Business Environment Unit 1 PDF

Business Environment Unit 1 Unit 1 Business Environment: An Introduction Structure: 1.1 Introduction Objectives 1.2 Concept of Business 1.3 Levels of the Business Environment Internal and external Factors Int...

Business Environment Unit 1 Unit 1 Business Environment: An Introduction Structure: 1.1 Introduction Objectives 1.2 Concept of Business 1.3 Levels of the Business Environment Internal and external Factors Internal Environment External Environment External Micro Environment External Macro Environment 1.4 Understanding the Environment SWOT Analysis What Business Managers should do 1.5 Summary 1.6 Glossary 1.7 Terminal Questions 1.8 Answers 1.1 Introduction Generally speaking, an environment includes the air we breathe, the water we drink, the available business, social and educational infrastructure in the locality, state and country. It literally means the surroundings, external objects, influencing factors, or circumstances under which someone or something exists. In the context of business, the environment refers to the sum of internal and external forces operating on an organization. Business Environment means the environment that affects business, be it external or internal. Managers must understand the impact of these forces on the business. This understanding of the business environment helps managers to react effectively to changes in the environment. This helps managers make better decisions. The environmental factors also help organisations plan for the future. Any business manager must understand the environment to be able to make better decisions. The environment that affects business can be classified based on different contexts. The environment may be based on Page No.: 1 Business Environment Unit 1 economic and non economic factors. The economic factors constitute the monetary and fiscal policy, the industrial policy, the price trends, the nature of the economic development etc. The non economic factors are the political and legal system, the socio cultural aspects and the educational system. The economic factors influence the non economic factors and the non economic factors have an influence on the economic factors. A business manager has to consider the economic environment to decide the price of a product, the financial environment helps to understand the means of financing available for the company, the legal environment is essential while framing the policies of the organisation. This unit gives an overview of the environment in which a business organisation works. Objectives: After studying this unit you should be able to: recognize the concept of business and the role of business organizations describe the external environment in which business operates state the nature of the ‘internal’ environment of business construct analysis tools such as SWOT to examine the business environment identify how business managers respond to changing environmental factors 1.2 Concept of Business Let us first think of what a business is all about. Any ‘Business organization’ is an integral part of the social and ecological systems and is influenced by diverse factors. Let us understand three basic propositions that form an integral part of a business: Business is an economic activity: An economic activity is the task of adjusting resources to the targets. Economic activity may be in the form of consumption, production, distribution and exchange. For example, Amul produces Chocolate, Cheese, Paneer and other milk products. Amul is the producer and you are the consumer who consumes the products. The process involves Page No.: 2 Business Environment Unit 1 setting up of the factory, purchasing inputs, producing the output and distributing the output through retailers. A business firm is an economic unit: An economic unit transforms a set of inputs into a flow of output, either goods and services or a combination of both. The nature of input requirements and the type of output flows are determined by the size, structure, location and efficiency of the business firm under consideration. Business decision making is an economic process: Business decision making involves making a choice among a set of alternative courses of action which is the essence of all economic problems. The firm has to think of optimum allocation of resources, as they are limited in supply and the same resource has alternative uses. Whatever may be the decision variable, procurement or production, distribution or sale, input or output, decision making is the process of selecting the best available alternative. That is why it is an economic pursuit. Managers everywhere face diverse situations which require decision making ability. The nature of most of the problems faced is making the best of the scarce resources. Most important decisions for a successful business are: 1. What business am I in? 2. Who are my target customers? 3. Where/When/ How to do the business? 4. Do I expand? 5. If yes, where and by how much? All these questions arise from a host of factors which are generally referred to as the business environment. The effectiveness of interaction between the business firm and its environment determines the success or failure of the business. The basic job of a firm is to identify the environment and formulate policies that are in accordance with the forces which operate in the environment. Page No.: 3 Business Environment Unit 1 Self Assessment Questions Fill in the blanks: 1. A firm aims towards ________ allocation of resources limited in supply with alternative uses. 2. Managers face situations requiring _______ making skills. 3. Select the right option: Consumption, production, distribution and exchange are all ________activities. (economic/ support) 4. An economic unit transforms _______ into output. a) inputs b) raw materials c) money 1.3 Levels of Business Environment The business firm adapts to the environment and managers must be capable of dealing with the environment. Business environment can be classified on different criteria. Based on time, we may talk of the past, the present and the future environment of business. Based on space, we may think of local, regional, national and international environment of business. Based on forces, we can distinguish between market and non-market environment of business. Environment can also be assessed in quantitative terms based on data or qualitative terms.Also based on the economic or non economic factors we may specify economic and non economic environment of business. The survival and success of a firm also depends on two sets of factors, that is, the internal factors (the internal environment) and the external factors (the external environment). The external environment has broadly two components, the business opportunities and the threats to business. 1.3.1 Internal and external factors The internal factors are generally regarded as controllable factors because the company has control over these factors and can alter or modify such factors to suit the environment. The external factors, on the other hand, are beyond the control of a company. The external factors such as the economic factors, socio-cultural factors, government and legal factors, demographic, geo-physical factors etc., are generally regarded as uncontrollable factors. Page No.: 4 Business Environment Unit 1 Although business environment consists of both the internal and the external environments, many people often confine the term to the external environment of business. 1.3.2 Internal environment Internally, an organization can be viewed as a resource conversion machine that takes inputs (labor, money, materials and equipment) from the external environment (i.e., the world outside the boundaries of the organization), converts them into useful products, goods, and services, and makes them available to customers as outputs. The organization must continuously monitor and adapt to the environment if it is to survive and prosper. Disturbances in the environment may spell profound threats or new opportunities. Asuccessful organization will identify, appraise, and respond to the various opportunities and threats in its environment. The internal environment is essentially all the factors that can be controlled by the organization. These factors are usually things like technology advancement, e-commerce, andbusiness expansion. Here we discuss a few of the factors that constitute the internal environment: i) Value System: The value system of the founders of a business affects the choice of business, mission and objectives of the organization, business policies and practices. The ethical standards are also among the factors evaluated by many companies for the selection of suppliers, distributers, collaborators etc. ii) Vision, Mission and Objectives: The business philosophy, policy, direction of development, priorities etc., are guided by the vision, mission and objectives of the company. iii) Management Structure and Nature: Some management structures delay decision making while some others facilitate quick decision making. The organizational structure, extent of professionalism of management etc., are very important factors which influence business decisions. iv) Internal Power Relationship: Within an organization we find that, many times, the relationship between the Board of Directors and the Chief executive is acritical factor. Also the support the top management Page No.: 5 Business Environment Unit 1 gets from different levels of employees, share holders etc., have very important repercussions on the decisions implemented. v) Human Resources: This includes the characteristics of human resources such as their skills, morale, commitment, attitude etc. The initiative, resistance, involvement of people at different levels in an organization varies across organizations. vi) Company Image and Brand Equity: The image of a firm or its brand equity matters a lot when you are trying to raise finance, to form joint ventures, to enter sale or purchase contracts. vii) Miscellaneous Factors: Physical assets and facilities like technology, production facilitiesetc, are very important factors. Research and Development facilities usually decide how much the firm is ready to innovate and compete. Marketing Facilities and the Financial Factors are also very important parts of the internal business environment. 1.3.3 External environment An organization operates within the larger framework of the external environment that shapes the opportunities and poses threats to the organization. The external environment is a set of complex, rapidly changing and significant interacting institutions and forces that affect the organization's ability to serve its customers. External forces are not controlled by an organization, but they may be influenced or affected by that organization. It is necessary for organizations to understand the environmental conditions because they interact with strategy decisions. The external environment has a major impact on the determination of marketing decisions. Successful organizations scan their external environment so that they can respond profitably to unmet needs and trends in the targeted markets. The external environment covers part of the organization, which usually cannot be controlled within the organization and includes such factors as social, legal, technological and political factors.The external environment includes the micro and the macro environment. The micro environment is formed by the individual suppliers, customers, competitors etc. The macro environment, on the other hand, can be thought of as consisting of the natural, technical, political, cultural and demographic forces. Many times if the micro elements are different between firms then it has a huge impact on Page No.: 6 Business Environment Unit 1 the success of the firm. On the other hand, if two environments are same between firms, then the difference lies in the relative effectiveness in dealing with the different elements. The internal and external environments are depicted in figure 1.1 Figure 1: Internal and External Environments 1.3.4 External Micro Environment The external microenvironment consists of forces that are part of an organization's marketing process but are external to the organization. These micro environmental forces include the organization's market, its producer- suppliers, and its marketing intermediaries. While these are external, the organization is capable of exerting more influence over these than forces in the macro environment. Let us see the different External Factors that affect the business environment. Suppliers: The suppliers supply inputs like raw materials and components to a company.Suppliers are organizations and individuals that provide the Page No.: 7 Business Environment Unit 1 resources needed to produce goods and services. They are critical to an organization's marketing success and are an important link in its value delivery system. Uncertainty regarding supply would mean uncertainty in production; hence supplies are a very important part of the environment. It is risky to depend on a single supplier as any problem with him would affect performance of your own firm. More problems might arise in case the resource to be supplied is scarce in nature. Hence there is no doubt that the role of the suppliers is indeed very important in determining the nature of the business environment. Marketing intermediaries: Like suppliers, marketing intermediaries are an important part of the system whodeliver value to customers. Marketing intermediaries are independent organizations that aid in the flow of products from the marketing organization to its markets. They are the “firms that aid the company in promoting, selling and distributing the goods to the final buyers”. They are the middlemen or agents, marketing research firms, media and consulting firms. Financial intermediaries who insure business risks are also included. The intermediaries between an organization and its markets constitute a channel of distribution. These include middlemen (wholesalers and retailers who buy and resell merchandise). Physical distribution firms help the organization to stock and move products from their points of origin to their destinations. Warehouses store and protect the goods before they move to the next destination. Marketing service agencies help the organization target and promote its products and include marketing research firms, advertising agencies, and media firms. Financial intermediaries help with finance transactions and insure against risks, and include banks, credit unions, and insurance companies. All of them create a link between the final customers and the company. The performance and attitude of these intermediaries affect the business environment. Customers: Creating and sustaining customers is again another key to the success of any organization. Monitoring customer sensitivity is a prerequisite for success. With growing globalization and more effective means of advertising, and with markets becoming more open, customers are becoming more global in their needs too. So the companies should not only look into the global needs of the consumers but also those consumers who mightstill be unwilling to give in, to the newer trends. Understanding customers thus is a part of the business environment. Page No.: 8 Business Environment Unit 1 Market: Organizations closely monitor their customer markets in order to adjust to changing tastes and preferences. A market is people or organizations with wants to satisfy, money to spend, and the willingness to spend it. Each target market has distinct needs which need to be monitored. It is imperative for an organization to know -itscustomers, how to reach them and when customers' needs change, in order to adjust its marketing efforts accordingly. The market is the focal point for all marketing decisions in an organization. Competitors: Knowing competitors, their moves, their research focus and innovations is a very important task, otherwise in this growing era of newer products, the company can face a complete wipe-out if it is not able to keep up in the race. Financiers: The financing capabilities of the financiers, their policies, strategies, attitudes are all important factors determining the internal environment. 1.3.5 External Macro Environment This environment consists of thefactors that operate in a larger environment, creating forces that shape opportunities and pose threats to the company. The external macro environment consists of all the outside institutions and forces that have an actual or potential interest or impact on the organization's ability to achieve its objectives: competitive, economic, technological, political, legal, demographic, cultural, and ecosystem. Though non-controllable, these forces require a response in order to keep positive actions with the targeted markets. An organization with an environmental management perspective takes aggressive actions to affect the forces in its marketing environment rather than simply watching and reacting to it. Economic environment: The economic environment consists of factors that affect consumer purchasing power and spending patterns. Economic factors include business cycles, inflation, unemployment, interest rates, and income. Changes in major economic variables have a significant impact on the marketplace. For example, income affects consumer spending which affects sales for organizations. According to Engel's Laws, as income rises, the percentage of income spent on food decreases, while the percentage spent on housing remains constant. Page No.: 9 Business Environment Unit 1 Technological environment: The technological environment refers to new technologies, which create new product and market opportunities. Technological developments are the most manageable and controllable force faced by marketers. Organizations need to be aware of new technologies in order to turn these advances into opportunities and a competitive edge. Technology has a tremendous effect on life-styles, consumption patterns, and the economy. Advances in technology can start new industries, radically alter or destroy existing industries, and stimulate entirely separate markets. The rapid rate at which technology changes has forced organizations to quickly adapt, in terms of how they develop, price, distribute, and promote their products. Political and legal environment: Organizations must operate within theframework of governmental regulations and legislations. Government’s relationship with organizations encompasses subsidies, tariffs, import quotas, and deregulation of industries. The political environment includes governmental and special interest groups that influence and limit various organizations and individuals in a given society. Organizations hire lobbyists to influence legislation and run advocacy ads that state their point of view on public issues. Special interest groups have grown in number and power over the last three decades, putting more constraints on marketers. The public expects organizations to be ethical and responsible. An example of response by marketers to special interests is green marketing, the use of recyclable or biodegradable packing materials as part of marketing strategy. The major purposes of business legislation include protection of companies from unfair competition, protection of consumers from unfair business practices and protection of the interests of society from unbridled business behavior. The legal environment becomes more complicated as organizations expand globally and face governmental structures quite different from those within their countries. Demographic environment: Demographics help marketers identify the current and potential customers, where they are and how many are likely to buy what the marketer is selling. Demography is the study of human populations in terms of size, density, location, age, sex, race, occupation, and other statistics. Changes in the demographic environment can result in Page No.: 10 Business Environment Unit 1 significant opportunities and threats presenting themselves to the organization. Major trends for marketers in the demographic environment include worldwide explosive population growth,a changing age, ethnic and educational mix; new types of households; and geographical shifts in population. Social / cultural environment: Social/cultural forces are the most difficult, uncontrollable variables to predict. It is important for marketers to understand and appreciate the cultural values of the environment in which they operate. The cultural environment is made up of forces that affect society's basic values, perceptions, preferences, and behaviors. U.S. values and beliefs include equality, achievement, youthfulness, efficiency, practicality, self-actualization, freedom, humanitarianism, mastery over the environment, patriotism, individualism, religious and moral orientation, progress, materialism, social interaction, conformity, courage and acceptance of responsibility. Changes in social/cultural environment affect customer behavior which affects sales of products. Trends in the cultural environment include individuals changing their views of themselves, of others, and of the world around them and the movement toward self- fulfilment, immediate gratification, and secularism. Ecosystem environment: The ecosystem refers to natural systems and theirresources that are needed as inputs by marketers or that are affected by marketing activities. Green marketing or environmental concern about the physical environment has intensified in recent years. To avoid shortages in raw materials, organizations can use renewable resources (such as forests) and alternatives (such as solar and wind energy) for non-renewable resources (such as oil and coal). Organizations can limit their energy usage by increasing efficiency. Goodwill can be built by voluntarily engaging in pollution prevention activities,ofnatural resources. Global environment: The economic conditions in other countries may affect the business. The global environment refers to those global factors that are relevant to business. Certain developments such as a hike in the price of crude oil can make a major global impact affecting all nations. International political factors like wars or political tensions create uncertainties in the business environment. Page No.: 11 Business Environment Unit 1 Self Assessment Questions 5. The __________ environment refers to the factors that affect the consumers’ purchasing power. a) economic b) political c) cultural 6. The most difficult forces to control are socio/cultural forces. (True/ False) 7. The demographic environment is part of the __________ environment. (Micro/ macro) 1.4 Understanding the Environment The manager’s job cannot be accomplished in a vacuum within the organization. There are a number of factors both internal and external which jointly affect managerial decision-making. It is therefore very important for the manager to understand and evaluate the impact of the business environment due to the following reasons: 1. Businesses may face problems due to restrictive business environment which may be because of rigid government laws (e.g. no polluting industry can ever be located within a 50 Km radius of the Taj Mahal) , state of competition etc. 2. The present and future viability of an enterprise is impacted by the environment. For e.g. no TV manufacturer can be expected to survive by making only the traditional cathode-ray tube television sets when consumer preference has clearly shifted to plasma and LCD television sets. 3. The cost of capital and the cost of borrowing – the two key financial drivers of any enterprise are impacted by the external environment. For e.g. the ability of a business to fund its expansion plan by raising money from the stock markets depends on the prevalent public mood towards investment in stock markets. 4. The availability of all key inputs like skilled labour, trained managers, raw materials, electricity, transportation, fuel etc., is a factor of the business environment. 5. Increasing public awareness of the negative aspects of certain industries like hand woven carpets (use of child labour), pesticides Page No.: 12 Business Environment Unit 1 (damage to environment in the form of chemical residues in groundwater), plastic bags (choking of sewer lines) have resulted in the slow decline of some industries. 6. Finally, the environment offers the opportunities for growth and profits. For e.g. when the insurance and the aviation industrieswerethrown open to the private sector, the new entrant could easily build on the expectations of the public. 1.4.1 SWOT analysis Organizational environment has basically two components: strengths and weaknesses of the organization. A SWOT analysis (analysis of the strengths and weaknesses of the organization and opportunities and threats in the environment), therefore is one of the first steps in the strategic management process. The SWOT analysis framework is both a simple and powerful tool for strategy development. Thorough market research and accurate information systems are essential for the SWOT analysis to identify key issues in the environment. SWOT is an acronym used to describe the particular Strengths, Weaknesses, Opportunities, and Threats that are strategic factors for a specific company. A SWOT analysis should not only result in the identification of a firm’s core competencies, but also the identification of opportunities that the firm is not currently able to take advantage of, due to a lack of appropriate resources. We need to follow certain steps in order to do this analysis. Step – 1: Assess your market What are the things happening externally and internally that will affect our company? Who are our customers? What are the strengths and weaknesses of each competitor? What are the driving forces behind sales trends? What are important and potentially important markets? What is happening in the world that might affect our company? What are the strengths the company needs to compete successfully? Page No.: 13 Business Environment Unit 1 Step – 2: Assess your company What do we do best? What are our company resources – assets, intellectual property, and people? What are our company capabilities? Step – 3: Assess your competition How are we different from the competitors? What are the general market conditions of our business? What needs are there for our products and services? What are the customer-market-technology opportunities? What are the customers’ problems and complaints with the current products and services in the industry? What “If only….” statements do a customer make? Step – 4: Opportunity It is an area of “need” in which a company can perform profitably. Step – 5: Identify the threats Challenge posed by an unfavorable trend or development that would lead (in the absence of a defensive marketing action) to deterioration in profits/sales.An evaluation needs to be completed, drawing conclusions about how the opportunities and threats may affect the firm. Step – 6: Internalanalysis Competitor Analysis: Here we identify the actual competitors as well as substitutes. Assess competitors’ objectives, strategies, strengths & weaknesses, and reaction patterns. Select which competitors to attack or avoid. The Internal Analysis of strengths and weaknesses focuses on internal factors that give an organization certain advantages and disadvantages in meeting the needs of its target market. Strengths refer to core competencies that give the firm an advantage in meeting the needs of its target markets. Any analysis of the company’s strengths should be market oriented/ customer focused because strengths are only meaningful when they assist the firm in meeting customer needs. Weaknesses refer to any limitations a company faces in developing or implementing a strategy. Weaknesses Page No.: 14 Business Environment Unit 1 should also be examined from a customer perspective because customers often perceive weaknesses that a company cannot see. Being market focused when analyzing strengths and weaknesses does not mean that non-market oriented strengths and weaknesses should be forgotten. Rather, it suggests that all firms should tie their strengths and weaknesses to customer requirements. Only those strengths that relate to satisfying a customer need should be considered true core competencies. The following area analyses are used to look at all internal factors affecting a company: Resources: Profitability, sales, product quality brand associations, existing overall brand, relative cost of this new product, employee capability, product portfolio analysis Capabilities: Goal: To identify internal strategic strengths, weaknesses, problems, constraints and uncertainties Step – 7: External analysis The External Analysis examines opportunities and threats that exist in the environment. Both opportunities and threats exist independently of the firm. The way to differentiate between a strength or weakness from an opportunity or threat is to ask: Would this issue exist if the company did not exist? If the answer is yes, it should be considered external to the firm. Opportunities refer to favorable conditions in the environment that could produce rewards for the organization if acted upon properly. That is, opportunities are situations that exist but must be acted on if the firm is to benefit from them. Threats refer to conditions or barriers that may prevent the firms from reaching its objectives. The following area analyses are used to look at all external factors affecting a company: Customer analysis: Segments, motivations, unmet needs Competitive analysis: Identify completely, put in strategic groups, evaluate performance, image, their objectives, strategies, culture, cost structure, strengths, weakness Market analysis: Overall size, projected growth, profitability, entry barriers, cost structure, distribution system, trends, key success factors Environmental analysis: Technological, governmental, economic, cultural, demographic, scenarios, information-need areas Page No.: 15 Business Environment Unit 1 Goal: To identify external opportunities, threats, trends, and strategic uncertainties The SWOT Matrix helps visualize the analysis. Also, when executing this analysis it is important to understand how these elements work together. When an organization matched internal strengths to external opportunities, it creates core competencies in meeting the needs of its customers. In addition, an organization should act to convert internal weaknesses into strengths and external threats into opportunities. Table 1: Linking the SWOT Analysis and the Internal and External Environment INTERNAL EXTERNAL STRENGTHS OPPORTUNITIES WEAKNESSES THREATS 1.4.2 What business managers should do? Here you will get to understand the kind of issues that need to be dealt with in order to understand the business environment. Firstly Focus on your strengths. Shore up your weaknesses. Capitalize on your opportunities. Recognize your threats. Now identify Against whom do we compete? Who are our most/less intense competitors? Makers of substitute products? Can these competitors be grouped into strategic groups on the basis of assets, competencies, or strategies? Who are the potential competitive entrants? What are their barriers to entry? Next evaluate What are their objectives and strategies? What is their cost structure? Do they have a cost advantage or disadvantage? What is their image and positioning strategy? Who are the most successful/unsuccessful competitors over time? Why? Page No.: 16 Business Environment Unit 1 What are the strengths and weaknesses of each competitor? Evaluate competitors with respect to their assets and competencies. Regarding the given points we need to raise the following questions: Size and growth: What are important and potentially important markets? What are their size and growth characteristics? Which markets are declining? What are the driving forces behind sales trends? Profitability: For each major market, consider the following: Is this a business area in which the average firm will make money? How intense is the competition among existing firms? Evaluate the threats from potential entrants and substitute products. What is the bargaining power of suppliers and customers? How attractive/profitable is the market now and in the future? Cost structure: What are the major cost and value-added components for various types of competitors? Distribution systems: What are the alternative channels of distribution? How are they changing? Market trends: What are the trends in the market? Key success factors: What is the key success factors, assets and competencies needed to compete successfully? How will these change in the future? Environmental analysis: An environmental analysis is the fourth dimension of the External Analysis. The interest is in environmental trends and events that have the potential to affect strategy. This analysis should identify such trends and events and then estimate their likelihood and impact. When conducting this type of analysis, it is easy to get bogged down in an extensive, broad survey of trends. It is necessary to restrict the analysis to those areas relevant enough to have significant impact on strategy. This analysis is divided into five areas: economic, technological, political- legal, socio-cultural, and future. Economic: What economic trends might have an impact on business activity? (Interest rates, inflation, unemployment levels, energy availability, disposable income, etc.) Page No.: 17 Business Environment Unit 1 Technological: To what extent are existing technologies maturing? What technological developments or trends are influencingor could affect our industry? Government: What changes in regulation are possible? What will be the impact on our industry? What tax or other incentives are being developed that might affect strategy development? Are there political or government stability risks? Socio-cultural: What are the current or emerging trends in lifestyle, fashions, and other components of culture? What are the implications? What demographic trends will affect the market size of the industry? (Growth rate, income, population shifts) Do these trends represent an opportunity or a threat? Future: What are the significant trends and future events? What are the key areas of uncertainty as to trends or events that have the potential to impact strategy? Internal analysis: Understanding a business in depth is the goal of internal analysis. This analysis is based on resources and capabilities of the firm. Resources: A good starting point to identify company resources is to look at tangible, intangible and human resources. Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identified and valued in the firm’s financial statements. Intangible resources are largely invisible, but over time become more important to the firm than tangible assets because they can be a main source for a competitive advantage. Such intangible recourses include reputational assets (brands, image, etc.) and technological assets (proprietary, technology and know-how). Human resources or human capital isthe productive services human beings offer the firm in terms of their skills, knowledge, reasoning, and decision- making abilities. Capabilities Resources are not productive on their own. The most productive tasks require that resources collaborate closely together within teams. The term Page No.: 18 Business Environment Unit 1 organizational capability is used to refer to a firm’s capacity for undertaking a particular productive activity. Our interest is not in capabilities per se, but in capabilities relative to other firms. To identify the firm’s capabilities we will use the functional classification approach. A functional classification identifies organizational capabilities in relation to each of the principal functional areas. Self Assessment Questions 8. SWOT analysis is an acronym for _________, __________, __________ and ___________. 9. Over time, intangible resources become more important than tangible resources. (True/ false) 10. The current or emerging trends in lifestyle and fashions refer to ___________ analysis. 1.5 Summary Success of an organization depends on its adaptability to the Business Environment, it is subjected to. A business environment comprises a number of environmental factors. Linking such factors influences policy making in every business organization. In this Unit, we have learnt the role of business organizations.Both the internal and the external environment of business areimportant for the organization. Any change in the environment produces an effect on the functioning of the business organization. SWOT analysis is an effective tool in examining the business environment.Business should respond to changes in environmental factors, and the manager’s approach towards the change is very important. This unit has explained how a business manager needs to think in order to analyze the environment properly. 1.6 Glossary Internal factors: Controllable factors and the company can alter or modify such factors to suit the environment. External factors: Factors beyond the control of a company. Internal environment: All the factors that can be controlled by the organization, like technology advancement, e-commerce and business expansion. Page No.: 19 Business Environment Unit 1 External environment: This constitutes external forces that are not controlled by an organization, but may be influenced or affected by the organization. External micro environment: Factors that are part of an organisation’s marketing process but external to it. External macro environment: This consists of all the outside institutions and forces that have an actual or potential interest or impact on the organization's ability to achieve its objectives. SWOT analysis: Analysis of the strengths, weaknesses, opportunities ad threats that a company faces Economic environment: The economic environment consists of factors that affect consumer purchasing power and spending patterns Technological environment: The technological environment refers to new technologies, which create new product and market opportunities. Political and legal environment: This relates to the Government’s relationship with organizations which encompasses subsidies, tariffs, import quotas, and deregulation of industries. Demographic environment: Demography is the study of human population in terms of size, density, location, age, sex, race, occupation, and other statistics. Social / cultural environment: The cultural environment is made up of forces that affect society's basic values, perceptions, preferences, and behaviors. 1.7 Terminal Questions 1. What is business environment? 2. What constitutes internal environment of a firm? 3. What are the constituents of the micro external factors in business environment? 4. What should business managers do to access the business environment? 5. What are the key points to be understood in environmental analysis? Page No.: 20 Business Environment Unit 1 1.8 Answers Self Assessment Questions 1. Optimum 2. Decision 3. Economic 4. a) inputs 5. a) economic 6. True 7. Macro 8. Strengths, weaknesses, opportunities, threats 9. True 10. Socio cultural Terminal Questions 1. Business Environment means the environment that affects businesses, be it external or internal. The internal and external forces of the environment affect the business. Refer section 1.1 & 1.2. 2. The internal environment is essentially all the factors that are able to be controlled by the organization. These factors are usually things like technology advancement, e-commerce and business expansion. Refer section 1.3.1. 3. The external microenvironment consists of forces that are part of an organization's marketing process but are external to the organization. These micro environmental forces include the organization's market, its producer-suppliers, and its marketing intermediaries. Refer section 1.3.4. 4. Refer Section 1.4. 5. Refer Section 1.4. Acknowledgements, References & Suggested Readings Adhikary, M. (2009). Economic Environment of Business: Theory and The Indian Case. New Delhi, Sultan Chand and Sons. Bedi, S. (2010). Business Environment. New Delhi, Excel Books. Cherunilam, F. (2008). Business Environment: Text and Cases. Mumbai, Himalaya Publishing House. Page No.: 21 Business Environment Unit 1 Daniel, C. (2011). Business Environment. http://www.articlesnatch.com/ Article/ Business- Environment/252704. Retrieved February 9, 2011. Internal and External Analysis. (2011). Retrieved from http :// mystrategicplan.com/resources/internal-and-external-analysis/ Retrieved February 9, 2011. Paul, J. (2010). Business Environment: Text and Cases. New Delhi, Tata McGraw-Hill Publishing Company Limited. Saleem, S. (2010). Business Environment. New Delhi, Dorling Kindersley (India) Pvt. Ltd. Page No.: 22