Business Environment B.B.A. 2nd Semester (M.G.K.V.P University Varanasi) Unit I Notes

Unit I

•       Business covers a complex field of industry and commerce which involve activities related to both production and distribution. These activities on one hand satisfy society’s needs and desires and on the other hand bring profit to the business firms.

•       Business Environment refers to all those internal and external factors which impact the functioning/ performance of the firm and/ or its decision making, particularly strategies.

•       Although the scope of the term Business Environment includes, in broad sense, both internal and external factors impacting the business in its common usage it often refers to the external factors.

Types of Business Environment

·         Internal Environment

·         External Environment – External Environment has two parts

                       1. Micro environment

          2. Macro environment

•       Internal Environment

•       Controllable Factors

•       Alteration/ Modification Possible

•       At times few factors may go out of control

Includes

•       Value System : Promoter’s/ Shareholder’s (Ex-TATA)

•       Mission/Objectives/Goals : Provides direction

(Mission of Reliance Comm.: Excellence in Communication Arena)

•       Management Structure/ Nature : Composition of BOD, Professionalism, Decision making methods, Role of Financial Institutions

•       Internal Power relationships : Extent of support for Top Management, Implementation of decisions

•       Physical Assets & Facilities : Like Production Capacity

•       Company Image/ Brand Equity : Important for tie-ups, Joint Ventures, Selecting Intermediaries, Product Launch

•       Human Resource : Skill, involvement, morale, attitude, Process improvers/ workers, team work

•       Financial Capability :  Available Funds for project

•       Technological Capability : Standing know-how with firm, R&D Facilities

•       Marketing Capability : Marketing team’s reach and skill

•       External Environment

•       Micro Environment:

•       The Micro environment consists of the factors in the company’s immediate environment that affects the performance of the company.

•       Includes the suppliers, marketing intermediaries, competitors, customers and publics.

•       Macro Environment:

•       The Macro Environment consists larger societal forces that affect all the actors in the company’s Micro Environment.

•       Includes economic, demographic, legal, natural, political and cultural forces.

Micro Environment

The Micro forces need not necessarily affect all the firms in a industry in the same way. Some of the factors may be particular to the firm. Major Factors are:

A.        Suppliers-

• Uncertainties regarding supply compel for high inventories causing cost increase
• Indian Factories: generally stock for 3-4 months (against imported stock 9-10 months)
• High emphasis on Vendor development & Backward integration
• Risky to depend upon single supplier
• Purchase department should learn how to “wine & dine” suppliers for favorable treatment
• Depends upon Partnering/ Relation Marketing
• For Ex: Intel supplies 80% Processors of PC Market

B-Customers-

• Major task of business – to create and sustain customers
• Different categories of Customers – individual, industrial, government etc.
• Depending upon single customer – too risky
• Global Customers

C-Competitors-

• Include all those who compete for the discretionary income of customers
• Desire Competition – For Basic Need of customers
• Generic Competition – Selecting suitable means for particular basic desire
• Product form competition – Type of product preferable by customer
• Brand Competition – Selection of brand for transaction
• Seller’s market converting to Buyer’s market

D-Marketing Intermediaries-

• Firms that aid the company in promoting, selling and distributing its products to final buyers
• Includes agents, physical distribution firms(like transport firms), marketing service agencies(advertising, research firms), financial intermediaries.
• Power of Intermediaries

E-Publics

• A public is any group that has an actual or potential interest in or impact on an organization’s ability to achieve its interest
• Includes media public, citizen action public or local public.

D-Financiers

 Besides financial capabilities, their policies, strategies, attitudes towards risk and ability to provide non-financial assistance are very important

Macro Environment

1. Government/ Political Environment:

•          Extent of State intervention in business- (Adam Smith-” That Government is the best which governs the least”) Up to 1991- High State   Intervention in India

•          Political Stability

•          Taxation Policy – (Corporate Tax : Heavy burden)

•          Licensing Policy

•          1991 onwards only 15 industries related to security, safety & environmental concern require licensing).

•          Later on changed to 5 industries only (Alcohalic drinks, cigarettes, defence equipments, industrial explosives and hazardous chemicals).

•          Atomic Energy and Railways reserved for PSUs.

•          Foreign Direct Investment Policy

2. Demographic Environment-

•          Important as people constitute Market

•          Success of business largely depends upon competence and motivation of its people

•          Demographic factors often used by business for market segmentation

•          Important Demographic factors include-

a) Size of population including growth rate -

•       India 2.4% of total land with population above 17.5% of world population

•       1951-361 million, 2005-1065 million, 2011-1.21 billion

•       Average Annual Growth Rate: 1951-1.25%, 1981-2.22%, 2005-1.7%, 2011-1.41%

•       May be most populous by 2025

b) Age structure –

•       More than 50% below age 25,

•       By 2020- Expected average age-29 years

•       c) Gender Composition: 1981-934, 1991-927, 2001-933, 2011-914.

•       d) Rural urban Distribution: Rapid urbanization (2001-72.2% Villages)

•       e) Occupation: Heavy dependence on Agriculture, Services and Industry

•       f) Literacy rate: 1951-27% Males, 9% Females, 1981-64%M, 39%F, 2001-76%M,54%F, 2011-82.14%M, 65.46%F.

Socio-Cultural Environment

Socio-Cultural environment is made up of attitudes, desires, expectations, degree of intelligence, education, belief, lifestyle and customs of various groups

(Ford Fiera – In Spanish-speaking Latin American countries Fiera means “ugly old woman”)

For example –

·         Western Societies-Modern & Liberal, Receptive, Health conscious

·         India has more than 2000 ethnic groups

·         Laws are changing as per anticipation of changes-FEMA, Competition Act, Globalization

·         Cultural difference & MNCs

Natural & Technological Environment

Natural environment performs four basic functions including

•       Life support,

•       Supply of resources,

•       Waste absorption and

•       Amenity services

Previous decades – Businesses were concerned about Profit Maximization caused tremendous damage to natural resources such as forests.

Water and Air contamination

On account of natural imbalances, now humans are forced to take care of environment.

–      Technology refers to skills, knowledge and procedures for making, using and doing useful things

–      Technological innovations are cost effective and demand increasing both

–      Provided greater output, shorter working hours, safer working conditions, production of new and standardized quality goods with more efficient use of raw material

–      Only negative impact of technology has been partial unemployment.

–      Legal Environment

–      Legislations defining business organizations, laws of contract, the way business activities are carried out in the business environment, economic legislations and upcoming legislations, may come under the purview of Legal Environment for business.

–      Including

–      Indian Contract Act

–      Companies Act

–      Competition Act

–      FEMA Act

–      SEBI Act

–      Information Technology Act and Sale Of Goods Act

                           

•       Global Environment

–      Refers to those global factors which are relevant to business mainly

•       WTO : Mission and Agreements (WTO — is the international organization whose primary purpose is to open trade for the benefit of all)

•       International Treaties (SAARC-South Asian Association for Regional Cooperation)

•       Economic Conditions (Global)

–      Other factors, which become important at times like Crude Oil prices, International Political factors, Technological requirements worldwide.

•       Economic Environment

•       Economic Environment includes Economic System (Capitalism, Socialism & Mixed Economy), National Income Concepts, Business Cycle, Inflation and Deflation.

•       Any improvement in the economic conditions such as standard of living, purchasing power of public, demand and supply, distribution of income etc, influences business environment significantly.

Significance of Business Environment

An analysis of business environment helps to identify strength, weakness, opportunities & threats. Analysis is very necessary for the survival and growth of the business enterprise. The importance of business environment is briefly explained in an analysis below:

(1) Identification of Strength: The analysis of the internal environment helps to identify strength of the firm. For instance, if the company has good personal policies in respect of promotion, transfer, training, etc, then it can indicate strength of the firm in respect of personal policies.

            This strength can be identified through the job satisfaction and performance of the employees. After identifying the strengths the firm must try to consolidate its strengths by further improvement in its existing plans & policies.

(2) Identification of Weakness: The analysis of the internal environment indicates not only strengths but also the weakness of the firm. A firm may be strong in certain areas; where as it may be weak in some other areas. The firm should identify sue weakness so as to correct them as early as possible.

(3) Identification of Opportunities: An analysis of the external environment helps the business firm to identify the opportunities in the market. The business firm should make every possible effort to grab the opportunities as and when they come.

(4) Identification of Threats: Business may be subject to threats from competitors and others. Therefore environmental analysis helps to identify threats from the environment identification of threats at an earlier date is always beneficial to the firm as it helps to defuse the same.

(5) Continuous Learning: Environmental analysis makes the task of managers easier in
dealing with business challenges. The managers are motivated to continuously update
their knowledge, understanding and skills to meet the predicted changes in realm of
business.

(6) Keeping Business Enterprise Alert: Environment study is needed as it keeps the business unit alert in its approach and activities. In the absence of environmental changes, the business activities will be dull and lifeless. The problems & prospects of business can be understood properly through the study of business environment. This enables an enterprise to face the problems with confidence and secure the maximum benefits of business opportunities available.

(7) Keeping Business Flexible and Dynamic: Study of business environment is needed for keeping business flexible and dynamic as per the changes in the environmental forces. This will enable the development of business organization.

(8) Understanding Future Problems and Prospects: The study of business environment enables to understand future problems and prospects of business in advance. This enables business organizations to face the problems boldly and also take the benefit of favorable situation.

(9) Making Business Socially Acceptable: Environment study enables businessmen to expand the business and also make it acceptable to different social groups. Business organizations can make positive contribution for maintaining ecological balance by studying social environment.

(10) Ensures Optimum Utilization of Resources: The study of business environment is needed as it ensures optimum use of resources available. For this, the study of economic and technological environment is useful. Such study enables organization to take full benefit of government policies, concessions provided, and technological developments and so on.

(11) Ensures Survival and Growth: Business environment inform about suitable changes to be affected in business policies. This helps the business organizations to grow & prosper.

(12) Maintaining adaptability to changes: Business environment guides the business organization about socio-economic changes & the organization must accordingly adapt these change. This enables the business organization to survive for a longer period

Corporate Social Responsibility

•       CSR is operating the core business in a socially responsible manner

•       CSR refers to operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of business

•       Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large

Present Era

•       Corporate Social Responsibility is a concept whereby companies integrate social and environmental concerns into their business operations and in their interaction with their stakeholders including employees, customers, shareholders, investors, local communities, government etc., on a voluntary basis.

Inclined towards sustainability:

•       CSR is closely linked with the principles of Sustainability, which argues that enterprises should make decisions based not only on financial factors such as profits or dividends, but also based on the immediate and long-term social and environmental consequences of their activities.

•       Mr. Narayan Murthy, Infosys said:

–      Corporate’s foremost social responsibility is to create maximum shareholder value working under the circumstances where it is fair to all its stakeholders- workers, consumers, community, government and the environment. He pointed out that by living in harmony with the community and the environment around us and not cheating our customers and workers, we might not gain anything in the short-run, but in the long term it means greater profits and shareholder value.

•       Before the passing away, Jamshedji Tata wrote a letter to his son Dorab:

–      “Be sure to lay out streets planted with shady trees, every other one of a quick growing variety. Be sure there is plenty of space for lawns and gardens. Reserve large area for football, hockey and parks. Earmark areas of Hindu temples, Mohammedan Mosques and Christian Churches.”

Factors affecting CSR

•       Values & Vision of Promoters & top Management

•       Board of Directors-policies and Resource allocation

•       Stakeholders and internal power relationships

•       Societal Factors

•       Industry and trade associations

•       Government, laws and political influences

•       Competitors

Level 1          ECONOMIC Responsibilities

Be profitable

The foundation upon which all other levels rest

Economic Components

•       Maintain a high level of operational efficiency

•       Maintain a strong competitive position

•       Committed to being as profitable as possible

•       Consistent with maximising earnings per share

•       Successful firm be defined as one that is consistently profitable

Level 2              LEGAL Responsibilities

Obey the Law

Law is society’s codification of right and wrong; Play by the rules

Legal Components

•       Perform in a manner consistent with expectations of government and the laws

•       Comply with various national and supra-national laws and regulations

•       Successful firm- one that fulfils its legal obligations

•       Provide goods and services that at least meet the minimal legal requirements.

Level 3              ETHICAL Responsibilities

Be Ethical

Obligation to do what is right, just and fair; Avoid harm.

Ethical Components

•       Corporate behaviour go beyond mere compliance with laws and regulations

•       Consistent with the expectations of societal morals and ethical norms

•       Respect new or evolving ethical/moral norms adopted by society

•       Prevent ethical norms from being compromised in order to achieve corporate goals

`           Level 4             PHILANTHROPIC Responsibilities

Be a Good Corporate Citizen

Contribute resources to the community; improve quality of life

Philanthropic Components

•       Perform in a manner consistent with the philanthropic and charitable expectations of society

•       May assist education, art, sports or social sections having problems

•       Employees should participate in voluntary and charitable activities

•       It is important to assist voluntarily those projects that enhance a community’s ‘quality of life’.

•       Now it includes environmental issues also

Concept of Economic System

•       Economics - Economics is the social science that analyzes the production, distribution and consumption of goods & services.

•       Economic System is the system of production, distribution and consumption

•       An economic system is a mechanism (also defined as system or social institution) which deals with the production, distribution and consumption of goods and services in a particular society.

•       The economic system is composed of people, institutions and their relationships. It addresses the problems of economics like the allocation of the resources.

An economic system is the combination of the various agencies, entities  that provide the economic structure that guides the social community.

Types of Economic Systems

–      Capitalism (Market Economy)

–      Socialism (Planned economy)

–      Mixed (Capitalism + Socialism)

Capitalism

•       Capitalism is an economic system in which the means of production are privately owned and operated for profit, usually in competitive markets.

•       In other words; An economic system in which investment in and ownership of the means of production, distribution, and exchange of products is made and maintained chiefly by private individuals or corporations.

•       Under capitalist system, the means for producing and distributing goods (the land, factories, technology, transport system etc.) are owned by a small group of people (referred as capitalist class). The majority of people sell their ability to work, in return for a wage or salary (Referred as the working class).

•       Capitalism is the social system which now exists in most countries of the world.

Features of Capitalism

•       Centralized to Decentralized system

•       Resource ownership from government to private hands

•       Results in job creation

•       Authoritarianism to  representative democracy

•       Freedom of business activities like what, how, for whom to produce

•       Individuals/ groups are owners of their business units, products and profits

•       Free flow of resources

•       Voluntary exchange for profit motive

•       Easy transfer of products with least regulatory interference may result in competition

•       People strive for self interest in free market: Profit Motive

•       Concentrate on individual interest through acceptable products and their high demand in market

•       This will result in betterment of business and its stakeholders as well as capital accumulation

•       Hard work is rewarded

•       Beneficial for society

•       For betterment of business, individuals will offer improved products; it will result in better living standard of society with less expensive products

•       Based on Demand & Supply Forces

Only needed products and services will be supplied; unwanted products will be removed from market

•       Producer interest to customer power

•       Availability of variety in range of products, results in Customer Powers

•       Speedy flow and suitable prices also ends in customer empowerment

•       Monopoly to Competitiveness

•       Shift from state owned monopoly to free market competition

•       Self sufficiency to International interdependence

•       Offering competitive products at global level

•       Creating global interdependence regarding goods and services

Benefits of Capitalism

•       In years 1000–1820 world economy grew six-fold, in years 1820–1998 world economy grew 50-fold

•       Provides Choice to customers

•       Provides valuable goods and services

•       Capitalism actively rewards positive traits like hard work

•       Similarly, it punishes negative traits such as laziness and theft

•       Provides opportunity to narrow the gap between common person and wealthy

•       Provides opportunity to realize dreams and desires

•       Capitalist societies usually do not have large black markets

•       Build on democracy

•       Social Good

Major limitations/ Criticism of Capitalism

•       Downfall of work ethics

•       No Free Markets

•       Focus on Self Interest

•       Accumulation of wealth

•       Encourages inequality in  society

•       Business lobbying with government

•       Monopolistic tendency

•       Human resource exploitation

Socialism

Collective ownership and democratic control of the material means of production by the people.

Socialism is

–      an economic organization of society

–      in which the material means of production are owned by the whole community and

–      operated by representatives and responsible to the community

–      according to the general economic plan,

–      all members of the community being entitled to benefit from the results of such socialized planned production  

–      On the basis of equal rights.

•       Socialism means four closely connected things

–      a human fellowship (partnership) which denies and expels distinction of class

–      A social system in which no one is much richer or poorer than his neighbors as to be unable to mix with them on equal terms

–      The common ownership and use of all the vital instruments of production &

–      An obligation on all citizens to serve one another according to their capacities in promoting the common well-being

•       Common ownership doesn't mean decisions are made collectively. Instead, individuals in positions of authority make decisions in the name of the collective group.

•       A primary goal of socialism is social equality and a distribution of Wealth based on one’s contribution to society and an economic arrangement that would serve the interests of society as a whole.

•       Socialism as we know it today, most commonly refers to "market socialism," which involves individual market exchanges organized by collective planning.

•       Difference between socialism and communism is that communists directly oppose the concept of capitalism, an economic system in which production is controlled by private interests. Socialists, on the other hand, believe socialism can exist within a capitalist society.

Features of Socialism

–      Emphasis on Social & Economical equality

–      Classless Society

–      Social Ownership of means of production (Nationalization)

–      Abundance of public sector

–      Decisive role of Economic Planning

–      Production guided by Social Benefits

–      Abolition of exploitation of laborers

–      Space for Private organizations (Capitalism)

Benefits of Socialism

–      Better salaries

–      Stable Environment

–      Eliminates poverty

–      Better Quality Products

–      Fulfills survival need

–      Opportunity for citizens to explore non-economically-productive pursuits

Criticism of Socialism

•   Extraordinary powers to government

•   Distorted price signals

•   Suppression of economic democracy

•   Slow Technological advancements

•   Minimize self management

•   Reduced incentives

Mixed Economy

•       Any economy in which private corporate enterprises and public sector enterprises exist side-by-side, and decisions taken through market mechanism are supplemented by some form of partial planning, is to be described as a mixed economy.

•       This system overcomes the disadvantages of both the market and planned economic systems.

•       Provides a clear demarcation of the boundaries of public sector and private sector so that the core sector and strategic sectors are invariably in the public sector.

•       The government intervenes to prevent undue concentration of economic power, and monopolistic and restrictive trade practices

•       The rights of the individual are respected and protected subject only to  the requirements of public law & order and morality

Features of Mixed Economy

•       Resources are owned both by the government as well as private individuals. i.e. co-existence of both public sector and private sector.

•       Market forces prevail but are closely monitored by the government.

•       Monopolies may be existing but under close supervision of the government.

•       Advantages

•       Producers and consumer have sovereignty to choose what to produce and what to consume but production and consumption of harmful goods and services may be stopped by the government.

•       As compared to Market economy, a mixed economy may have less income inequality due to the role played by the government.

•       A mixed economy represents an achievable balance between individual initiative and social goals.

Communism

•       Communism is extreme form of socialist government. In other words Socialism is soft form of Communism.

•       In this economic system, approximately all the resources are owned by government (public) and there is no place for private sector.

•       This is the only and significant difference from socialism, rest of the points are same.