Saturday, 17 September 2016
Businesses all over the world, irrespective of their size and
the kind of products and service they deal in, can be
distinctly divided into two types: those that are successful
and those that are not. Those that are successful run professionally. What does that indicate? That means that the business is being run through a series of processes as a part of a system. Successful businesses have been able to use the concept of systems to achieve their objectives and develop themselves.
This chapter deals with the definition of system and its
environment, meaning of the term sub-system, and types of business environments.
I. Definition of a System
II. System Environment
III. Types of Systems
IV. Methods of building Systems from Sub-Systems (i.e. Building blocks)
For the uninitiated the term ‘Business’ is derived from the English word “bisig” literally means a state of being “busy”. It is a part of social system. What does this mean? It means that the business cannot operate in a vacuum. It operates on the basis of certain policies, processes, and people working together in close cooperation for specific objectives to be achieved. This means its operating in a systematic manner.
Put in another sense, it is the system that drives the business through the
processes and objectives, following rules and regulations laid down with
people knowing exactly what they have to do within the business and outside it.
They are also aware of what happens if the system is not followed. Simply stated, the objectives then would not be achieved and in fact no work can be carried out in an orderly manner. Chaos would prevail.
Business is an economic activity. It is concerned with the use of resources to produce goods or services. It also involves exchange of things. Every individual has to satisfy his/her basic requirements of food, clothing and shelter for survival. For the satisfaction of these requirements he turns to the manufacturer of goods or deliverer of services, in short- businessmen. Even a businessman has to buy goods from other businessmen for his own consumption. Thus, business activities are concerned with production, and distribution of goods and services.
Within the business, the individual is the smallest unit. Even at that level, whatever actions are undertaken impact the larger unit which is the team or group working towards achieving the laid down objective. This in turn is going to affect the department and eventually the company- positively or negatively based on the outcome of the action taken.
So whatever action needs to be taken should be weighed in terms of its pros and cons not only for the self but also for the organization as well as the industry. At this stage it is important to point out that the business is a sum total of many inter- related, intertwined and interdependent parts, which have been put together for a larger aim. This is the crux of the business system concept.
Systems Approach to Management
The systems approach to management is based on general system theory – the theory that says that to understand fully the operation of an entity, the entity must be viewed as a system. This requires understanding the inter-relationship among its parts. Thus the system comprises the following:
a. A large number of parts or sub- systems
b. These are put together for a larger aim
c. There exist boundaries for each sub system
d. Pre-defined goals are there not only for the sub system but also for the system as a whole
e. Close relationship exists between the different sub systems
Subsystem is a system created as part of the process of the overall management system. A planning subsystem increases the effectiveness of the overall management system.
Systems in general can be biological like the living beings, physical, also called mechanical or even social. Systems can be open or closed.
A closed system does not interact with the environment around the business, is self-sufficient. Any disturbance in the system is managed by the system itself so that order prevails without any interference from outside forces.
Figure 1: A Closed System
An open system, on the other hand regularly interacts with the environment, affects it and is in turn affected by the environmental forces. This means that the system is liable to change as a result of action of the environment.
Open systems continuously analyze information, provide feedback to their environments, adjust internal systems as needed to achieve the system’s goals, and then send necessary information back out to the environment.
To take an example the evolution and growth in information technology and its application is an example of open system prevailing that has helped IT companies grow and develop at an explosive pace.
Companies which have disappeared from the IT sector are a result of closed system as they were indrawn and unable to see beyond the changes happening at that time. This also means that they were unable to adapt to the changes in the environment.
Corrective Action Feedback
Fig 2: Open System
Characteristics of the Business System
Importance of the Business System
It helps to understand the working of the organization better as the organization itself is made of sub systems. The manager is able to identify those subsystems which are critical in the business, as well as the relationship that they enjoy with each other and the environment surrounding it.
In addition, all large systems are complex. The systems approach helps to anlayse it by breaking it into smaller and independent sub systems which are systems in themselves. It thus helps in looking at the ‘big picture’.
The business system always tries to be in a state of stability i.e., where all the sub components or sub systems are operating at their optimal level, so that whatever output is desired can be achieved. Where the system is open there is a lot of dynamism in the environment that affects the working of the business which in turn too becomes dynamic as a result. Thus what is in a state of stability now may not be so the next second and this keeps on changing regularly. Nevertheless the inherent nature of the system is such that it tries to settle the disturbance on a continuous basis.
Components of the Business System
1. Individual or People-Initial businesses are people driven. The motives, experiences, behavior, attitude, learning, personality and culture shape the business culture and they decide what they want from the business system.
2. Formal and Informal Setup- Within the formal setup lies the rules and regulations, hierarchical relationships and authority- responsibility relations that help to carry out different processes aimed at objective attainment of the sub system as well as the business system.
The informal setup comprises the relationship the individual develops with the informal groups also called the power groups or the interest groups. Each of them helps to modify the behavior of the other through regular interaction.
3. Physical Surroundings-The physical surroundings of the business systems play a very critical role. Managers need to keep a close watch on the man- machine interplay to get the best output from both. In both the cases the best input would give the best output, so w.r.t. the manpower the best in terms of physical, mental and psychological health should be given charge of the best machines
The primary objective of the interaction between the different sub components of the business system is to achieve one or all of the following: growth,
In a nutshell the business system be said to be a sum of three sub systems-
a. The physical system comprising people, material, physical infrastructure that helps to convert the raw material into the finished product
b. The decision sub system which provides direction and control for the physical sub system
c. The information sub system that helps to link the physical and decision sub systems
organising, directing and controlling are inter-related in the real world and do not occur in isolation.
One negative aspect associated with it is that it is sometimes referred to as vague.
It may not also be applicable to large organizations comprising a number of sub systems.
In addition managers are sometimes left twiddling their thumbs for lack of tools and techniques associated with this approach.
It would be clear to you by now, especially after going through the topic above that businesses are dependent on systems and do not operate in a vacuum. Analysing this statement further, it can be said that all businesses take some inputs from society and give something or ideally should return something back to society. This means that there is an inter-relationship between society and business. In this part we will further study these components of society that affect as well as get affected by the business.
The various basic concepts (or features) of a business system unmistakably suggests that a business enterprise is an open, adaptive, goal-oriented system with its environment acting as a MEGA-system.
Business environment consists of all those forces or factors both internal and external that affects the working of a business. Business environment refers to the socio-economic surrounding under which business activities are to be conducted. Such environment is the net result or sum total of various political, economic, social, technological, natural and other factors. Environmental factors are largely beyond the control of business enterprises.
An organization operates as a part of an industry, which in turn is a part of the economy. This means that it cannot operate in isolation as it feeds other companies. The same is true for most of the industrial enterprises be it local, national or global. A very important reason as to why the manager today and tomorrow needs to be aware of the environment in and around the entity where he/she functions.
Any firm is small fry as compared to the environment around it. Its very survival and all of its perspectives/resources, problems and opportunities are generated and conditioned by the environment. It is important, therefore, for the organization to monitor the relevant changes taking place in the environment around it. Without taking into account the relevant environmental influences, a company cannot even hope to develop its tactical and operational strategy since business derives its existence from the environment.
The business environment can be broadly divided into two types i.e. internal and external factors. The internal factors comprise firm’s plans and policies, resources like manpower, capital, machineries etc. The external environment comprises the micro factors such as customers, competitors, suppliers etc. and the macro factors such as economic, political, social, technical and other factors. Analysis of the internal environment helps the firm to identify its strengths and weaknesses and the analysis of external environment helps to identify opportunities and threats. Thus environmental analysis helps to undertake the SWOT analysis i.e. strengths, weaknesses, opportunities and threats.
Definition and Features
The environmental factors vary from country to country; even region to region e.g., Social environment in US is different as compared to India. Therefore Multinational Corporation like McDonald’s has modified their products to suit India’s consumption habits.
“Business environment encompasses the ‘climate’ or set of conditions, economic, social, political or institutional in which business operations are conducted” – Arthur M. Weaner
“Environment of the business means the aggregate of all conditions, events and influences that surround and affect it”. - Keith Davis
FIGURE : Business Environment
Nature of Business Environment
The business decision makers have little or no control over the environment external to the firm. The external forces comprising the uncontrollable environment are the micro factors as customers, channel members, suppliers, competitors and general public and macro factors such as demographic, economic, natural/physical, technological, politico-legal and socio-cultural factors.
The internal environment includes the controllable as product related aspects like the product design, pricing, people, promotion and distribution policies of the firm. It is important to note here that the above agents are not predictable.
The following are the important features / characteristics of business environment.
1) Dynamic in Nature
Business environment is flexible and perpetually evolving. It changes frequently due to various external forces i.e. economic, political, social, international, technological, and demographic. Business enterprises have to operate under such dynamic environmental conditions
2) Direct and Indirect Impact
Business environment may have direct and indirect impact on the working of a business. Competition; government policies, customer, etc. can have a direct and immediate effect on the working of a business enterprise whereas the macro-external factors like social, economic and political factors may have indirect effect.
3) Inseparable Part of Business
Business environment refers to the socio-economic surrounding under which business activities are conducted. Business can’t work in isolation. Both, business and its environment are interdependent on each other. Business is not only influenced by its environment but also can’t function without it.
4) Internal and External Factors
Activities of business enterprises are affected by internal and external factors. The internal factors are controllable in nature e.g. manpower, machinery, management labour relations, etc. The external factors such as legal, political, global etc. are beyond the control of a business enterprise. A business man is required to adjust its strategies depending upon the changes in external factors.
5) Complex in Nature
Business environment is also complicated and unpredictable. Technological changes are taking place at a rapid pace; new legislations are enacted every day and not only are consumers becoming aware of their rights but economies are become global. Such factors have made the environment complex.
6) Regulates Scope of Business
Environment provides the frame-work within which business enterprises have to operate. Business activities have to be adjusted as per the prevailing environment e.g. manufacturers of products like cigarettes and alcoholic drinks can’t advertise on television in India. Such regulations must be taken into account.
7) Opportunities and Obstacles
Environment provides opportunities and creates obstacles in the working of the enterprise. Opportunities may be termed as favourable situations which can help to make more profit and growth. On the other hand, obstacles imply unfavourable environment, which affect the enterprises profitability and growth. Both the situation must be accepted by business enterprise with confidence.
8) Environment and Planning
Business environment and business planning are closely related concepts. In fact, planning is necessary in order to derive maximum benefit from favourable environment and also useful for dealing with the problems created by unfavourable business environment known as threats.
9) Multi - Dimensional
Changes in environment may have positive and negative impact on the working of business. Environmental change may be favourable to some enterprises and unfavourable to others e.g. Government of India has liberalised the entry of foreign countries into India. The foreign firms consider it as on opportunity, whereas, Indian firms consider it as a threat.
Importance of Business Environment/Benefits of Environment Scanning
Environmental scanning can be defined as ‘the study and interpretation of the political, economic, social and technological events and trends which influence a business, an industry or even a total market’. It is an objective review of the current and anticipated environmental factors that affects an organization. The environmental scan helps to understand the broader context in which business is operating. By investing the time to identify key trends and environmental factors we may take appropriate course of action. The following are the importance of observing business environment -
1) Identification of Strengths
The analysis of the internal environment helps to identify the strengths of the firm. Strength is an inherent capacity of an organization which can used to gain strategic advantage over its competitors. Every organization must strive to maintain and improve on its strengths.
2) Identification of weaknesses
The analysis of the internal environment also helps to identify weakness of the firm. A weakness is an inherent limitation of the organization which creates a strategic disadvantage. Therefore, the firm should identify its weaknesses and correct them as early as possible.
3) Identification of Opportunities
The analysis of the external environment helps to identify the opportunities in the market. A company which is more conscious about the changes taking place externally may take maximum benefit out of it known as first mover advantage. We have already witnessed how liberalization has brought global opportunities for Indian business houses.
4) Identification of Threats
Environmental analysis helps to identify threats from the environment. A threat is an unfavourable condition in the organization’s environment that creates a risk or damage to the organization like rapid technological changes that have made technologies used by organizations obsolete. Identification of threat helps to defuse the same.
5) Effective Planning :
A business organization should have short term as well as long-term plans. Proper environmental analysis about the various environmental factors affecting the business organizations helps such planning effectively.
6) Facilitates Organising of Resources :
Proper analysis of environment enables a firm to know the demand potential in the market. Accordingly, the firm can plan and organize the right amount of resources to handle the activities of the organization.
7) Optimum Utilization of Resources :
The study of business environment is needed as it ensures optimum use of resources available with the business organization. Such study enables an enterprise to take full benefits of policies framed by the government.
8) Flexibility in Operations :
A study of environment enables a firm to adjust its activities depending upon the changing situation e.g. the environmental analysis may indicate that the nearest competitor adopts flexible credit policy. Therefore, the business firm may also do the same to win the trust of the customer.
9) Business Expansion :
The environment analysis provides opportunities for expansion and diversification of business activities. Because environment analysis helps to discover and exploit such opportunities fully when the environment is favourable, new ideas, ventures and schemes may be put into action.
10) Understand Future Problems :
The study of business environment is needed in order to understand future problems and prospects of business well in advance. This enables a business enterprise to face problems boldly and also take the benefit of favourable business situation.
Interrelationship between Business and Environment
Business and environment are like the two sides of the same coin i.e. one can’t survive without the other. Business and environment are independent but interdependent on each other for survival and growth. Environment supplies resources to the business organizations for undertaking production activities. At the same time, products manufactured are sold to the people who are the part of demographic environment.
Growth and profitability of business depend on the environment under which business has to operate. Business will be successful when it is adjusted as per the requirements of environmental forces. “To manage business means to manage the environment around the business”. This suggests the close relationships between business and its environment. The interface between business and the various types of environment can be briefly explained as follows -
1) Business and Natural Environment:
Business firms depend on natural environment for the supply of resources like raw materials, water, etc. The natural environment also benefits from business. This is because of developments in the field of technology; there is availability of alternative sources of energy. Business firms have also come up with innovations that can substitute natural resources or materials. Such technological developments and innovations help to preserve and protect the environment
2) Business and Economic Environment:
Business is influenced by the economic policies relating to taxation, money supply, import - export etc. A change in economic policy has both positive and negative effect on industry. A positive change in the policy provides opportunities for growth and expansion.
Business has limited scope to influence the economic environment. However, the Joint efforts through trade association representation to the government, there can be some positive changes in the economic policies affecting the business activities.
3) Business and Political Environment :
Political environment factors affect the functioning of a business as it has to modify its policies according to the decisions taken by the government. Moreover these changes can have a lasting impact. For example, in the year 1977, Janata Party Government adopted a stringent attitude towards MNCs as a result companies like IBM and the Coca-Cola had to ignore India. On the other hand in 1991 when the Congress Government headed by Mr. Narsimha Rao decided to liberalise and open our economy, small business units were compelled to close down while many were taken over by the multinationals.
Business organizations also influence the political environment. It is a well-known fact that some business houses funds political parties. It is possible that such organizations benefit when the party they fund comes to power.
4) Business and Demographic Environment :
Demographic environment factors such as age, sex, male, female, rural - urban population, education etc. influence business decisions. The business firms can take business decisions depending on demographic features of population. For example, the income of the people in India is quite low. This affects the purchasing power and has to be taken into account by the manufacturers while fixing the price of their products. On the other hand, business organization also affect demographic environment. For example, business organizations often undertake various community welfare programmes like health camps, literacy drives etc. They thus contribute towards upliftment of the people.
5) Business and Regulatory Environment :
The legal environment has a good influence on business decisions. Business firms need to follow the provisions of various laws or acts affecting their business decisions. It should carry on their business within the frame work given by the legal environment. Business firms can influence legal environment. They can support government in framing various laws and acts. Through proper representations, business firms can influence the framing of laws and acts in the country.
6) Business and Technological Environment :
Technological environment can influence business decisions. Development in the field of technology can benefit the firms by way of improvement in quality and quantity of goods. Business can also influence technological developments. Business firms can invest a good amount in research and development to develop new and better technology. Technological development may help firms to come up with new and better type of goods at lower cost of production.
7) Business and Socio-Cultural Environment :
Business firms need to monitor closely the socio-cultural environment. The social and cultural environment greatly influences business decisions. An analysis of socio-cultural environment would enable the business firm to design and promote its products and services effectively. For example, in India, people are emotionally attached to their festivals, dance, music, culture and so on. Business firms can dramatise the socio-cultural elements in their advertisements.
8) Business and International Environment :
Business firms, especially those dealing in foreign trade are affected by international environment. The international environment is affected by international forums like WTO, trading block like NAFTA, ASEAN etc. Due to globalization and liberalization business organization are forced to view business issues from a global perceptive. Hence, business policies and practices may be adjusted to survive in the global environment. Business organizations also have a capacity to influence the international environment but to a limited extent. The business community can influence their government to represent it effectively at various international forums.
Components of Business Environment
A proper classification of the various environmental factors facilitates the study of business environment. The business environment can be broadly divided into two group’s i.e.
1. Internal Environment &
2. External Environment
Internal Environment refers to all the factors which influence business and are present within an organization which affect its functioning. These factors are generally regarded as controllable i.e. the organization can alter or modify such factors. A firms’ internal environment consists of its objectives, plans, policies, resources, production capacity, Management Information System, industrial relations and other internal factors which affect its working.
Factors of Internal Environment:
The following are some of the important factors of internal environment.
1) Vision, mission and objectives :
A vision statement highlights the long term goals of the organization. It is broad based and provides necessary directions to the business. On the other hand, short term targets are referred to as mission statement. A mission statement provides directions in setting objectives and framing policies of the organization. There must be consistency between the vision statement, the mission statements and the objectives of the organization.
2) Plans and Policies:
A knowledge of internal environment and how it affect the functioning of the organization is important to understand the use of business plan and policies. Broadly, plan and policies cover functional areas i.e. production, marketing, finance and human resource development. Business plan and policies provide the broad guidelines within which an organization has to work.
3) Human Resource:
A successful business is known by its efficient human resources and not by the building and machines. Human resource makes or breaks a business. Care should be taken to recruit result oriental employees.
4) Physical Resources:
Physical resources include machines, equipment, buildings, office premises, furniture and fixture etc. Analysis of the internal environment may indicate the weaknesses of the physical resources, and as such the firm can take an appropriate measure to correct such weaknesses e.g., the obsolete machines may be replaced.
5) Financial Resources:
Finance is the life blood of all business activities. Every organization requires adequate fixed and working capital. The organization must have a sound financial policy where the inflow of funds is more than the outflow. In such a case, the organization does not fall into a liquidity trap.
6) Corporate Image:
Every organization enjoys an image among the employees and the outside world. Some refer to their employers as progressive whereas others refer to them as conservative. To make the business acceptable to the society, every business must try to improve its image. Objectives base on enlightened lines certainly help to improve corporate image.
7) Labour - Management Relations:
Both labour and management should try to maintain pleasant and harmonious relations at workplace. It is important to keep clear line of communication. Differences and conflicts can be settled across the table. Work environment should attract labours to their work.
8) Research & Development Facilities:
Research and Development is the strength of the business. It helps the business to go ahead of the competitors by introducing new and improved products and services.
External environment includes all those factors and forces, which are external to the business organization such as economic, socio-cultural, demographic etc. These factors are beyond the control of the business and are considered as dynamic because they keep on changing continuously.
There is a constant need to analyse the external environment so as to find out the opportunities and threats. A proper analysis of external environment will enable the firm to grab the opportunities and to defuse the threats. Some of these factors influence the whole industry while others affect a particular company or industry. The external environment is broadly divided into –
A. Micro Environment or Operating Environment and
B. Macro Environment or General Environment
A. Micro Environment :
The micro environment consists of all those factors in the firm’s immediate environment. The micro environment can have direct impact on the working of a firm.
Factors of Micro Environment:
The following are the most important factors of micro environment:
1) The Customer :
A firm may have different type of customer groups e.g., household customers, government, business and institutional customers etc. Individual and household customers require service. For business and institutional customers, credit services are especially important. The government market is made up of state, city or municipal governments and such entities like the sewer and water department etc. If a firm supplies goods only to government and because of any reason their relation gets soured then closure of the firm is certain. Some firms operate in international markets also i.e. they provide services to domestic customers as well as to foreign customers.
2) The Producers and Suppliers:
Suppliers include those who supply inputs like raw materials, and components to the organization. An organization can’t function without a smooth supply of its stocks and raw materials. Therefore, it becomes essentials to ensure a good relationship with its suppliers to get quality goods at the right price and at right time.
Most firms depend on other suppliers for raw materials and services they need to produce and deliver the product e.g. in a bank the printer who provides the customers with their checks are suppliers and bankers rely on them to fill their customer's order quickly. If a business has only one supplier and some problem arises w.r.t. that supplier, then a question mark may raise on existence of that business. Hence, efforts should be made to have multiple suppliers.
Uncontrollable events that affect a firm's suppliers can seriously affect marketing management. Shortage of raw materials can raise the producer's costs which are then passed on to the consumer in the form of higher prices. Problems in labor and management relations can also affect product quality
3) Channel Intermediaries:
Now-a-days, dealer recommendations play an important role to convince buyers to buy products, especially in the case of consumer durables. The firm has to motivate the dealers to push and promote its products and also to obtain timely feedback about consumers’ tastes, preferences, likes, dislikes, etc.
Business has not only to earn profits but also to serve the society. Society consists of general public, media, government, financial institutions and organised group. Like trade unions, shareholders associations etc. Society directly influences the decisions of a business.
The society may also affect company’s decisions. The society can either facilitate or make it difficult for a company to achieve its objectives e.g. favorable media report affects sale/share prices of the company. If a firm is spreading pollution or it is too noisy then local population may oppose that concern.
5) Corporate Resources:
Corporate resources include employees, funds, materials, machinery and management. These resources are controllable. They can be used as per the guidelines provided by business policies.
6) The Competitors:
A competitor is someone who markets and sells a product that according to the buyer is substitutable for some other brand. Competition occurs when two or more entities seek a similar result. The marketing manager must keep an eye on competition and formulate a strategy for responding to changes in the market. Launching various sales promotion and trade promotion schemes, introducing new and cheap products, proper care on after sale services etc. are a way to respond to the excessive competition.
Firms that understand they are in a specific business define the competition differently than do firms with a more myopic view e.g. an educational institution offering professional course say for engineers may consider other such institutions as its competitor and not to other professional courses like those for lawyers or doctors.
The instant coffee was initiated in India by Nestle in the late 70s. With time more brands entered the market and the market continued to grow. Gradually the product technology in the sector stabilised. Almost all the branded competitors acquired similar technology and the cost structure too was pretty much similar. As a result, all brands became almost alike and the consumer had no choice but to keep price as a parameter to decide.
Thus the marketing manager must always keep an eye on competition and formulate a strategy for responding to changes in the market.
The unrelenting pressure put by the competitors creates a whole host of problems in the long and the short term that must be solved by the manager today. This could even incorporate through planned efforts, anticipating the actions of the competitors and try his utmost in preventing the competitors to anticipate his own actions.
The firm's action plan will depend on what it wants the competitor to do - as a first mover and not as a reactant.
The name of the game in marketing is differentiation. What benefit can the organisation offer which is better than their competitors. Can they sustain this differentiation over a period of time from their competitors? Competitor analysis and monitoring is crucial if an organisation is to maintain its position within the market.
Another way of looking at competition is through the Five Forces Model as developed by Michael Porter where the variables to be taken into consideration are as follows:
Five forces analysis helps the marketer to contrast a competitive environment. It has similarities with other tools for environmental audit, such as PEST analysis, but tends to focus on the single, stand alone, business or SBU (Strategic Business Unit) rather than a single product or range of products. For example, Dell would analyse the market for Business Computers i.e. one of its SBUs.
Bargaining power of suppliers
Threat of Entry
Rivalry among existing firms
Substitute products or services
Bargaining power of buyers
Fig: Porter’s Five Forces Model
Five forces looks at five key areas namely the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry.
1. The Threat of Entry
Economies of scale e.g. the benefits associated with bulk purchasing.
The high or low cost of entry e.g. how much will it cost for the latest technology?
Ease of access to distribution channels e.g. Do our competitors have the distribution channels sewn up?
Cost advantages not related to the size of the company e.g. personal contacts or knowledge that larger companies do not own or learning curve effects.
Will competitors retaliate?
Government action e.g. will new laws be introduced that will weaken our competitive position?
How important is differentiation? e.g. The Champagne brand cannot be copied. This desensitises the influence of the environment.
The firm should also worry about firms that may compete with it in the market in future, thus posing a threat as potential competitor now e.g. Reynolds pens having created a name for itself may want to move to the kids range as in pencil colors/crayons/ pencils etc. thus posing as competitor to Camlin.
This will primarily be determined by the entry barriers in the Industry i.e. those things that make it difficult for the firm to enter a new industry e.g. a new car manufacturer might find it difficult to set up a plant, then an office and then a distribution and service network against established players like Maruti, Santro, Indica etc. In addition the brand building exercise poses its own problem. The risk attached is too high if it does not pay off. Coke may have found the going tough if it had not acquired the Parle brand and with it the distribution network and the bottling plant. It is history that Pepsi initially found the going tough against the then famous national brand Thums up.
If there are aggressive players in the market say the detergent industry like P&G and HLL they might respond with price cuts and heavy discounts thus raising the barrier to entry for the incumbent. This might force the firm to look elsewhere where prices are more stable.
2. The Power of Buyers
This is high where there a few, large players in a market e.g. the large grocery chains.
If there are a large number of undifferentiated, small suppliers e.g. small farming businesses supplying the large grocery chains.
The cost of switching between suppliers is low e.g. from one fleet supplier of trucks to another.
Bargaining power is the ability to influence the setting of prices. Monopsonistic or quasi-monopsonistic buyers will use their power to extract better terms (higher profit margins) or at the expense of the market. In a truly competitive market, no one buyer can set the prices. Instead they are set by supply and demand. Prices are set by supply and demand and the market reaches the Pareto-optimal point where the highest possible number of buyers are satisfied at a price that still allow for the supplier to be profitable.
Supply and Demand
The supply curve is the relationship between price and supplied quantity. Normally, the higher the price, the higher the supplied quantity as more supplier will be interested to produce and sell at a higher price. The demand curve is the relationship between price and demanded quantity. Normally, the lower the price, the higher the demanded quantity as buyers will be willing to buy more at a lower price.
In a truly competitive market, supply and demand meet at the price where the supplied quantity equals the demanded quantity. If supplied quantity is higher, price will fall. If demanded quantity is higher, price will raise.
Industries facing powerful buyers:
Defense contractors have a limited set of politically motivated buyers (governments). Sub contractors to car makers have a limited set of potential clients, each commanding a large share of their market.
Industries facing weak buyers:
Retailers face individual consumers with little or no power at all.
3. The Power of Suppliers
The power of suppliers tends to be a reversal of the power of buyers as given in Point 1 above
Where the switching costs are high as in case of switching from one software supplier to another.
Power is high where the brand is powerful e.g. Cadillac, Pizza Hut, Microsoft.
There is a possibility of the supplier integrating forward e.g. Brewers buying bars.
Customers are fragmented (not in clusters) so that they have little bargaining power e.g. Gas/Petrol stations in remote places.
In a B2B situation where the supplier is stronger than the customer, say a multinational TV company supplying TV sets for a 100 room hotel, the terms and conditions are going to be set in favour of the MNC company because of their leveraging power and the hotel will call the shots if they source their TVs from a local brand as for the local brand, 100 sets sales in one order can substantially boost their bottomline.
4. The Threat of Substitutes
Where there is product-for-product substitution e.g. email for fax Where there is substitution of need e.g. better toothpaste reduces the need for dentists.
Where there is generic substitution (competing for the currency in your pocket) e.g. Video suppliers compete with travel companies or we could always live without such products as cigarettes.
A firm may develop a new product or service that renders the firm's own product obsolete e.g., low fat butter may pose a serious threat to established players like Amul, Mother Dairy and Britannia
An example taken from a mix of education and techno savvy industry- Post 9/11 many MNC consultancy firms were wary of coming to India to pick candidates as management trainees. So they arranged for interviews with the short-listed candidates through video conferencing.
The travel industry does not view this as a serious threat now but it definitely poses a serious threat on the morrow.
5. Competitive Rivalry
This is most likely to be high where entry is likely; there is the threat of substitute products, and suppliers and buyers in the market attempt to control. This is why it is always seen in the center of the diagram.
A firm may develop a new product or service that renders the firm's own product obsolete e.g. low fat butter may pose a serious threat to established players like Amul, Mother Dairy and Britannia
An example taken from a mix of education and techno savvy industry- Post 9/11 many MNC consultancy firms were wary of coming to India to pick candidates as management trainees. So they arranged for interviews with the short-listed candidates through video conferencing.
The travel industry does not view this as a serious threat now but it definitely poses a serious threat on the morrow.
According to this model the concept of competition goes beyond the framework of competition as we know it, to those firms who supply the products and services that are in direct competition to our own products and services profile.
The other four sources as in points 2,3,4 and 5 can also affect the competitive environment.
Direct Competitive Rivalry can occur between different firms producing a product/ services considered to be the same / similar by the consumer market e.g. in the branded potato chips market there is Lays, Uncle Chipps and Haldiram's. There could be a case where although two firms are in the same industry but are not in direct competition with each other e.g., Titan and HMT in the Watch industry. Often marketing strategists have to use their experience, skill and judgment to decipher who are the direct rivals.
Ideally the planner should do a SWOT analysis of the competition and evaluate their competitive strategies as well. This will help him in evolving the firm's own counter marketing strategies as well.
Rivalry it is said is good for the business and also for the industry. Each competitor wants a larger share of the sectoral pie and hence aims to get that. At this stage it is important to distinguish between various types of competitive behaviour.
A firm should always be responsive of and to its various publics and to how these publics view it. A public is a group of people having something in common. The service firm has both the external and internal publics to consider. The external publics would be the stockholders and other such interested parties. Another public is the media i.e. the newspapers, the television and radios that serve its market and whose reporting of the firm may adversely affect its business. State and local government officials are a public with whom the firm must maintain good relations.
The firm's internal public is its employees and its top management. Their view of and attitude to the firm can affect either for good or ill, the way they deal with customers and with one another. It is imperative that the firm manages its communication and relations with all its publics in its efforts to establish a favorable image.
To survive in such turbulent times the firm must try to anticipate changes and be proactive in its approach, Only then will the best one be able to survive.
B. Macro Environment :
The macro environment consists of the larger factors that affect the day to day functioning of a firm. It relates to demographic, economic, natural, technological, political, cultural, international and legal factors. A prominent feature of these factors is that they influence almost all the business units simultaneously.
Factors of Macro Environment :
The following are the important factors of macro environment.
1) Economic Environment
Economic environment is related to money and its impact on business activity. The economic environmental variable comprise the following –
i. Economic system and its structure
ii. Economic policies in practice
iii. Economic conditions.
i. Economic System – Economic system of a country influences the freedom of business. Economic system is mainly of three kinds –
a. Socialistic Economic System
b. Capitalistic Economic System
c. Mixed Economic System
a. Socialistic Economic System - Under socialist economic system the business is directly controlled by the government. Individuals are not permitted to run business. The population enjoys the benefit of centrally planned economy; China, Russia are examples of this economy.
b. Capitalistic Economic System- Under capitalist economic system private entrepreneurs are given due importance; this economy is also know known as free market economy. Under this system factors of production remains in control of private people. Such system is prevailing in USA, Canada etc.
c. Mixed Economic System – India is good example of this economic system. Under this system government as well as individuals own and control the business.
ii. Economic Policies - Economic policies are laid down to direct the economic activities. Components of economic policies are as follows –
- Export import policy
- Taxation policy
- Industrial policy
- Agricultural policy
- Foreign Investment policy
- Public expenditure policy etc.
iii. Economic Conditions – Economic condition of a country may be considered to be the outcome of economic system and economic policy. Government starts various welfare programmes for the general public on the basis of prevailing economic condition of the country. Some of the examples of economic conditions are – National income, Level of economic development, foreign trade, Industrial development, General Price level etc.
Economic Cycle and its Impact –
Historically, a nation’s economy tends to follow a cyclical pattern consisting of four stages: prosperity, recession, depression and recovery. Consumer buying differs in each stage of the business cycle and managers must adjust their strategies accordingly.
a. Prosperity- In times of prosperity, consumer spending maintains a brisk pace. Managers respond by increasing number of products, increasing spending and expanding distribution in order to raise market share and raising prices to widen their profit margins.
b. Recession - During recessions, consumers frequently shift their buying patterns to emphasize basic, functional products that carry low price tags. During such times, managers should consider lowering prices, eliminating non profitable products, improving customer service, and increasing spending to stimulate demand. Consumer spending sinks to its lowest during a depression.
c. Recovery - In the recovery stage of the business cycle, the economy emerges from recession and consumer purchasing power increases. While consumers’ ability to buy increases, caution often restrains their willingness to buy. They may prefer to save than to spend or buy on credit.
Business cycles, like other aspects of the economy, are complex phenomena that seem to defy the control of marketers. Success depends on flexible plans that can be adjusted to satisfy consumer demands during the various business cycle stages.
Inflation devalues money by reducing the products it can buy through persistent price increases. It increases marketers’ costs such as expenditures for wages and raw materials and the resultant higher prices may therefore negatively affect sales. Inflation makes consumers conscious of prices, especially during periods of high inflation. This influence can lead to three possible outcomes, all of them are important to marketers -
i. consumers can elect to buy now, in the belief that prices will rise later,
ii. they can decide to alter their purchasing patterns and
iii. they can postpone certain purchases.
Other Factors -
Unemployment - Unemployment is defined as the proportion of people in the economy who do not have jobs and are actively looking for work. Unemployment increases during recessions and declines in the recovery and prosperity stages of the business cycle. Unemployment affects business because it is related to the personal income, saving and expenses of an individual.
Income – Income is another important determinant of the economic environment, because it influences buying power. By studying income statistics and trends, managers can estimate market potential and trends thus developing plans for targeting specific markets. For them, a rise in income represents a potential for increasing overall sales.
Purchasing Power - The market requires not only people but their purchasing power as well. Total purchasing power is a function of four major factors: savings, current income, prices and credit availability. The level and distribution of savings in a country make a great difference as to how much spending occurs for capital goods, consumer luxury goods and consumer staples.
2) Political Environment :
The political environment refers to the way in which public policy affects markets. Ideologies of different political parties differ significantly and different political parties show different attitude towards business community.
The political environment could change as a result of the actions and policies of governments at all levels, from the local level to the central level. Businesses need to be prepared to deal with the fallouts of government politics. To cope with the vast, complex and changing political-legal environment, many large firms have in-house legal department; small firms often seek professional advice from legal experts. All marketers, however, should be aware of the major regulations that affect their activities.
The political environment is one of the less predictable elements in an organization’s business environment. The fact that democratic governments have to seek re-election every few years has contributed towards a cyclical political environment. This is due to the fact that each and every political party does some promises with the people through their election manifesto.
The political environment in its widest sense includes the effects of pressure groups who seek to change government policies. The political environment can impact business organizations in many ways. It could add a risk factor and lead to a major loss. Companies should be ready to deal with the local and international outcomes of politics.
Below, is a list of political factors affecting business:
• Corruption level
• Freedom of the press
• Tariffs & Trade control
• Environmental Protection Law
• Health and safety law
• Competition regulation
• Tax policy (tax rates and incentives)
• Government stability and related changes
• Involvement of Government in trade unions and agreements
• Intellectual property law (Copyright, patents)
• Consumer protection and e-commerce
The political environment of a country is influenced by philosophy of political parties, ideology of government or party in power etc. political stability in the country, foreign policy, defense and military policy, image of the country and its leaders in and outside the country. The political environment of the country influences the business to a great extent. It is important to monitor political environment, because change in this environment can impact on business strategy and operations in a number of ways like-
- the stability of the political system affects the attractiveness of a particular national market,
- economic environment is influenced by the actions of government,
- Government is itself a major consumer of goods and services,
- Governments see business organizations as an important vehicle for social reform.
- The political ideology of the Government can affect the international brands wanting to enter a market.
3) Legal Environment :
The legal environment refers to the principles, rules and regulations established by the government and applicable to people. These regulations come through various legislations. The government has passed and enacted various Acts to control, monitor and check the activities of business organisations. A business must observe and follow these legislations before taking any decisions.
Acts are mostly passed to regulate business activities like- sale –purchase, regulating partnerships and companies, foreign exchange, industrial disputes etc. In India there is a separate Business Law (Mercantile Law) to deal with the issues arising w.r.t. business; it is very complex in nature hence every manager is expected to study it.
The government exerts a certain amount of influence on business to protect consumers, natural resources, the economy, and other entities from various kinds of harm e.g., the Bureau of Indian Standards (BIS), the Food and Drug Administration (FDA) and the Securities and Exchange Board of India (SEBI) regularly issue rules those in the private sector must follow.
Following is the list of some important laws passed to regulate business –
Some common practices are also there which are expected from the business to follow e.g.no unfair discrimination on the basis of Race, religion, sex, age, or colour should take place at the work place, child labour should not be used, workers should be provided with proper safety equipments, business cannot dismiss the workers because they have joined a trade union or for being pregnant etc.
Some examples worth quoting in this regard –
a. Companies Act 2013 permitted formation of One Person Company in India.
b. A detailed displaying of the ingredients in product labels is mandatory in India.
c. Use of children is advertising and advertising to children are banned in certain countries and is a punishable offence.
d. With the opening of the economy and the banking sector, the regulatory limits on banking are gradually lessening, creating new challenges for the service firms e.g. banks are now able to provide consumers with a broad range of financial services such as mutual fund, cash delivery at the doorstep, doorstep banking etc.
3) Socio-cultural Environment :
Man is a social animal. His behavior therefore is greatly influenced by the social factors like the reference group and pressure group. Reference group here refers to relatives, neighbors and friends. Often a product succeeds or fails in the market because of these influences esp. in the service sector. It is important to remember that a service succeeds in the market when it has the constant backing and support of buyers who are perceived as opinion leaders by the target market. The diffusion takes a trickledown effect approach i.e. from opinion leaders to others who may be perceived as opinion leaders by the next group of customers.
Social environment of a business consists of the class structure, customs, fashion , education level, tradition, population, standard of living, religious values, social institutions, corruption, consumers’ consciousness etc. We get a difference in the demand pattern of customers from rural and urban background customers. Urban customers demand for luxury items and value brand more than the products whereas rural customers demand for low priced goods.
The social and cultural influences on business vary from country to country. It is very important that such factors are considered. Factors include:
1. What is the dominant religion?
2. What are attitudes to foreign products and services?
3. Does language impact upon the diffusion of products onto markets?
4. How much time do consumers have for leisure?
5. What are the roles of men and women within society?
6. How long are the population living? Are the older generations wealthy?
7. Does the population have a strong/weak opinion on green issues?
Some examples –
i. People started their protest against a particular brand of cold drink after getting the information that it contains some pesticides; it is a nice example of consumer awareness.
ii. Demand of automatic machines and luxury items in middle class families is a good example of impact of social environment on business.
iii. One recent development is a concern for the reduction in the amount of fat and salt intake in the food. This concern has led food marketers to expand or modify their product lines. Low fat and no fat alternatives are slowly emerging - from colas to ice creams to low sodium content in salt itself.
iv. Another social trend of which the service firms need to be aware is the growing need for convenience and for time saving services. On the retail front, this has led to the growth of catalog companies and cable television home-shopping networks, and online shopping websites whose services let customer's shop at home and over the telephone.
v. Banks are very much clear and aware of their customers' need for convenience. Some of them (in the light of growing competition) have extended their working hours - on the lines of the private operators. Some of them have started to open even on the weekends and now virtually all banks provide or are in the process of providing ATMs.
4) Demographic Environment :
Demography is the science dealing with the vital statistics of populations and population groups. Some of the major changes taking place in India are the declining birth rate, the changing make-up of the family, the shifting of population from the rural to the urban areas.
For the purpose of assessing demand of a particular item in a particular market the population may be divided in groups and subgroups. For example market as per age (irrespective of the sex) may be compartmentalized as follows: infant market, child market, the pre-teens segment, the teenagers segment, the youth market, the adult market and ultimately the seniors market. We may simultaneously consider the low income, the low middle income, the mid middle income, the higher middle income, the low higher income and the high higher income market.
The assumption here is that the people having common demographic characteristics behave in an identical manner and will have nearly the same preferences for example youth demand for high end mobile and marketing in malls, teenage girls prefer designer cloths, children demand for video games, adult and senior age customers demand for the normal goods which can fulfill their needs.
Institutions are hiring multilingual employees, providing telephone customer service that communicate in multiple languages, printing advertising in second languages in minority newspapers and magazines. An example here will make matters clear- One Chicago hotel created a special cell to serve the 15,000 Koreans living in that city. It installed a voice response system in Korean and named the cell Blossom because of the Korean regard for flowers.
5) Natural Environment :
In an era when the world is affected by ozone layer depletion, increasing types of pollution and other concerns of gigantic proportion, all firms must pay special attention to the environmental effects of their marketing efforts. Generally service industries like banking, consultancy add only marginally to the pollution, they also do their bit by avoiding to add to it wherever and whenever they can- extensive promotion and usage of recycled paper is a step in the right direction.
The natural environment is capable of creating situations- natural disasters- to which service firms must respond. The recent earthquake in Nepal, India and Pakistan devastated large tracts of land leaving destruction of immense magnitude in its wake. Customers needed access to their cash to pay for much needed food, clothing and shelter. Banks quickly devised new service distribution techniques, setting up makeshift check cashing facilities in modular buildings, mobile homes or mobile banking vans for residents short of cash. Their prompt response was possible due to the compliance with the regulation that requires banks to have written disaster recovery plans.
6) Technological Environment :
Technological environment includes new approaches to producing goods and services. It is a product of the wealth of technical knowledge and advances in the society. The fruits of technology, whether constructive or potentially destructive, have significantly shaped our world. Technology has given consumers a greater number of choices in the way they access their services. Now we have LCD in place of Television, mobile in place of digital watches and landline phone, artificial fibre cloth in place of pure cotton textile the list is endless and so the saga of technology.
The technological revolution means a faster exchange of information beneficial for businesses as they can react quickly to changes within their operating environment, consider the following examples for better understanding -
i. No longer do the customers have to wait endlessly at railway reservation counters, hotel reservation counters as Internet booking facility is available round the clock.
ii. The Internet is having a profound impact on the marketing mix strategy of organisations. Consumers can now shop 24 hours a day comfortably from their homes.
iii. Technology is power, now we can read emails, get credit card statements, can know by GPS where someone is, can order a piece of pizza or order for a car through click of button of our cell phone.
Advances in technology, is generally not equitably shared within society. People with money have more opportunity to acquire technology, which enables them to acquire even more wealth. Technology leads to greater social economic division. Laborers are viewed as commodities and expendable. Technology leads to alienation because it can create jobs that require no specialist knowledge.
The internet in its current form was developed as a free exchange of information, unregulated by any one government or owned by any one person or company. The free flow of information has brought about technological advances at an unprecedented rate and has made many rich and brought companies who failed to adapt to a standstill.
E-commerce affects the middle man and allows direct trade with consumers. It will create efficiencies that effectively remove the need for a long supply chain but at the expense of social relationships. The effect of e-commerce and the internet is creating an impact on every society on the earth. The internet dissolves national boundaries, company contact details are searchable through powerful search engines, and trade can commerce between two individuals who would otherwise never have met. Resisting the tide of technological change is impossible. Of course it is possible to do business without a website or email or mobile phone or a fax machine. People have been doing business well before any of these gadgets were invented. But business today is about competition, and technology is about leverage.
7) International/Global Environment
The international business environment can be defined as the environment in different countries other than the national boundaries where the business is established. A number of factors away from the national environment influence the decision making process of firms established on the international landscape. These decisions range from trading to manufacturing including resources sourcing and mobilization.
No country today, in the world , which is moving towards a globalised world can progress and grow in isolation. Out of the five factors required for production or manufacturing- Manpower, Money, Materials, Machines, Methods and Markets- it has to look beyond its geographical boundaries if it plans to grow and provide its people a better standard of living. This involves indulging in transactions related to goods, services and people.
As Michael Porter has said for a firm- cost or competitiveness helps to move and grow in a dynamic world, the same is true for economies. For a firm trying its hand at international market, the following factors gain importance:
1. Economic namely
a. economic indicators of another economy like GDP, per capita income, cost of production in another country; expected revenue and potential for sending the same back to the home country (repatriation of profits)
b. level of income and its distribution i.e., whether the economy being targeted is a low income, middle income or higher income economy
c. Level of inflation in the targeted country(ies)
d. Consumer behavior
e. Level and intensity of competition- generally from local, national and international perspective
f. Availability or the lack of skilled labour
g. Capital flows and availability
h. Level of Technical Knowhow
i. Infrastructure Level
j. Level of International trade
k. Monetary and Fiscal indicators
2. Monetary and Fiscal Policies
3. Legal namely laws related to
Local, state and national laws related to trade and manufacture of goods and services’ import and export of commodities, duties and taxes
4. Political like control mechanism or the lack of it; form of political system, tariffs, foreign investment attractiveness, any political risk or uncertainty involved and if yes the level of it,
5. Cultural like beliefs, customs, traditions, attitude, personality, behavior, and language, religion and education
The International environment due to the above factors is constantly changing, and is far more volatile and dynamic than the domestic environment.
How do managers prepare for the changing environment?
The quicker the managers are able to adapt the changing environment the better the chances for the business to survive and grow. Managers can be proactive as well as reactive in their change. The proactive manager is prepared well beforehand to the impending change. He can prepare for change by understanding the situation through constant scanning of the environmental components explained above and by continuously asking the following questions from himself and his team:
o What are the objectives the business wants to achieve?
o What are the resources available to achieve this?
o What is the mission and vision of the business?
o Are the business objectives in tune with the mission and vision of the business?
o What are the inherent strengths and weaknesses of the system?
o What opportunities exist outside the business? Outside the industry?
o What are the changes that can be anticipated? Locally? Nationally? Internationally?
Flexibility and innovation in the light of change helps to avert any crisis. The same is true for the business. Not all changes are bad and therefore there need not be blanket resistance to all changes. A majority of the changes may not be within the control of the business so the sooner the manager can adapt to the change the better it is for people around.
One more thing that today’s manager can do is keep informed and updated with respect to the environment. Technology today has a big role to play in the mindset of people be it the people at the top in the business or its customers or competitors. It is changing rapidly and things are becoming smaller but more efficient and powerful, forcing both businesses and their competitors to react quickly ushering quick changes in strategy and this the environment. The manager of today should not stop learning- new skills, technological knowhow. As a manager, you need to assess regularly how you can reduce the time spent on work, either in increments or in large chunks. If the manager is willing to accept ambiguity and uncertainty and not let them prevent him/he from trying new things, it will help to enhance the managerial value to the organization.
1. Enlist the characteristics of business environment.
2. Define the following terms
a. Business Environment
b. Internal environment
3. “Business and environment are independent but interdependent on each other for survival and growth”. Explain.
4. Enlist the important factors of internal environment.
1. “The dynamism of the environment makes it difficult for the marketer to scan it on a regular basis” Comment
2. “If the companies are into the perpetual environment scanning mode critical decision making will always get postponed” Comment
3. If the external environment of the firm is dotted with features like volatility, unpredictability and dynamism, why should the manager bother about it?
4. If you were the marketer for a leading brand of LCD TVs in India, what aspects of the external environment would you watch for and why?
5. What is more important and why- monitoring the internal or the external environment and why?
6. What role does the government play as a regulator?
7. Comment on the relevance of the political environment in the life of a corporate entity
8. What is the relationship between the cultural environment and the marketing department of the firm?
9. Explain the relevance of environment scanning for a company? How does that help the company to market its offering better.