BUSINESS_ENVIRONMENT_Introduction_lectures123.ppt

BUSINESS ENVIRONMENT: Introduction 1  Introduction Business organizations differ in many ways, but they also have a common feature: the transformation of inputs into output. This transformation process takes place against a background of influences which a...

BUSINESS ENVIRONMENT: Introduction 1  Introduction Business organizations differ in many ways, but they also have a common feature: the transformation of inputs into output. This transformation process takes place against a background of influences which affect the firm and its activities. This environment is complex, volatile and interactive, but it cannot be ignored in any meaningful analysis of business activity. PREPARED BY: KENANI 2 MWAKANEMELA  Cont… Understanding the environment within which the business has to operate is very important for running a business unit successfully at any place. Because, the environmental factors influence almost every aspect of business, be it its nature, its location, the prices of products, the distribution system, etc. Hence it is important to learn about the various components of the business environment. Every business operates in a particular environment and each business unit has its own environment. A change in environment presents opportunity to some and threats to others PREPARED BY: KENANI 3 MWAKANEMELA  Cont… Business environment is a combination of the words business- environment. Environment refers to all external forces, which have a bearing on the functioning of business. The environment includes factors which can lead to opportunities for or threats to the firm. PREPARED BY: KENANI 4 MWAKANEMELA  Definitions of Business Environment Business environment encompasses all those factors (internal and external) that affect a company’s operations Business environment is the sum total of all external and internal factors that influence a business. PREPARED BY: KENANI 5 MWAKANEMELA  Characteristics of Business Environment  Total of external forces. Business environment is the sum total of all factors external to the business firm and that greatly influences their functioning.  Business environment includes both specific and general forces. Specific forces (such as investors, customers, competitors and suppliers) affect individual enterprises directly and immediately in their day-to-day working. General forces (such as social, political, legal and technological conditions) have impact on all business enterprises and thus may affect an individual firm indirectly only.  Multi-faceted. Business environment changes may be viewed differently by different individuals depending on the knowledge of business person. It may be an opportunity for some or a threat for others. PREPARED BY: KENANI 6 MWAKANEMELA  Cont…  Dynamic Nature. The business environment is dynamic in nature, which means, it keeps on changing whether in terms of technological improvement, shifts in consumer preferences or entry of new competition in the market  Uncertainty. The changes in business environment are unpredictable. It is very difficult to predict the exact nature of future happenings and the changes in economic and social environment..  Relativity. Business Environment differs from place to place, region to region and country to country. Political conditions in Sudan differ from those in Kenya. Taste and values cherished by people in Sudan and Kenya vary considerably PREPARED BY: KENANI 7 MWAKANEMELA  Importance of Business Environment  Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business. It helps the business enterprises for meeting the challenges successfully.  Giving Direction for Growth: The interaction with the environment enables the business to identify the areas for growth and expansion of their activities.  Continuous Learning: The managers are motivated to continuously update their knowledge, understanding and skills to meet the unpredicted changes in realm of business. PREPARED BY: KENANI 8 MWAKANEMELA  Cont…  Image Building: Environmental understanding helps the business organizations in improving their image by showing their sensitivity to the environment within which they are working. For example, in view of the shortage of power, many companies have set up an alternative power sources in their factories to meet their own requirement of power.  Meeting Competition: It helps the firms to analyze the competitors’ strategies and formulate their own strategies accordingly.  Identifying Firm’s Strength and Weakness: Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments. PREPARED BY: KENANI 9 MWAKANEMELA  Figure: Types of Business Environment. Types of Business Environment Internal External Environm Environm ent ent Micro Macro Environme Environme nt nt Culture, Vision and Mission Economic Environment Top Mgt Structure Customers Social Environment Power Structure Employees Political Environment Human Resources Suppliers Legal Environment Company Image and ShareholdersTechnological Environment Brand Equity Competitors Demographic Environment Media Natural Environment PREPARED BY: KENANI 10 Global Environment MWAKANEMELA Financial Environment  Explanations on the types of Business Environment  There are mainly two types of business environment, internal and external environment. A business has absolute control in the internal environment, whereas it has little or no control on the external environment. 1. Internal Environment  Internal environment refers to the factors internal to the firm i.e., factors existing within a business firm. These factors are generally controllable because the company has control over them.  The important internal factors are as follows; PREPARED BY: KENANI 11 MWAKANEMELA  Cont…  Culture: Culture of the organization is the collective behavior of humans that are part of an organization. The extent to which the culture of the organization is shared by all, leads to an important factor contributing to success.  Vision and Mission of the business: The business vision and mission is vital to the future growth and success of the business.  The vision and mission not only guides the course of the business and its employees, but also it is vital in marketing your brand to your customers. PREPARED BY: KENANI 12 MWAKANEMELA  Cont…  Your vision statement is where you want your business to reach at. It is your future dream for your business. It is your ultimate goal. Examples of vision statements:  TIA “To be the Institute of choice in the provision of tertiary business education in the country”  Your mission statement explains why your business exists. Your mission is how you will get to your ultimate goal. It defines the company’s objectives and its approach to reach those objectives. Examples of Mission statements are;  TIA “To provide quality education, research and consultancy services in the areas of accountancy, procurement, Business Administration, Human Resources Management, Information Technology and other business related disciplines”. PREPARED BY: KENANI 13 MWAKANEMELA  Cont…  Top Management Structure: The composition of the board of directors is very critical factor for the development and performance of company as they are highest decision-maker authorities  Power Structure: The internal power relationship between the board of directors and senior executive officers highly effect the decision making process of the organization.  Human Resources: The quality of human resources of a company (which depends largely on competence, commitment, attitude and motivation), plays an important role in the success of the organization.  Company image and brand equity: The image and brand equity of the company matters a lot in raising finance, forming joint ventures and other alliance, choosing dealers and suppliers etc. PREPARED BY: KENANI 14 MWAKANEMELA  Cont… 2. External Environment  External environment refers to external aspects of the surroundings of business enterprise, which have influence on the functioning of business. There are two types of external environment namely Micro and Macro environment. Micro Environment  The micro environment/ Task environment consists of the factors in the company’s immediate environment that affects the performance and working of the company. It includes the following; PREPARED BY: KENANI 15 MWAKANEMELA  Cont..  Customers: Organizations survive on the basis of meeting customer needs and wants. Failure to meet their needs may affect the company negatively.  Employees: Employees have a substantial influence on the success of the enterprise. They help in executing the policies and plans of business. If this factor is not given, as much attention as it requires, it may prove to be non beneficial for the organization as employees after customer, are the backbone of the organization.  Suppliers: Suppliers provide business with the materials they need to carry out their manufacturing and production activities. Close supplier relationships are an effective way to remain competitive and secure quality products. PREPARED BY: KENANI 16 MWAKANEMELA  Cont…  Shareholders: A shareholder is an individual that invests into company’s business. They own shares of the company; therefore, they have the right to vote on decisions that affect the operations of company. Sometimes shareholders may pressurize the company to increase its profits which in turn can detrimentally affect the long term success of the business.  Competitors: Activities of a business adjust according to the actions and reactions of competitors. This factor should be known to a company as the upcoming profit or revenue will only be driven when this factor is in control  Media: Organizations need to manage the media so that it helps promote the positive things about the organization and conversely reduce the impact of a negative event on their reputation. Some organizations will even employ public relations (PR) consultant to help them manage a particular event. PREPARED BY: KENANI 17 MWAKANEMELA  Cont… Macro environment  Macro environment Are major external and uncontrollable factors that influences an organization’s decision-making, strategies and performance. When the macro environment is uncontrollable, the success of a company depends on its adaptability to the environment. It includes the following; 1. Economic Environment 2. Social Environment 3. Political Environment 4. Legal Environment 5. Technological Environment 6. Demographic Environment 7. Natural Environment 8. Global Environment 9. Financial Environment PREPARED BY: KENANI 18 MWAKANEMELA  Cont… 1. The economic environment: The survival and success of every business enterprise depend fully on its economic environment. The main factors that affect the economic environment are: a. Economic System: The world economy is primarily governed by three types of economic systems, (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy. Capitalist Economy emphasis on market forces while the Socialist Economy emphasis on central planning authority. b. Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have great influence on business organizations and their operations. These include the following: PREPARED BY: KENANI 19 MWAKANEMELA  Cont…  Gross domestic product, the higher the GDP, the better the business environment and vice versa  Per capita income, the higher the per capita income, the better the business environment and vice versa  Markets for goods and services, plenty availability of markets act as a stimulant for business firms to increase production and vice versa  Availability of capital, lack of capital deteriorates business activities and vice versa  Inflation, moderate inflation rate promotes business activities and vice versa  Growth of foreign trade, this expands the size of market for local businesses  Strength of financial market, a well functioning of stock market e.g. DSE promotes business activities and vice versa.  Exchange rate, Rate at which one country’s currency is exchanged for another country’s. It has become a major concern for companies doing business internationally. Changes in the exchange rate can have major implications for profitability of international operations PREPARED BY: KENANI 20 MWAKANEMELA  Cont… c. Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are: Industrial Policy, Fiscal policy, Monetary policy, Foreign investment policy and Export –Import policy (Exim policy) PREPARED BY: KENANI 21 MWAKANEMELA  Cont….  The industrial policy of the government covers all those principles, policies, rules and procedures which direct and control the industrial enterprises of the country.  Fiscal policy: It is the government policy related to taxation and public spending. Business environment can be affected by fiscal policy through manipulation of Direct tax, Indirect tax, government expenditure and public debt.  For example, Increased direct tax reduces personal income  reduces purchasing power of a person  reduces demand for goods and services  decline in sales and profits.  Increasing indirect tax increases production costs of firms increases price reduces demand for goods and services  decline in sales and profits. PREPARED BY: KENANI 22 MWAKANEMELA  Cont…  An increase in government spending e.g. through improvement in physical infrastructures such as roads and railways may lower the so called transport cost incurred by business firms. Lower costs will have a positive impact on the business firms. The vice versa is true for a decreased government spending.  An increase in public debt has an adverse impact on the performance of business firms in many countries. The government tend to shift the burden of its debt to the public by increasing more tax to individuals and business corporations. This action tend to affect the performance of business negatively. PREPARED BY: KENANI 23 MWAKANEMELA  Cont…  Monetary policy is a policy employed by the central bank to control the supply of money (including other highly liquid financial assets that are close substitute for money) available in the national economy in order to achieve a certain policy objective. The monetary policy carried out by the central bank may affect the performance of businesses positively or negatively in the following ways;  Discount rate / Bank rate (It is the rate of interest at which a central bank lends to commercial banks). So an increase in the bank rate discourages the commercial banks from lending from the central bank. In return the commercial banks will increase the interest rate to their customers (business organizations). This will force the business organizations to increase the prices of their goods or services. Higher price will lower the demand, lower sales and finally poor profits PREPARED BY: KENANI 24 MWAKANEMELA  Cont…  Open market operations. This involves buying and selling government securities through which the central bank affects the supply of money and interest in an economy. For example, the selling of securities reduces money stock rises interest rates discourages borrowers decreases in investments decreases in sales and profits to businesses On the other hand, the buying of securities increases money stock reduces interest rates  encourages borrowers increases in investments increases in sales and profits to businesses PREPARED BY: KENANI 25 MWAKANEMELA  Cont…  Reserve requirements. It is the amount that the commercial banks are required by law to hold a specific percentage of their deposits and required reserves with a central bank. An increase in reserve requirement affects commercial banks negatively and thus other business entities.  Special credits. Here Commercial banks are instructed to provide credits to only special sectors which may increase production in the economy. This means if your business is not included, it will be affected negatively. PREPARED BY: KENANI 26 MWAKANEMELA  Cont…  Foreign investment policy: This policy aims at regulating the inflow of foreign investment in various sectors for speeding up industrial development and take advantage of the modern technology.  Export–Import policy (Exim policy): It aims at increasing exports and bridges the gap between export and import. Through this policy, the government announces various duties/levies. PREPARED BY: KENANI 27 MWAKANEMELA  Cont… 2. Social Environment: The social environment of business includes social factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a society cherishes have a considerable influence on the functioning of business firms. For example, during festive seasons there is an increase in the demand for new clothes, flower, etc. Due to increase in literacy rate the consumers are becoming more conscious of the quality of the products. 3. Political environment: The political system prevailing in a country can promotes or discourages the business activities. A political system which is stable, honest, efficient and dynamic and which ensures political participation of the people, and assures personal security to the citizens, is primary factor for growth of any business. PREPARED BY: KENANI 28 MWAKANEMELA  Cont… 4. Legal Environment: This refers to set of laws, regulations, which influence the business organizations and their operations. Every business organization has to obey, and work within the framework of the law. The important legislations that concern the business enterprises include Companies Act, 2002, etc. 5. Technological Environment: The progress of business depends on the level of technology available in a country. In a competitive business environment, technology is the key to development. PREPARED BY: KENANI 29 MWAKANEMELA  Cont… 6. Demographic Environment: This refers to the size and density of population. All these factors have a direct bearing on the demand for various goods and services. For example a country where population rate is high and children constitute a large section of population; then there is more demand for baby products. 7. Natural Environment: The natural environment includes geographical and ecological factors that influence the business operations. These factors include the availability of natural resources, weather and climatic condition, location aspect, etc. Business is greatly influenced by the nature of environment. For example, sugar factories are set up only at those places where sugarcane can be grown PREPARED BY: KENANI 30 MWAKANEMELA  Cont… 8. Global Environment: It includes rules and regulations of IMF, WB, G20 and other international bodies which duly effect the business organization operating their business in any particular country. Business has to exist in world market and then it should understand their effect and take action according to these rules and regulations. PREPARED BY: KENANI 31 MWAKANEMELA  Cont…  Some of the major conditions of IMF and WB that affects (positive or negative) business operations in LDCs include:  Balance of payment: deficits reduction through currency devaluation  Budget deficit: reduction through higher taxes and lower government spending  Enhancing the rights of foreign investors  Cutting wages  Liberalization policy: Liberalization refers to the process of eliminating unnecessary controls and restrictions on the smooth functioning of business enterprises.  Privatization policy: Privatization refers to reducing the role of public sector by involving the private sectors in most activities.  Improving governance and fighting corruption PREPARED BY: KENANI 32 MWAKANEMELA  Cont… 9. Financial Environment: Business finance is concerned with making decisions about the investments in the business. It includes money market, capital market and foreign exchange market. All these markets play an important role in raising finances for the companies and at the same time give profits to the investors PREPARED BY: KENANI 33 MWAKANEMELA  Course Contents In this course we will cover all those points