MBA Business Environment and Strategy PDF

UNIT 01 Introduction to Business Environment Names of Sub-Units Introduction to Business Environment: Business, Scope of a Business/Business Scope, Goals and Objectives of a Business, Business Environment, Nature of Business Environment,...

UNIT 01 Introduction to Business Environment Names of Sub-Units Introduction to Business Environment: Business, Scope of a Business/Business Scope, Goals and Objectives of a Business, Business Environment, Nature of Business Environment, Scope of Business Environment, Importance of Business Environment, Components of Business Environment, Relation Between Business Environment and Strategic Management Overview The unit begins by explaining the meaning of the business environment. Further, it discusses the meaning, scope, goals and objectives of a business. The unit explains the nature of the business environment. It also discusses the scope of the business environment, the importance of Business Environment as well as its components. Towards the end, you will be acquainted with the study of Relation Between Business Environment and Strategic Management. Learning Objectives In this unit, you will learn to:  Explain the meaning and scope of business  Comprehend the meaning and scope of Business Environment  Elucidate the Relation Between Business Environment and Strategic Management  Describe the nature of business environment  Discuss the goals and objectives of a business  State the importance of business environment  Explain the components of the business environment JGI JAIN DEEMED-TO-BE UNIVERSIT Y Business Environment and Strategy Learning Outcomes At the end of this unit, you would:  Assess the classification of business objectives  Evaluate the internal and external factors of a business strategy  Analyse the important factors of business environment  Examine the macro factors of business environment Pre-Unit Preparatory Material  https://nios.ac.in/media/documents/SrSec319NEW/319_Bus_Studies_Eng/319_Bus_Studies_Eng_ Lesson1.pdf 1.1 INTRODUCTION Businesses, like humans, do not operate in isolation. They operate within a particular environment and negotiate their way through it. The extent to which a business flourish is determined by how it interacts with its surroundings. Businesses that stay oblivious to crucial changes in the environment ultimately vanish from the market. To be successful, businesses must not only be aware of the various elements of the environment, but also appreciate, adapt to, manage and influence them. If a business wants to survive and thrive, it must constantly monitor and adapt to the environment. Disturbances in the environment might either pose a serious threat to the business or provide it with new chances. A successful business must be able to recognise, assess and respond to the numerous possibilities and risks that exist in its surroundings. For example, a firm must make the appropriate adjustments to adapt to the new policies. Similarly, a shift in technology may make the current product obsolete or irrelevant, as we have seen with the introduction of computers, which replaced typewriters, and with the arrival of colour television, which made black and white television obsolete. A change in fashion or customer preferences can also modify demand in the market for a certain product; for example, the demand for jeans reduced the sale of other conventional clothing. All of these elements are external to the business and beyond its control. As a result, in order to survive and prosper in business, business units must adapt to these changes. 1.2 BUSINESS A business is an economic activity performed by an enterprising entity or an organisation often with the objective of maximising profits. Economic activities performed by a business organisation include production (conversion of inputs into output), distribution (supply of output in the market) and sales (exchange of products with buyers for money). The essential idea underpinning a firm is the concept of the business based on which the business model, plan, vision and mission are created. For example, Uber was founded on the idea of combining taxi drivers and providing on-demand services under one brand. This principle served as the foundation for all other corporate strategies. All business entities have to deal with limited resources; therefore, it becomes challenging for business entities to allocate resources in such a way that profits can be maximised and at the same time costs 2 UNIT 01: Introduction to Business Environment JGI JAIN DEEMED-TO-BE UNIVERSIT Y are kept to a minimum. In the process of allocating resources and maximising profits, business entities need to answer the following questions:  What to produce?  Where to produce?  How much to produce?  How to produce? Let us understand with the help of an example. An automobile manufacturer may face a dilemma whether to produce cars or buses. Once it decides to produce both, the manufacturer needs to decide whether to produce both cars and buses in equal quantities, or cars should be produced more. After this, the automobile manufacturer has to decide the location of its manufacturing plant. Finally, the manufacturer has to take a call on which methods of production or technology should be used. Generally, the methods chosen are cost effective so that profits can be maximised. 1.2.1 Scope of a Business/Business Scope Business is an organised and systematic activity for earning profit. It is an integral part of society as it creates employment opportunities. The following points explain the scope of business:  Enhances living standards of the people by providing a variety of goods and services at the right time and at the right place.  Generates employment opportunities, which in turn reduces poverty  Makes optimal utilisation of scarce resources of the nation  Improves nation’s image by producing and exporting quality goods and services to foreign countries  Provides a better return to the investors on their capital investment  Promotes social interest by providing tourist services, sponsoring trade shows, etc. in the country  Facilitates exchange of culture among the people of different nations, thereby maintaining international harmony and peace  Performs research and development to promote innovation 1.2.2 Goals and Objectives of a Business Business objectives refer to results that a business organisation aspires to achieve or accomplish over a specified period of time. It is a common belief that all business organisation has a single objective i.e., to make a profit. However, no business organisation can overlook the interests of its different stakeholders, i.e. employees, customers and society and the nation as a whole. Thus, business objectives of the business organisations are classified into four types, which are listed in Figure 1: Economic Objectives Social Objectives Human Objectives National Objectives Figure 1: Business Objectives 3 JGI JAIN DEEMED-TO-BE UNIVERSIT Y Business Environment and Strategy Let us explain these business objectives in detail.  Economic objectives: These objectives include earning maximum profits, exploring new market opportunities, acquiring new customers, expanding business operations, making innovation, improving existing goods and services, making the optimal utilisation of available resources.  Social objectives: These objectives are sought by organisations for the benefit of society. Some of these social objectives are producing and supplying goods and services to society at reasonable prices; preventing malpractices such as hoarding, black marketing overcharging, puffery, etc.; promoting consumer education; ensuring fair returns for investors, protecting the environment; and so on.  Human objectives: These objectives are meant for protecting the interests of employees and ensuring their welfare. Some of these objectives are providing fair remuneration and incentives to employees, arranging better working conditions, providing job satisfaction, arranging training and development programmes for the growth of employees and providing equal job opportunities for all classes of the society.  National objectives: These objectives of business organisations include generating employment opportunities, promoting social justice, paying taxes and duties, implementing the government’s economic and financial policies and so on. 1.3 BUSINESS ENVIRONMENT The Business environment comprises surroundings, external objects, influences and circumstances under which a business exists. These factors can be internal or external and have a direct impact on the business decisions of an organisation. Business and its surroundings are inextricably linked and mutually dependent as a business acquires resources from its environment. The following are the definitions of business environment: According to Keith Davis, “Business environment is the aggregate of all conditions, events and influences that surround and affect it.” As per A.M. Weimer, “Business environment encompasses the climate or set of conditions—economic, social, political or institutional in which business operations are conducted.” Customers, rivals, suppliers, as well as the social, political, legal and technological framework of country comprise the external environment. On the other hand, organisational resources as well as technological, financial, marketing and operations capabilities of a business organisation fall under the internal environment. It should be noted that internal factors are controllable, while external factors are uncontrollable. 1.3.1 Nature of Business Environment A business environment comprises various characteristics. The following are some important characteristics of a business:  Complex: A business environment comprises a range of elements, events, situations and influences originating from various sources that have a significant impact on business, making it more complex.  Interdependence: Social, economic, legal, cultural, technological and political issues all play a key role in the business environment. These environmental elements are interdependent. For example, the 4 UNIT 01: Introduction to Business Environment JGI JAIN DEEMED-TO-BE UNIVERSIT Y evolution of the latest technology is influenced by a country’s economic standing. A wealthy country can afford to spend enough on research and development. Similarly, changes in the environment policies can have a substantial impact on the business of manufacturing organisations.  Dynamic: The Business environment is always evolving. The business environment is dynamic because it is always changing due to technical advancements, shifts in consumer tastes, and the introduction of new competitors. The numerous factors in the environment are always changing, making business dynamic rather than static.  Uncertainty: The business environment is primarily unpredictable since it is difficult to forecast future events, particularly when the environment is subject to frequent changes, for example, the business environment of information technology and fashion industries.  Relativity: As the business environment varies from country to country and area to region, it is a relative concept. For example, the business environment existing in India will not be the same as that of the United States due to different market conditions and factors. 1.3.2 Scope of Business Environment Like human beings, business organisations do not exist in a vacuum. Each business organisation survives and grows within the context of different environmental forces. While these forces are uncontrollable, business organisations have no alternative but to respond to them timely. A good understanding of the environment by business managers enables them not only to identify and evaluate, but also to react to the forces external to their firms. Let us understand how a thorough understanding of the business environment helps business organisations in the following points:  Identifies business opportunities and threats: A business environment aids in the identification of numerous opportunities (new markets, lifting of government restrictions, etc.) and dangers (a rise in the number of new entrants, etc.) to the business organisation. All threats may be easily identified with good interaction between the business and its surroundings. It will allow businesses to take corrective action in a timely manner. For example, Samsung saw the popularity and scope of smartphones and rode on the most popular and advanced Android OS, whereas Nokia failed to recognise this scope and continued to utilise its Symbian OS, resulting in Nokia’s market share falling from 55 percent to 27.7% in 2014. Similarly, Volvo has made good use of its first-mover advantage in India’s luxury bus market. It currently controls roughly 74% of the market.  Helps in planning and policy formulation: A thorough understanding of the business environment aids in the formulation of more effective policies and plans. It provides businesses with up-to-date information about market circumstances. Business organisations that are well-versed with their environment make sound judgments.  Provides useful resources: The business environment provides a variety of inputs such as raw materials, capital and labour to a business organisation so that it can carry out business activities. These inputs are transformed into goods and services in order to meet market demands. An organisation cannot continue to operate unless it has a sufficient supply of inputs. For receiving inputs and delivering the essential goods or services, it is completely reliant on the environment.  Improves performance: The business environment plays an important role in boosting corporate organisations’ overall performance. Managers keep their knowledge and abilities up to date by maintaining constant awareness of the environment. Environmental research is used as a tool to educate managers. Environmental monitoring gives qualitative data that aids in the development 5 JGI JAIN DEEMED-TO-BE UNIVERSIT Y Business Environment and Strategy of strategic thinking. It enables managers to regulate and improve corporate performance by implementing appropriate management techniques.  Helps in coping with rapid changes: The factors that make up the corporate environment are always changing. They fluctuate in their appearance from time to time. Changes in customer preferences, fashion, technology, economic situations and so on are all examples of these changes. The ability to recognise these occurring changes is aided by a thorough awareness of the business environment. It enables them to effectively deal with these changes by taking the relevant steps in the appropriate time. Managers are sensitive to such changes and respond efficiently as a result of continual monitoring of the environment.  Enhances business image: Businesses can improve their public image by having a thorough grasp of their surroundings. They are more responsive and sensitive to environmental concerns as a result of their thorough understanding of the corporate environment. Environmental research gives them the information they need to make realistic strategies and put them into action. Businesses are better able to provide better service and serve the common good. People are pleased with the company and have developed trust in it. This aids in the development of a better market image.  Assists in facing competition: All facts regarding market competitors are sent to businesses through the business environment. Every business organisation must be aware of its competitors’ actions and tactics in order to effectively meet competition. It aids businesses in developing plans and procedures in response to competition activity. Businesses can address market problems and competitiveness by planning ahead of time in a methodical and efficient manner. 1.3.3 Importance of Business Environment There is a close and continual contact between a business and its surroundings, regardless of its nature or size. This engagement also aids the firm’s strength and efficient utilisation of its resources. As a result, comprehending the significance of the business environment will aid in the pursuit of further business prospects. Let’s take a look at it one by one.  Identifying Business Threats and Opportunities: One of the most important advantages of a business environment is that the interaction between a company and its surroundings usually exposes the company’s potential and risks.  Providing Growth Direction: When a company interacts with its surroundings, it becomes easier to identify areas for expansion and growth. Is there a shift in consumer preferences for certain goods or services? Are there any features that your competitors offer that you should incorporate in your products as well? By connecting into its business environment, a company can acquire answers to comparable inquiries.  Learning that is ongoing: Because nature is essentially dynamic, the environment is always changing. This keeps managers motivated to maintain their knowledge and abilities up to date. This aids them in preparing for both anticipated and unanticipated changes in the commercial world. How has your customers’ purchasing behaviour altered since the introduction of GST, for example?  Image Construction: When a company shows environmental sensitivity, its image might increase significantly. In order to accomplish so, the company needs also have a thorough understanding of its surroundings. Many factories, for example, consider power shortages to be a problem in their operations. As a result, several businesses have installed captive power plants (CPPs) in their factories to meet their power needs. 6 UNIT 01: Introduction to Business Environment JGI JAIN DEEMED-TO-BE UNIVERSIT Y  Taking on the Competition: It is critical to be informed of your competitors’ actions and strategy in any business. Firms can study their competitors’ tactics and behaviours in a business setting. They might also devise their own techniques in this regard. Almost all telecom carriers offer identical services at similar pricing, if you take a fast look at the industry. The reason for this is that most telecom companies make it a point to keep up with their competitors’ tactics and actions. Markets are very competitive, and businesses must fight to stay afloat and thrive. Understanding the relevance of the business environment and allocating resources to thoroughly examine it can be a major stepping stone toward a company’s success. Consider that for a moment. Maruti Udyog looked at its business environment a few decades ago and spotted an opportunity in the demand for tiny automobiles. It began by producing low-cost little automobiles and quickly rose to the top of the small car industry. Any company that isn’t aware of its surroundings is blind to the hazards and/or possibilities hiding around every corner. 1.4 COMPONENTS OF BUSINESS ENVIRONMENT The environment of a business is divided into two parts, namely the internal environment and external environment. The internal environment comprises the strengths and weaknesses of a business organisation, while the external environment includes opportunities and threats for the organisation. Figure 2 lists the components of the business environment: Components of Business Environment Internal Environment External Environment Micro Environment Macro Environment Strategy Suppliers Political factors Structure Intermediaries Economic fact Skills of people Competitors Sociocultural factors Financial capability The public Technological factors Marketing capability Legal factors Operating and Environmental factors technical capabilities Figure 2: Factors Affecting Business Environment Let us discuss these factors in detail.  Internal environment: It is the environment within an organisation; thus can be controlled internally. The internal environment involves strengths and weaknesses of the organisation in different 7 JGI JAINDEEMED-TO-BE UNIVERSIT Y Business Environment and Strategy functional areas, namely marketing, operations, finance, information technology, personnel, etc. These factors can be modified or controlled by the organisation from time to time. Some of the internal factors that are important to be identified and analysed for an organisation are explained as follows:  Strategy: It represents the courses of actions taken by an organisation to fulfil its business objective. To put in simple words, the business strategy of the organisation determines the environment within which the business organisation operates.  Structure: An organisational structure represents the relationship between different levels of management and the board, employees to employees, managers to employees, management to labour unions, etc. Harmonious relationships between these parties have significant effect on the business decisions of an organisation.  Skills of people: The success of a business organisation depends a great deal on the skills and competencies of its employees. Many organisations need to incur a high cost due to unskilled employees or wrong hiring of employees. Thus, it is important for the business organisation to ensure that right people are hired with the right skills. Also, the business organisation should conduct training and development programmes from time to time to keep building the skills of its existing employees.  Financial capability: It is the finance that keeps a business organisation moving and affects its business performance, strategies and decisions to a large extent. The financial capability of a business organisation encompasses sources of funds, capital investment, acquisition of assets, management of funds, and so on.  Marketing capability: Marketing involves the sending the message to the customers regarding availability of products or services. The marketing capability involves the modes of promotion, marketing channels, brand equity, distribution networks, etc.  Operating and technical capabilities: The operating capability involves the production of goods and services and use of material resources. On the other hand, the technical capability involves the adoption of techniques used for production and various other business functions. Right operating and technical capabilities at place lead to improvement in productivity and quality.  External environment: It comprises the factors on which a business organisation has no control; however, timely response by the organisation makes it play safely. The success and survival of a business organisation depends on its ability to respond to external factors. External environment is further divided into two types, which are:  Micro environment: It comprises factors existing in the immediate environment of a business organisation. These include suppliers, intermediaries, competitors and the public. These micro factors affect different organisations in the same industry differently. On the other hand, some micro factors are particular to one business organisation only. Although the micro factors are the same for business organisations operating in the same industry, the relative success of a business organisation depends on how effectively it deals with these micro factors.  Macro environment: Micro factors of a business organisation exist in a large environment known as macro environment. The micro environment poses a number of threats and opportunities for a business organisation. The following are the macro factors of business environment:  Political factors: These include government policies, political stability, systemic corruption, tax policies, labour regulations, trade barriers, etc. 8 UNIT 01: Introduction to Business Environment JGI JAIN DEEMED-TO-BE UNIVERSIT Y  Economic factors: These include economic growth, exchange rates, interest and inflation rates, and so on.  Sociocultural factors: These include country’s demographics, population growth rate, age distribution, career attitudes, health consciousness, and so forth.  Technological factors: These include automation, research and development, technology awareness, and so on.  Legal factors: These factors are related to the constitutional framework of a country, directive principles, fundamental rights, policies related to export and import.  Environmental factors: These factors include the availability of natural resources, climatic conditions, location aspects, pollution control measures, etc. 1.5 RELATION BETWEEN BUSINESS ENVIRONMENT AND STRATEGIC MANAGEMENT As explained above, business environment consists of all the factors that affect an organisation’s operations, actions and outcomes. It is divided into internal and external environment. An organisation is able to better respond to the external environment if it is well-versed with its internal environment. Strategy is the part of an organisation’s internal environment. A strategy is a plan of action designed to achieve a particular goal. The external and internal environment influence strategy planning; but, because the environment is difficult to forecast, it may be ineffective. As a result, marketers should constantly gather new information about the business environment and develop strategic plans that can adapt to changing situations. An organisation needs to formulate a business strategy after considering all internal and external factors. For example, if an organisation desires to enter the international market, it needs to thoroughly analyse the economic, political, technological, legal, sociocultural factors of the country and match with its internal capabilities. Similarly, to expand its business in the domestic market, an organisation needs to analyse various factors such as number of competitors, government laws, demand for products and services, and so on. Without analysing the environment, the entire business strategy of an organisation may lead to failure. Conclusion 1.6 CONCLUSION  A business is an economic activity performed by an enterprising entity or an organisation often with the objective of maximising profits.  Business objectives refer to results that a business organisation aspires to achieve or accomplish over a specified period of time.  Business environment comprises surroundings, external objects, influences and circumstances under which a business exists. These factors can be internal or external and have direct impact on the business decisions of an organisation.  A good understanding of environment by business managers enables them not only to identify and evaluate, but also to react to the forces external to their firms.  The environment of a business is divided into two parts, namely internal environment and external environment. The internal environment comprises strengths and weakness of a business organisation, while the external environment includes opportunities and threats for the organisation. 9 JGI JAIN DEEMED-TO-BE UNIVERSIT Y Business Environment and Strategy  An organisation needs to formulate a business strategy after considering all internal and external factors.  A business environment aids in the identification of numerous opportunities (new markets, lifting of government restrictions, etc.) and dangers (rise in the number of new entrants, etc.) to the business organisation.  The success of a business organisation depends a great deal on the skills and competencies of its employees.  If a business wants to survive and thrive, it must constantly monitor and adapt to the environment. Disturbances in the environment might either pose a serious threat to the business or provide it with new chances. 1.7 GLOSSARY  Business: An activity of making money by producing or buying and selling products  Environmental factors: These factors include the availability of natural resources, climatic conditions, location aspects, pollution control measures, etc.  Industry: A group of businesses that produces a closely-related set of raw materials, goods, or services  Standard of living: The material well-being of the average person in a given population 1.8 CASE STUDY: TATA NANO–ENVIRONMENTAL ANALYSIS Case Objective The case study explains the failure of Tata Nano due to poor environment analysis. Tata Motors is a leader in manufacturing of commercial, passenger, military and electric vehicles. It is also the world’s 4th largest truck and 2nd largest bus manufacturer by volume. In January 2008, Tata Motors introduced Tata Nano, dubbed as the ‘People’s Car’ and also known as the world’s cheapest car. The car was launched in March 2009 which created a significant impact in the Indian automobile market. Tata Motors Ltd. is one of the few companies which have its own R&D centres. It has established an engineering research centre at Pune (with strength of around 3,500 personnel). The main target group of customers for Tata Nano are the lower- and middle- income families in India, many of whom resisted purchasing four-wheelers mainly due to the price affordability and maintenance cost. Launching of Tata Nano gave an opportunity for these groups to purchase a car within their means. During the initial launch, Tata Nano was priced at about rupees one lakh. In December 2008, the cost of the car increased significantly due to higher raw material costs. Further, in 2013, Tata Nano was rated as the most trusted 4-wheeler brand by Brand Trust Report India Study. Tata Motors was so confident about Nano that they thought this is going to be a massive success. But it failed and became one of the most disaster products in the history of marketing due to the following reasons:  Tata Nano projects itself as the cheapest car. Nobody wants to drive the cheapest car. Buying a car is related to social status and prestige in society. 10 UNIT 01: Introduction to Business Environment JGI JAIN DEEMED-TO-BE UNIVERSIT Y  So many Nano cars catch fire. This created a complete buzz in media. Despite the low price, everyone hesitated to buy them because of the incidences of fire.  After the announcement of Nano, the second-hand market of cars faces a drop in price by 15% to 20%. New cars like Alto 800, Maruti 800, Indica, etc., also have to reduce the price. People called it a Nano effect.  The vision of Tata was an affordable car that could fit a family of four. But, in reality, it was not fitting an Indian family of 4 with ease. Source: https://bking.in/tata-nano-failure-case-study/ Questions 1. What was the vision of Ratan Tata behind the launch of Nano project? How did he analyse the environment? (Hint: Low-income group people, safety, substitute for a bike.) 2. In spite of extensive research and development programme, Nano was a huge failure. Why? (Hint: Poor vision and mission, competition, quality, etc.) 1.9 SELF-ASSESSMENT QUESTIONS A. Essay Type Questions 1. What do you mean by the term business? 2. What is the scope of business? 3. Explain the factors comprising the internal environment of a business. 4. What is the impact of external environment on the decisions of a business organisation? 1.10 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS A. Hints for Essay Type Questions 1. A business is an economic activity performed by an enterprising entity or an organisation often with the objective of maximising profits. Refer to Section Business 2. Business is an organised and systematic activity for earning profit. It is an integral part of society as it creates employment opportunities. Refer to Section Business 3. The internal environment involves strengths and weaknesses of the organisation in different functional areas, namely marketing, operations, finance, information technology, personnel, etc. Refer to Section Components of Business Environment 4. External environment comprises the factors on which a business organisation has no control; however, timely response by the organisation makes it play safely. The success and survival of a business organisation depends on its ability to respond to external factors. Refer to Section Components of Business Environment 11 JGI JAINDEEMED-TO-BE UNIVERSIT Y Business Environment and Strategy @ 1.11 POST-UNIT READING MATERIAL  http://www.jiwaji.edu/pdf/ecourse/tourism/Introduction,%20definition,%20concept%20&%20 features%20of%20Business%20environment.pdf  https://www.mgkvp.ac.in/Uploads/Lectures/47/2724.pdf 1.12 TOPICS FOR DISCUSSION FORUMS  Find information on how important it is for managers to understand the business of their organisations. 12