implementation machinery, strategy evaluation system, management information system, corporate planning system, rewards and incentives system for top managers, etc.
(b) Factors related to general managers like orientations, risk — propensity, values, norms, personal goals, competence, capacity for work, track record, balance of functional experience, etc.
Component # 2. External Environment:
The external environment consists of all the factors which provide opportunities or pose threats to an organization. In a wider sense, the external environment encompasses a variety of factors like international, national and local economy. Social changes, demographic variables, political system, technology, attitude towards business, energy sources, raw materials and other resources and many other macro level factors make up the external environment.
We could designate such wide perception of the environment as a general environment. All organizations, in some way or the other, are concerned about the general environment but the immediate concerns of any organization are confined just to a part of the general environment which could be termed as a highly relevant environment and enables the organization to focus its attention on those factors which are intimately related to its mission, purpose, objects and strategies.
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Depending on its perception of the relevant environment, an organization takes into account those influences in its surroundings which have an immediate impact on its strategic management process.
Micro external factors have an important effect on business operations of a firm. However, all micro factors may not have the same effect on all firms in the industry. For example, suppliers, an important element of micro level environment, are often willing to provide the materials at relatively lower prices to big business firms. They do not have the same attitude towards relatively small business firms.
Some important micro elements of the business environment are described here:
a) Customer:
The prime task for any business is to attract and retain customers. This is to ensure its own long-term profitability and existence in the market. It therefore follows that the need and the desire of the customer should be monitored minutely to ensure customer delight, which will lead to the firm having an increasing number of loyal customers.
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Changing tastes and preferences of the customer should not only be observed as they happen, but forecasted before, and necessary corrections should be made in the product/service profile by the company. Customers are the backbone of a company and the very reason for the company’s existence.
b) Products:
Product factors such as the demand, image, features, utility, function, design, life cycle, price, promotion, distribution, differentiation and availability of substitutes of products or services also form an intimate part of the business environment. The product/service features are the key to attract/retain customers.
c) Marketing Intermediary:
This includes all those who facilitate distribution of goods from the centres of production to the various centres of consumption. These are the middlemen who form part of the distribution channel and those who help reach the product/service to the ultimate consumer. They can be few or many in number, depending on the length of the distribution chain and type of distribution system that the company adopts. If this chain is hassle free and functions without many hurdles, it eventually helps the organisation.
d) Competitors:
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The world has become a global market. There exists tremendous competition in each and every area. There are other business entities that manufacture similar products and compete with a company for market share and turnover. These have to be managed well and market intelligence is required to find out about their future plans. These can play a major role in making or marring the fortunes of any company.
e) Suppliers:
An important factor in the micro environment is the supplier, i.e., those who supply raw materials and components and machines to the company. The suppliers should be reliable and act as business partners, working in coordination to fulfil the ultimate consumer expectations. If the suppliers are reliable, there is no need to keep heavy inventory stocks that increases the risk of obsolescence and damage and also blocks to working capital of the company.
ii. Macro Environment:
The macro environment is the larger, uncontrollable environment consisting of societal forces that affect all other environments. They offer tremendous opportunities for any business and also present threats that can harm a business in a major way. This environment becomes crucially important to understand and study for the purpose of strategic planning and decision-making.
It has broader dimensions than the micro environment. It consists of individuals, groups, agencies, events, conditions and forces with which the organisation comes into frequent contact in the course of its functioning. The macro environment is actually the real environmental factor that influences the growth and structure of any business to the greatest degree.
It is made up of following components:
a) Socio-Cultural Environment:
This consists of the society and culture of a place where the organisation is doing its business. It is a general entity and influences almost all firms in a similar manner. Some of the important factors and influences operating in the social environment are the buying and consumption habits of people, their languages, beliefs and values, customs and tradition, tastes and preferences, education and ail factors that affect the business.
These factors are listed below:
I. Demographic characteristics such as population, its density and distribution, etc.
II. Social concerns such as the role of business in society, etc.
III. Social attitudes and values such as the expectations of the society from business.
IV. Family structures
V. Educational levels
VI. Awareness and work ethics
VII. Beliefs and value systems
VIII. Local festivals
The political environment consists of factors related to the management of public affairs and their impact on the business of an organization. Political environment has a close relationship with the economic system and economic policies. For Example, communist countries have a centrally planned economic system. In most countries apart from those laws that control investment and related matters, there are a number of laws that regulate the conduct of the business. These laws cover such matters as standard of product, packaging, promotion, etc.
India is a democratic country having a stable political system where the Government plays an active role as a planner, promoter and regulator of economic activities. Businessmen therefore are conscious of the political environment that their organization faces. Most governmental decisions related to business are based on political considerations in line with the political philosophy followed by the ruling party at the centre and the state level.
Some aspects of the political environment are as follows:
I. The general state of political development
II. The degree of politicisation of business and economic issues
III. The level of political morality
IV. The law and order situation
V. Political stability
VI. Political ideology and practices of the ruling party
The economic environment consists of macro level patterns related to the areas of production and distribution of wealth that have an impact on the business of an organization.
Some of the important factors and influences operating in economic environment are:
I. Economic stages existing at a given time in a country.
II. The economic structure adopted such as capitalistic, socialistic or mixed economy.
III. Economic planning, such as 5 — year plans, annual budgets, etc.
IV. Economic policies, such as industrial, monetary and fiscal policies.
V. Economic indices like national income, distribution of income, rate of growth and growth of GNP, per capita income, disposable personal income, rate of saving, investment, value of imports and exports, balance of payments etc.
VI. Infrastructural factors such as financial institutions, banks, modes of transportation, communication facility, energy sources, etc.
Some examples highlighting the role of economic environment are described below:
1) Liberalization of the economy since past twenty years has had a mixed effect on Indian industry. While most of the companies have benefited in terms of the resulting freedom to alter product mix and capacity, there have been some adverse effects too in the areas of overcapacity and increased competition.
Partial decontrol of cement in 1982 led to a rapid increase in production capacity and resultant supply, changing the market situation from that of acute scarcity to a comfortable surplus. Liberalization of imports has led to increased competition in the capital goods industries causing profits to decline as a result of which many companies have not been able to sustain their business.
2) Public saving in India have been traditionally invested in fixed assets and precious metals. The share of savings invested with the Government has been channelled through post-offices and banks. However, of late the investors have increasingly turned to other avenues like stock markets and company deposits.
Recent changes in economic and fiscal policies have led to many significant developments. Leasing and financing companies, public sector bonds, mutual funds, venture capital business, newer financial instruments, entry of banks and financial institution in stock trading are some of the developments which provide the resources for capital market and project financing.
The regulatory environment consists of factors related to the planning, promotion and regulation of economic activities by the Government that have an impact on the business of an organization.
Some of the important factors and influences operating in the regulatory environment are as follows:
I. The constitutional framework, directive principles, fundamental rights and distribution of legislative power between Central and State Government.
II. Policies related to licensing monopolies, foreign investment and finance of industries.
III. Policies related to distribution and pricing and their control.
IV. Policies related to imports and exports.
V. Other policies related to the public sector, small — scale industries, sick industries, development of backward areas, control of environment pollution and customer protection.
Business and Industry operate within a regulatory environment. The relationship between industry and the regulatory environment exists as a two – way process. The Government lays down the policies, procedures and rules according to which the industry functions.
There are a number of administrative controls over business that are exercised through the regulatory mechanism.
Some of the important areas of control are:
1) Industrial policy and licensing;
2) Monopolies and restrictive trade practices.
3) Legislation related to a company’s operation.
4) Import and export control and control over foreign exchange;
5) Control over foreign investment and collaboration;
6) Control through consumer protection; and
7) Control of environmental pollution
The technological environment consists of those factors related to knowledge applied and the materials and machines used in the production of goods and services that have an impact on the business of an organization. For many enterprises, technology is the most dynamic of all environmental factors. An individual firm is concerned with its product and process technology. This environment consists of those factors that involve any type of technological advancement or lack of the same.
Some of the specific factors that can be described are as follows:
I. Sources of technology like company sources, external sources and foreign sources.
II. Technological development, stages of development change and rate of change of technology and research and development.
III. Impact of technology on human beings, the man – machine system and the environmental effects of technology.
IV. Communication and infrastructural technology and technology in management.
V. Technological obsolescence.
In the Indian context, we find the state of technological development varies among different sectors of the industry. Generally it is felt that the technological aspect of competition varies with customer needs and Government policy. Technology is often used as a strategic weapon by companies operating in highly competitive environment.
This environment deals with the composition and characteristics of the population of a place. All the relevant descriptions of the population of a place with respect to its demographic profile will affect business decisions drastically. It would be in the interest of any firm to consider these aspects in detail before planning the strategy.
It includes factors such as:
I. Average family size
II. Size of population
III. Educational levels
IV. Economic stratification of the population
V. Job profiles and Income levels
VI. Sex ratio composition of the population
VII. Life expectancy
VIII. Religion, Caste and customs and traditions
IX. Spatial mobility of the population
Components of Business Environment – Economic Environment, Technological Environment, Social Environment, Demographic Environment and a Few Others
The general environment of an organisation is made up of vital components such as economic, technological, social, demographic, political and legal and global forces. These have positive, neutral and negative influence on business. Professors Alex Miller and Gregory Dess have nicely presented this in their title “Strategic Management”.
Component # 1. Economic Environment:
It is the macro-economic indicators that the strategist is to study as they have bearing on his decisions. These indicators shape the economic health and well-being of the economy. These are the determinants of firm’s ability to earn profits and generate wealth. It is wealth maximisation that is more important because it means maximisation of profits and ploughing them back into investments that generate further income.
The components of economic environment are:
i. General Economic Conditions:
The general economic conditions that prevail in an economy are the determinants of economic prosperity and well-being of the community. These economic conditions are- amount of national income, per-capita income, economic resources, distribution of income and wealth, economic development are the variables that make or mar the economic prosperity of the people.
The income and its distribution determine the business prospects and, hence business strategies. In an economy where it is low and the per-capita is comparatively low, results in poor demand. This pessimistic situation does not attract the business people to invest and carry on the manufacturing and marketing activities.
On the other hand, in case of those economies where the income of the economy is rising and that leads to more and more investments and entering into industrial and marketing activities. In India, the middle, the backbone of Indian economy, is finding its income rising and ready to invest in business.
Even NRI’s are finding it profitable to invest their surplus income thus, helping the Indian economy to go stronger and, in turn, getting benefits of profits.
Economy is an arrangement that encourages generation of income, its distribution by use of resources at its disposal based on some accepted economic philosophy. The economies, all over the world are broadly wedded to cabalistic, socialistic, and communistic as pure breeds or hybrid economies called as mixed economy.
India is the best example of mixed economy where the benefits of capitalism and socialism are brought under one focus thus doing away with demerits of pure socialism or capitalism.
Capitalism grants the maximum economic freedom in managing economic activities and socialism speaks of utmost control by the state and mixed economy has the freedom as well as state’s role where both public and private sectors co-exist supporting one another.
The fall of mighty nation that was formed at the beginning of 20th century had to kick the bucket over a period of 100 years. Today, USSR is divided into small countries which was one of the greatest powers of the world wedded to socialistic ideology.
It is the apt and timely economic policies taken and implemented by the government that decides the fortunes of the country and the citizens. Think of India before 1991 and now. Indian economy was on the verge of collapse where foreign reserves were just sufficient to pull on another eight days.
It was the change in the personality as the political leader and the brains behind, who together liberated India from control raj and opened up the Indian economy to the whole world.
The private sector and public sector undertakings which were working under the shade of protection umbrella, were to get up and face the challenge of changing competition; Indian players to become global players failing which foreign companies could take their place. Today, “made in India” is as important as “made in Japan.”
Economic growth or development is the rise and sustaining per capita income of every individual who is the member of the economy. It is economic growth rate that speaks of increased consumption expenditure, lowering of pressure in the industrial field that offers more opportunities and makes the firms to withstand the rigors of threats. Other way round is also true; lower economic growth, reduced consumption expenditure builds up the pressure and lowers down the profitability.
The rate of interest influences the demand for the goods and services in the economy when the goods and services are bought through borrowed funds. In case the rate of interest is low, the demand for products may be consumer durables or non-durables. This gives fillip to the industries to grow.
Opposite is true when the rates are high. Today, R.B.I, has come out with lowest rates of interest to boot the demand for consumer durables and non-durables and this is going to take Indian economy out of the rut of pessimism and morrows.
The cost of capital is also dependent on interest rates. The companies, when they are getting capital at lowest rates will be a boosting dose for all companies to have ambitious plans and strategies in case of borrowed funds.
Exchange rate stands for the currency conversion into any other currency—may be hard or soft. In 1991 Indian rupee was devalued to make Indian products cheaper in world market so as to boost India’s exports. That was the golden opportunity for all Indian exporters to export more goods and reserves and earn foreign exchange.
Today, foreign exchange reserves are of 200 billion rupees an all-time high boosting the quality production at least cost. Exporters of India will do so only when they understand and implement three strategies with regard to cost of exports, quality of exports and quantity of exports on regular basis. Thus, it is the exchange rate that decides the destiny of the country.
Component # 2. Technological Environment:
Rapid developments in technology exert a powerful influence on all the organisations and not just on those operating in a high-tech environment say microprocessor manufacture, pharmaceuticals, fibre-optic technology and so on. The combined impact of computer, digital technology and telecommunications affects most of private and public sector undertakings.
As rightly called by none other as Mr. J. Schumpeter “a perennial gate of creative destruction.” Change of technology is both creative and destructive process in that it is responsible for building new by destroying the old. Thus, the heart of any progress is destruction.
It means that destruction and construction are not conflicting but complementary providing opportunities and threats. In the age of fast changing technology the secret of success is triangular strategy. That is, the managers to anticipate, innovate and excel to have successful survival.
Those firms which fail to do so, they will be thrown out. When one American boxer took over Mohmed Ali he remarked, “Mr. Ali, you are the greatest but I am the latest”. We must learn from Japanese. Before World War, “Made in Japan” was a sign that nobody bought because goods were the cheapest but of lowest quality.
However today, there is great demand for Japanese products as they became totally quality conscious and ‘zero defect’ and anything “Made in Japan” whether it is an “automobile” or a “zip”. This speaks of their ability to anticipate, innovate and excel. Japanese are the best copy-cuts and equally able to innovate and excel others. Today, out of 2000 Toyota cars, 700 land on American soil—a great nation of big cars,—each day.
The strategic implications of changing technology have been nicely brought about by Russian thinker, Mr. Basis Petrov, in his article “The Advent of Technology Portfolio”—Journal of Business Strategy, Fall, 1982 as-
(i) It can change relative competitive cost positions within a business,
(ii) It can create new markets and new business segments, and
(iii) It can collapse or merge previously independent business by reducing or eliminating their segment barriers.
New ideas, new products, new processes new methodologies are the outcome of technological change. It means that changed order brings in good many opportunities studded with threats. That is why, it pays when a strategist constantly monitors the kingdom of technology and the effects on the firm and its activities.
Component # 3. Social Environment:
Social environment stands for socio-cultural environment. Socio-cultural environment consists of value system and accordingly the society’s attitudes, beliefs, desires, expectations, aspirations, habits, customs are changed that generate good many opportunities and threats to the business which operates for and part of society. This socio-cultural environment covers aspects of society and its constituents.
For a business house, these things mean:
(i) Expectations of the society from the business community
(ii) Attitudes of society towards business and its management
(iii) Views towards achievement of work
(iv) Outlook towards the authority structure, responsibility and organisational positions
(v) Views towards customs, traditions and conventions
(vi) Class structure and labour mobility
(vii) Level of education.
These socio-cultural environmental factors influence the organisations in three ways:
(i) Organisational objective setting,
(ii) Organisational processes, and
(iii) Products and services to be offered by the organisation.
The change that takes place in society caused by change in the value system that is accepted is right for the members of the society. Thus, what a particular age group is to wear, eat, entertain are decided by the cultural values. Today, everyone is aware of a particular life style based on the social norms. The philosophy of life is life is short—enjoy it any cost.
That is why more and more people are thinking of travelling to far off places. Another thing is to get rich by easy money and windfalls. This has encouraged the community to resort to lotteries, horse races, betting and the like. This has also resulted in antisocial activities.
Today kidnapping, high-jacking are quite common to get a booty. These activities have created demand for those goods and services that facilitate these activities. To fight back against these have also resulted in services and products that grant self-protection.
The place of women is no more confined to kitchen. They are having equal share and hence they are getting more education, occupying positions those were reserved for men. This meant lack of time for preparing food to care for children. Thus, fast food habits came to light, services of household servants increased, more and more families are going for washing machines and entertainment on small screen.
The younger generation has the freedom of video surfing, joining night clubs, going for costly and quality clothes, shoes, deodorants, toiletries. The mobile, mobike, automobiles are the needs of these youngsters. Similarly, old people want to look younger and to be younger that has resulted in hair colouring, health maintenance. Of late, people are becoming more health-conscious.
This extra care and caution has made them to go in for mineral water, preventive medicines, preventive health check-up, change in food habits. Thus, high cholesterol is the main cause of coronary ailments. That is why, the people are going in for double or table refined edible oils that too quantity of consumption has been reduced ; they avoiding red meat and going in for white meat-chicken and fish from beef, mutton, pork and so on.
Of late, social awareness has been ever on the increase. The social problems are given prominence like pollution, social responsibility of business house, workers safety and welfare. The social demands are increasing that are cast on business community as social responsibility. This has affected what the business house is to produce? What processes are to be employed? How the products are to be packed? and so on.
The consumerism which is in full force, has been responsible (for enactment of MRTP Act, Consumer Protection Act. Consumerism has made impact on technology, product quality, marketing efforts, standards of after sale services. All this means that the business community has to produce and market the products and services as decided by the socio- cultural values.
Component # 4. Demographic Environment:
Demographic features deal with population such as size, birth rate, growth rate, age composition, and family size, level of education, language, caste, income level, earners and non-earners in a family. The demand for the goods and services is dependent on demand for them and the demand is potential or actual market and market means actual and potential consumers.
There is a positive relationship between the growth of population and the demand for goods and services. Any decline in birth rate is having direct or indirect impact on goods and services meant for infants.
In case the population consists of more aged than youngsters, these will be more demand for preventive and curative medical services, medicines, waking stick, hair colour, and so on. In case we have more of youngsters, there is demand for all sorts of convenience goods, specialty goods and shopping goods based on consumer segments likes and dislikes, style movement, fashion, and their part-time or full-time earnings.
These population changes present good many opportunities and pose equally challenging threats. Availability of cheap labour—which is skilled, and increased demand for consumer goods and services may result in multinationals investing in new lines of activities.
The consumers from different nations may like the goods “Made in India” where Indian companies have cost advantage may attract foreign investment and that leads to optimum utilisation of resources of the country and increasing exports and imports.
One cannot under-estimate the changes in population in various dimensions that provide good opportunities with threats in the same trail. It is up “to the business houses to form strategies for success and implement them to encase these opportunities by handling the threats effectively.
Component # 5. Political and Legal Environment:
Political and legal environment is rightly called as regulatory environment. Governments of the nation, states and local area play a constructive role as the custodian of citizens. To protect and promote the interests of citizens, they resort to regulatory activities which can be done through constitutional provisions, government policies and Industrial laws.
Speaking of constitutional provisions in India, Indian Constitution was passed by the Constituent Assembly in 1949. Constitutional Provision lays down the guidelines for Central and State Governments to administer socio-economic policies and to regulate them.
The Constitutional Provisions are divided into “Fundamental Rights” and “Directive Principles”. The fundamental rights are covered in Articles 15, 16, 19, 23 and 24. Article 15 prohibits discrimination against any citizen on the grounds of religion, race, caste, sex or place of birth. Article 16 speaks of equality of opportunity to all citizens in public employment, save, provision of reservations by the state.
Article 19 says that all citizens have right to practice any profession, occupation, trade or business. Article 23 speaks of right against exploitation and traffic in human being. Article 24 provides for prohibition of child labour below 14 years in factory or mine or hazardous work. The Directive Principles are the principles and laws enforceable by courts.
These serve as guidelines for government and business houses of these, major ones are:
(i) Promotion of people’s welfare.
(ii) Minimising inequality of income and the elimination of inequalities of status facilities and opportunities of citizens.
(iii) Securing adequate means of livelihood of citizens.
(iv) Equality of pay for equal work for both men and women.
(v) Provision of just and human working conditions and maternity relief
(vi) Securing a wage and working conditions to provide decent living standard.
(vii) Workers participation in management.
(viii) Proper distribution of ownership and control of natural resources to prevent concentration of wealth with a few and instead serve the common good of community.
Coming to Government policies, these are based on Industrial Resolution. Industrial Resolution embodies a policy of Government in Power Government Policies are both positive and negative in approach. The policy framing and implementation grants four kinds of roles namely, regulatory, promotional, entrepreneurial and that of planners.
The ‘Regulatory Role’ consists of:
(i) Restriction of private participation in areas like defence, industries or atomic energy.
(ii) Controlling capacity and location of plants.
(iii) Putting ceilings on expenses,……… floor limit of wage and bonus, provisions of statutory welfare measures.
(iv) Regulation in terms of equity participation and foreign investment.
(v) Corporate tax, professional tax, tax on entertainment expenses and the like,
(vi) Export and import rules, custom duties, tariff and so on.
The ‘Promotion Role’ comprises:
(i) Development of infrastructure for industrial and commercial activities like roads, industrial estates, communication facilities and electricity.
(ii) Assistance like grant, investment subsidies, tax concession, tax holidays, subsidized water or electricity charges.
(iii) Providing fiscal and monetary incentives.
The ‘Entrepreneurial Role’ is to do with:
(i) Participation in business and industry where private participation is not adequate namely, electricity generation and distribution.
(ii) Ownership and management of reserved industries like defence production, atomic energy, oil and gas.
(iii) Managing public sector industries.
The ‘Planning Role’ covers the areas of:
(i) Five year plans
(ii) Prioritisation of industries
(iii) Foreign participation and bilateral agreements with other states or countries.
(iv) Green field area development plans
(v) Regional development plans and programs.
Turning our focus to “Industrial Laws”, good many laws have been passed from time to time to regulate the industrial and commercial activities, protection of interests of employees.
The most significant that business community is to take into account are- Indian Contract Act of 1872, Trade Union Act of 1926, Employees (Industrial) Standing Orders Act of 1946, Industrial Dispute Act of 1947, Import Export Control Act 1947, the Capital Issues 1947, Factories Act 1948, The Employees State Insurance Act of 1948, Industries Development and Regulation Act of 1951, Employees Provident Fund Act of 1952, Essential Commodities Act of 1955, Indian Companies Act 1956, Securities Contracts (Regulation) Act of 1956, Trade and Merchandise Marks Act of 1958, Weights and Measure Act of 1958, Income Tax Act of 1961, Borm Act of 1965, Monopolies and Restrictive Trade Practices Act 1969, The Water (Pollution and Control of Pollution) Act of 1974, Household Electrical Appliance (Quality Control) Act 1976, The Air (Prevention and Control of Pollution) Act of 1981, Consumer Protection Act 1986, Environment Protection Act 1986, Securities and Exchange Board of India Act 1992.
There are Taxation Laws which are subject to amendment each year. Same is the case of Price Control regulations.
For a manager, these laws and sets are very important because his polices or strategies cannot be repugnant to the laws of the land.
Component # 6. Global Environment:
Global or international environment is of particular importance when there has been powerful sway of globalisation. The changes in global environment create a set of opportunities and threats to the firm’s domestic and international share. Thus, the fall of state communism in Eastern Europe generated enormous growth opportunities for multinationals of America, western European countries and rising ‘Asian Tigers’.
The removal of trade barriers in 1992 between community members in European Community provided them opportunity for free- trade. The Euro-dollar case in as a new currency in 1999 that granted good many opportunities and threats for different currencies of the member countries.
In 1991 Indian Government announced new Indian Policy to cater to the needs of liberalisation and globalisation of Indian economy. This meant a thorough overhauling of monetary and fiscal policies of government, under the umbrella of which that led to dismantling of artificial trade barriers thus, dismissing the “License and Control Raj”.
The bold policy initiatives were in the areas of—industrial licensing, foreign investment, foreign technology agreements, changes in MRTP Act, public sector reforms, promotion of small sale industries, trade policy reforms. The globalisation prices affected the world-wide events.
Thus, the oil crises of 1980s, formation of European Union and other economic groups, dismantling of USSR, economic recession. This strengthened the hold of MNCs and TNCs. As a result, new strategic concepts cannot light like international value chain, networking, and relationship marketing and so on. As the managers of today are global players, they should analyse international environment both in focus and from distance.
An industry is the group of firms manufacturing goods or rendering service of identical products. Thus, steel industry we mean all those units engaged in producing steel or iron and steel products. Similarly we can talk of automobile industry. Here we mean in specific context—say four wheelers.
However, one can include two wheelers, three wheelers, six wheelers and eight wheelers. Even when we speak of it, it consists of Scotties, or mopeds, scooters and motor cycles. It is a matter of convenience which is taken as a base for calculating cost, price and so on.
That is, each unit in the industry is a competitor for others. The industry environment has its constituents namely, competitors, customers, suppliers and substitutes. Each is a competing force. Perhaps the best model of competition in industry environment has been developed by Michael Porter who is considered as guru of strategies.
This penta forces model is widely accepted which explains how competitive force works within an industry. Following is the model of competitive forces as described in article “How Competitive Forces Shape Strategy” in Harward Business Review, March-April 79.
Every strategist or manager has to study the implications of this penta-forces that are at constant work in the industry.
Components of Business Environment – 2 Important Components: Internal Environment and External Environment
Component # 1. Internal Environment:
Internal environment is composed of multiple elements existing within the organization, including management, current employees and corporate culture.
Internal environment is the conditions, people, events and factors within an organization that influence its activities and choices, particularly the behavior of the employees. Factors that are frequently considered part of the internal environment also include the organization’s mission statement, leadership styles and its organizational culture.
Component # 2. External Environment:
A business does not operate in a vacuum. It has to act and react to what happens outside the factory and office walls. These factors that happen outside the business are known as external factors or influences. These will affect the internal functions of the business and also the objectives of the business and its strategies.
“The external environment comprises of all the entities that exist outside the boundaries of a business, but have significant influence on its growth and survival.”
There are two major types of external environment:
i. Micro Environment.
ii. Macro Environment.
In simple terms, ‘micro’ means small and ‘environment’ is a factor that affects or impacts the surroundings. Micro-Environment is the immediate environment which has a direct impact on the business operations and their success. It is also known as the Task Environment.
These are the factors or elements in an organization’s immediate area of operations that affect its performance and decision-making process. These factors include competitors, customers, distribution channels, suppliers, and the general public. Micro-Environment affects business and marketing at the operating level in its daily function.
An organization refers to a group of all individuals working in different capacities and the practices and culture they follow. In micro-environment analysis, nothing is as important as self-analysis, which is done by the organization itself.
Understanding one’s own strengths and weaknesses in a particular business is of vital importance. Organizations consist of specific groups of people who are likely to influence an organization.
These are:
(1) Owners – Proprietor, partners, shareholders, etc.
(2) Board of directors – Elected by shareholders. The board is responsible for day-to-day and general management of the organization.
(3) Employees – People who actually do the work in an organization. Employees are the major force within an organization.
No organization can survive without customers and consumers. A customer is the one who buys a product or service for the consumer who ultimately consumes or uses the product or service of the organization.
Hence, the central position is that of the consumer.
Therefore, an organization must closely monitor and analyze the following:
(1) Who are the customers/consumers?
(2) What features or benefits are they looking for?
(3) What are their income levels?
(4) What are their tastes, preferences?
(5) What are their buying patterns, etc.?
Competitors are the other business entities that compete for resources as well as markets. Competition shapes business. A study of the competitive scenario is essential for the marketer to identify threats from competition.
Following are a few major questions that may be addressed for analyzing competitions:
(1) Who are the competitors?
(2) What are their present strategies and business objectives?
(3) Who are the most aggressive and powerful competitors?
Competition may be direct or indirect direct competition is between organizations, which are in same business activity. At the same time competition can also be indirect.
Example – The competition between a holiday resort and car manufacturing company for available discretionary income of affluent customers is indirect competition.
Market refers to the system of contact between an organization and its customers.
The firm should study the trends and development and the key success factors of the market, which are as follows:
(1) The existing and the potential demand in market.
(2) Market growth rate
(3) Cost structure
(4) Price sensitivity
(5) Technological structure
(6) Distribution system.
The suppliers refer to the providers of inputs, like raw materials, equipment and services to an organization. Large companies have to deal with hundreds of suppliers to maintain their production.
Suppliers with their own bargaining power affect the working and cost structure of the industry.
Therefore, it is important for an organization to carry out a study of the following:
i. Who are the suppliers?
ii. What are their products, prices and terms and conditions?
iii. Whether to “Outsource” production or get it done “in-house” depending on this supplier environment, and so on.
Intermediaries include agents and brokers who facilitate the contact between buyers and sellers to get a certain commission. They may exert a considerable influence on the business organizations as, in many cases, the consumers are not aware of the manufacturers and their products. Hence, manufacturers use intermediaries to reach out to the consumers.
In simple terms, ‘macro’ means major factors. Macro environment is the major external and uncontrollable factors that influence an organization’s decision making, and affect its performance and strategies. These factors include the economic factors; demographics; legal, political, and social conditions; technological changes; and natural forces.
The macro environment examines the general business climate as it relates to the organization, but has nothing to do with the organization itself. The macro environment is primarily concerned with major issues and upcoming changes in the environment.
Elements of Macro Environment:
Dimensions of, or the factors constituting the macro environment include demographic, economic, social, technological, political, cultural, legal and global conditions which are considered relevant for decision-making and improving the performance of an organization. In contrast to the specific environment, these factors explain the macro environment which mostly influences many organizations at the same time.
Demographics describe a population according to selected characteristics such as – age, gender, ethnicity, income, and occupation. In other words, Demographics is the study of population factors such as – the proportion of the population who are of a given race, gender, location or occupation, and also of such general factors as population density, size of population and location.
A country where population rate is high and children constitute a large section of population, and then there is more demand for baby products. Similarly the demand of the people of cities and towns are different than the people of rural areas.
The high rise of population indicates the easy availability of labour. These encourage the business enterprises to use labour intensive techniques of production. Moreover, availability of skill labour in certain areas motivates the firms to set up their units in such area.
The business units from America, Canada, Australia, Germany, UK, are coming to India due to easy availability of skilled manpower. Thus, a firm that keeps a watch on the changes on the demographic front and reads them accurately will find opportunities knocking at its doorsteps.
Business Organizations need to study different demographic factors to address the following issues:
i. What demographic trends will affect the market size of the industry?
ii. What demographic trends represent opportunities or threats?
Demographic factors of interest to a business are:
(1) Population Size:
It has an important and critical impact on the organization’s strategic competitiveness.
The most important changes in the population size are:
i. Changes in birth rate and/or family size;
ii. Increase or decline in the total population;
iii. Effects of rapid population growth on natural resources or food supplies.
(2) Geographic Distribution:
In every country or region, population shifts/ migrates from one region to another. It might be from one city to another or non-metropolitan to metropolitan. This shift in population has a direct impact on the strategic competitiveness of the organization.
These changes will compel the organizations to think about the following issues:
i. The attractiveness of a company’s location may be influenced by governmental support.
ii. Companies may have to consider relocation if population shifts have a significant impact on the availability of a qualified workforce.
iii. The concepts of working-at-home and commuting electronically on the information highway have also started in India though at a very small level. These may imply changes in recruiting and managing the workforce.
‘Ethnic’ means the characteristics of a people, especially a group (ethnic group) sharing a common and distinctive society, culture, religion, language, or the like. ‘Ethnic Mix’ refers to the social value system of a population. It has implications both for a Company’s potential customers and for the workforce.
Issues that should be addressed include:
i. What do changes in the ethnic mix of the population imply for product and service design and delivery?
ii. Will new products and services be demanded or can exist ones be modified?
iii. Are the managers prepared to manage a more culturally diverse workforce?
iv. How can the company position itself to take advantage of the increased workforce heterogeneity?
(4) Income Distribution:
In economics, income distribution is how a nation’s total economy is distributed amongst its population.
It has a direct impact on:
i. The purchasing power of the population.
ii. The disposable income of the society.
iii. The consumption level of the consumer.
iv. The saving patterns of the population.
The change in the above might identify new opportunities and sometimes threats for companies.
The economy pertains to the income, expenditures, and resources that affect the cost of running a business and household. Economic factors encompass such areas as the boom/bust cycle, and the growth in unemployment in some parts of the country as a result of the closing of traditional industries. The economic environment refers to the nature and direction of the economy in which a company competes or may compete.
The economic environment includes general economic situation in the region and the nation, conditions in resource markets (money market, manpower market, raw material components, services, supply markets and so on) which influence the supply of inputs to the enterprise, their costs, quality, availability and reliability of supplies. The survival and success of each and every business enterprise depend fully on its economic environment.
Factors that Affect the Economic Environment:
(1) Economic Systems:
a. Capitalism:
A capitalist economy is an economy where the laws of demand and supply operate freely. The capitalist system is one which is characterized by private ownership of the means of production, individual decision-making, and the use of market mechanisms to carry out the decision of individual participants and facilitate the flow of goods and services in market.
b. Socialism:
Socialism is generally understood as an economic system where the means of production are either owned or controlled by the state and where the resources allocation, investment pattern, consumption, income distribution, etc., are directed and regulated by the state.
c. Mixed Economy:
Mixed economy is the outcome of compromise between two diametrically opposing schools of thought. In a mixed economy, private, public and joint sectors and the like all have some say in the major decisions that influence the functioning of the economy. These are followed by the four important economic roles played by the government in a mixed economy viz., regularity role, promotional role, entrepreneurial role and planning role.
The economic conditions of a nation refer to a set of economic factors that have great influence on business organizations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help in improving the pace of economic growth.
All business activities and operations are directly influenced by the economic policies framed by the government from time to time.
Some of the important economic policies are:
i. Industrial policy.
ii. Fiscal policy.
iii. Monetary policy.
iv. Foreign investment policy.
v. Export -Import policy (Exim policy).
c. Political-Legal Environment:
Government guides and controls the business through its regulations and policies. Thus the type of government running a country is a powerful influence on any business. A strategist has to consider the changes in the regulatory framework and their impact on the business.
Political environment includes political conditions such as – general stability and peace in the country and specific attitudes that elected government representatives hold towards business.
Legal environment includes various legislations passed by the Government administrative orders issued by government authorities, court judgments as well as the decisions rendered by various commissions and agencies at every level of the government – centre, state or local. Legal factors follow on from political factors, as the governments often pass laws which affect business.
The important legislations that concern the business enterprises include the Companies Act, 1956, Foreign Exchange Management Act, 1999, The Factories Act, 1948, Industrial Disputes Act, 1972, etc.
d. Socio-Cultural Environment:
The social environment of business includes the social forces like customs and traditions, values, social trends, society’s expectations from business, etc.
Socio-cultural factors are those areas that involve the shared beliefs and attitudes of the population. People learn to behave in particular ways as a result of the feedback from the rest of the society. Behaviour and attitudes that are regarded as inappropriate or rude are quickly modified, and also people develop expectations about how other people should behave.
i. During festive seasons there is an increase in the demand for new clothes, sweets, fruits, flowers, etc.
ii. Due to increase in literacy rate, the consumers have become more conscious of the quality of the products.
iii. Due to the change in family composition, more nuclear families with single child concepts have come up.
This increases the demand for the different types of household goods.
Culture incorporates the set of values, ideas, and attitudes that are learnt and shared among the members of a group. Cultural changes over the same period include a major change in eating habits due to an increase in tourism and world travel, and greater globalization of food markets. Very few cultural changes come about as the result of marketing activities.
Technology refers to inventions from basic engineering research or Technological advances in recent years have been rapid, and have affected almost all areas of life. Whole new industries have appeared. The varying technological environments of different countries affect the designing of products.
In order to survive and grow in the market, a business has to adopt the technological changes from time to time. It may be noted that scientific research for improvement and innovation in products and services is a regular activity in most of the big industrial organizations.
Technology has changed the manner of communication. This has become possible with the advent of Internet and telecommunication system. It has changed the ways of how businesses operate now. This is creating many new business opportunities as well as making obsolete many existing systems.
The following factors are to be considered for the technological environment:
i. The pull of technological change.
ii. Opportunities arising out of technological innovation.
iii. Risk and uncertainty of technological development.
iv. Role of R&D in a country and government’s R&D budget.
The concept of global village has changed how individuals and organizations relate to each other. Global environment represents the process of liberalization. Through this liberalization process, Indian economy has opened up and started interacting with the world in a big way.
This has resulted in easy entry of foreign business organizations in India which further resulted in stiff competition and efficiency. Ultimately, liberalization has helped us in achieving a high growth rate, easy availability of goods at competitive rates, a healthy and flourishing stock market, high foreign exchange reserve, low inflation rate, strong rupee, good industrial relations, etc.
Among the global environmental factors that should be assessed are:
i. Potential – positive and negative impact of significant international events.
ii. Identification of both – important emerging global markets and global markets that are changing.
iii. Differences between cultural and institutional attributes of individual global markets.
Every organization faces competition, whether small or big, national, multinational or transnational. Medium and small businesses chase the same set of customers and find that prices and product quality are bound by the moves of their competitors.
Multinationals and large organizations clash directly on every level of product and service. The benefits of competition are also enjoyed by the society and the markets in which the competing organizations operate. The customers get products of better quality at lower costs. They get better value of their money because of competition.
What is Competitive Environment?
The external environment of an organization consists of general environment and/or a competitive environment. It is also widely accepted that the nature of competition in an industry is more directly influenced by developments taking place in the competitive environment.
The changes in customers and direct competitors that influence the competitive strategy of the business unit, are –
i. The development of new products by competitors;
ii. The emergence of new channels of distribution; and
iii. The rise of new customer values.
The competitive environment, also known as the market structure, is the dynamic system in which the business competes.
The competitive environment will have a major impact on the firm’s strategy.
i. The pressure from direct competitors, or, to use another phrase, the competitive intensity of the industry. If intensity is high, profitability of firms in the industry is likely to be low.
Example – A combination of slow growth and excess capacity is likely to produce lower margins, particularly if this is coupled with high exit barriers.
ii. Influencing industry profitability is the ease of entry for the new competitors. Industry profitability is likely to be low when entry barriers are low – when it is easy for competitors to enter and compete.
In the fight for market share, competition is not manifested only in the macro- environmental factors. Rather, competition in an industry is rooted in underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. Customers, suppliers, potential entrants, and substitute products are all competitors that may me more or less prominent or active depending on the industry.
A better understanding of the nature and extent of competition may be reached by answering the following questions:
i. Who are the competitors?
ii. What are their product and services?
iii. What are their market shares?
iv. What are their financial positions?
v. What gives them cost and price advantage?
vi. What are they likely to do next?
vii. How strong is their distribution network?
viii. What are their manpower strengths?
Cooperation in a Competitive Environment:
Mutual cooperation among business units is witnessed in every competitive business environment. In this set-up, every organization fulfills its business objective and gets mutual benefits.
Cooperation in a competitive environment can be ensured through the following techniques:
Collusion is an agreement between two or more persons, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage.
It is an agreement among firms to divide the market, set prices, or limit production. It can involve “wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties.” In legal terms, all acts affected by collusion are considered void; a Collusion may be either Indirect (Tacit) or Direct (Explicit).
a. Indirect or Tacit Collusion – It occurs through a system of public, unstated, informal rules and roles to follow, such as – leader-follower setup for setting industry prices or through signalling among firms, such as – announcing product plans or investment decisions.
b. Direct or Explicit Collusion – It happens when the firms discuss together what they will do. Direct collusion often leads to the formation of cartels, such as – OPEC, which in 2005 was composed of the world’s largest oil-producing countries.
A cartel is a formal agreement among competing firms. It is a formal organization where there is a small number of sellers and usually involves homogeneous products. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion (also called the cartel agreement) is to increase individual members’ profits by reducing competition.
Example – Cartel in middle-east, where OPEC tries to create the price and supply scenario of oil to protect their interest.
i. In the public cartel any government is involved to enforce the cartel agreement, and the government’s sovereignty shields such cartels from legal action.
ii. Private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world.
It is a complex arrangement in which firms take equity stakes in one another as a long standing strategic alliance. It is used in Japan to link up many different companies. The keiretsu maintained dominance over the Japanese economy for the greater half of the 20th century, but are beginning to lose their grip.
The member companies own small portions of the shares in each other’s companies, centered on a core bank. This system helps insulate each company from stock market fluctuations and takeover attempts, thus enabling long-term planning in innovative projects. It is a key element of the automotive industry in Japan.
a. Horizontal keiretsu – The primary aspect of a horizontal keiretsu (also known as financial keiretsu) is that it is set up around a Japanese bank. The bank assists these companies with a range of financial services.
Example – The leading horizontal Japanese keiretsu, also referred to as the “Big Six”, include – Fuyo, Sanwa, Sumitomo, Mitsubishi, Mitsui, and Dai-lchi Kangyo bank groups. Horizontal keiretsu may also have vertical relationships, called branches.
b. Vertical keiretsu – Vertical keiretsu (also known as industrial keiretsu) are used to link suppliers, manufacturers, and distributors of one industry. One or more sub-companies are created to benefit the parent company (for example, Toyota or Honda).
Cooperation generates automatically in businesses owned by a same family. The ownership, groups are engaged in the management of their enterprise in a direct manner. The ownership group is nothing but a family and its kith and kin. These include business houses such as – Tata, Birla, Godrej, Reliance, Modi, Escorts, et al. Major decisions and sometimes even minor decisions are made by members of the family who manage the enterprise.
4. Conglomerate:
It is a strategy that expands the firm’s operations into industries and markets that are not similar or related to firm’s initial base. It does not involve the firm’s distinctive competence across different lines of business.
Conglomerate is a corporation that is made up of a number of different, seemingly unrelated businesses. In a conglomerate, one company owns a controlling stake in a number of smaller companies, which conduct business separately. Each of a conglomerate’s subsidiary businesses runs independently of the other business divisions, but the subsidiaries’ management reports to senior management at the parent company.
Consortium is a Latin word, meaning ‘partnership, association or society’ and derives from consors, meaning ‘partner.’ A consortium is an association of two or more individuals, companies, organizations or governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for achieving a common goal.
In many high-tech industries, competing firms will actively cooperate to shares the costs and risks of developing cutting-edge technology that represents important breakthroughs.