PART A Business Environment

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1 PART A Business Environment 1

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3 CHAPTER 1 BUSINESS ENVIRONMENT Chapter Scope: Introduction and Features, Concepts of Vision & Mission Statements, Types of Environment, Internal to the Enterprise, Value System, Management Structure and Nature, Human Resource, Company Image and Brand Value, Physical Assets, Facilities, Research & Development, Intangibles, Competitive Advantage, External to the Enterprise, Micro-Suppliers, Customers, Market Intermediaries, Macro- Demography, Natural, Legal & Political, Technological, Economy, Competition, Socio-Cultural and International, Business Environment With Reference to Global Integration. MEANING OF BUSINESS ENVIRONMENT Business may be understood as the organized efforts of an enterprise to supply consumers with goods and services for a profit. Businesses vary in size, as measured by the number of employees or by sales volume etc. All businesses work on profits. The purposes of business that goes beyond earning profits are: 1. an important institution in society 2. for the supply of goods and services 3. creating job opportunities 4. offering better quality of life 5. contributing to the economic growth of the country. Success of every business depends on adapting itself to the environment within which it functions. For example, when there is a change in the government polices, the business has to make the necessary changes to adapt it to the new policies. Similarly, a change in the technology may render the existing technology obsolete, as we have seen that the introduction of computer has replaced the typewriters FEATURES OF BUSINESS ENVIRONMENT 1. Totality of External Forces: Business environment is the sum total of all things external to business firms and, as such, is summative in nature. 2. Specific and General Forces: Specific forces (such as investors, customers) affect individual enterprises directly and immediately in their day-to-day working. General forces (such as social, and technological conditions) have impact on all business enterprises. 3

4 4 Soft Tracker on CS Foundation Paper Dynamic Nature: It keeps on changing whether in terms of technological improvement, shifts in consumer preferences. 4. Uncertainty: Business environment is largely uncertain as it is very difficult to predict future happenings, especially when environment changes are taking place too frequently as in the case of information technology or fashion industries. 5. Relativity: Business environment is a relative concept since it differs from country to country and even region to region. 6. Multi-faceted: Business environment changes are frequent and depend on knowledge and existence of business person. Changes may be viewed as an opportunity for some or a threat for others. IMPORTANCE OF BUSINESS ENVIRONMENT Proper understanding of various aspects of business environment such as social, political, legal and economic helps the business in the following ways: 1. First Mover Advantage: Early identification of opportunities helps an enterprise to be the first to exploit them instead of losing them to competitors. 2. Coping with Rapid Changes: In order to effectively cope with these significant changes, firms must understand and examine the environment and develop suitable course of action. 3. Improving Performance: The enterprises that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period. 4. Identification of Threats: If an Indian firm finds that a foreign multinational is entering the Indian market, it can meet the threat by adopting measures like, by improving the quality of the product, reducing cost of the production etc. 5. Giving Direction for Growth: It enables the business to identify the areas for growth and expansion of their activities. 6. Meeting Competition: It helps the firms to analyse the competitors' strategies and formulate their own strategies accordingly in order to cope with the rapidly increasing competition. 7. Image Building: Environmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working. 8. Continuous Learning: The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes.

5 [Chapter 1] Business Environment 5 VISION AND MISSION STATEMENT 1. A Vision Statement describes the desired future position of the company. 2. A Mission Statement defines the company's business, its objectives and its approach to reach those objectives. 3. Elements of Mission and Vision Statements are often combined to provide a statement of the purposes, goals and values of the company. Internal to Organisation Guide management's thinking on strategic issues Help define performance standards Inspire employees to work more productively Guide employee's decision making Help establish a framework for ethical behavior. External to Organisation Enlist external support Create closer linkages with customers & suppliers Serves as a public relations tool. VISION STATEMENT It is your optimum version of your business or where you can visualize being positioned in 5 to 7 years time. Examples of Vision Statements: (a) Disney to make people happy". (b) ICSI "to be a global leader in promoting good corporate governance". Mission Statement MISSION STATEMENT Your mission explains why your business exists. It tells how to achieve the vision in stages. It can be crafted in the following steps: What does your company do? Who do you do it for? Where do you exist? How does it do it? Why does your company do it?

6 6 Soft Tracker on CS Foundation Paper - 1 Examples of Mission Statements: (a) Nike "to bring inspiration and innovation to every athlete in the world". (b) ICSI "to develop high caliber professionals facilitating good corporate governance". TYPES OF BUSINESS ENVIRONMENT There are mainly two types of business environment, internal and external. INTERNAL ENVIRONMENT The internal environment has received considerable attention by firms. Internal environment contains the owner of the business, the shareholders, the managing director, the non-managers, employees & the customers. It includes 6 Ms i.e. Man Money Marketing Resources Machinery Management Structure Miscellaneous Factors (Research and Development, Company Image) Human Resource (MAN) The human resource in any organization must have characteristics like skills, quality, high morale, commitment towards the work, attitude, etc. The involvement and initiative of the people in an organization at different levels may vary from organization to organization. Financial Factors (MONEY) Financial facilities are required to start and operate the organisation. The sources of finance are share capital, banking and other financial institutions and unorganised capital markets. The availability of finance coupled with various incentives attached is a facilitating internal factor. Marketing Resources Resources like the organization for marketing, quality of the marketing men, brand equity and distribution network have direct impact on marketing efficiency of the company.

7 [Chapter 1] Business Environment 7 Physical Assets and Facilities (MACHINERY) An organisation invests money in plant and machinery because it expects a positive rate of return over cost in future. The revenue from the use of plant and machinery should be sufficient so as to cover the invested money, operating costs, and generate enough profit to satisfy the organisation. Management Structure and Nature The structure and style of the organization directly has an impact on the decision making decisions of a firm. These needs to be appropriately managed for smooth functioning and operations. The strategies available to an organisation are determined by its structure. Different strategies are better suited to different environments. Some markets and environments change faster than others. Miscellaneous Factors 1. Research and Development: R&D mainly results in technological improvements of the Business environment. The technological environment refers to the sum total of knowledge providing ways of doing things. 2. Company Image and Brand Equity: The image of the company in the outside market has the impact on the internal environment of the company. It helps in raising the finance, making joint ventures expansions and acquisitions. 3. Value System: These values helps guide the basic principles of business for a period of time which moulds an impression of positivism among people dealing with the business. 4. Competitive Advantage: Competitor's actions affect the ability of the business to make profits, because competitors will continually seek to gain an advantage over each other, by differentiating their product and service. EXTERNAL ENVIRONMENT An organisation has little or no control over its external environment but needs to constantly monitor and adapt to these external changes. A proactive or reactive response leads to significantly different outcomes. MICRO ENVIRONMENT (1) These are the task environment and operating environment which have a direct bearing on the operations of the firm. It consists of the factors in the company's immediate environment that affects the performance and working of the company. Micro environmental factors, internal factors close to a business that have a direct impact on its strategy includes: (a) Customers: Organizations survive on the basis of meeting 'customer needs and wants' and providing benefits to their customers.

8 8 Soft Tracker on CS Foundation Paper - 1 (b) Employees: Training and development play a critical role in achieving a competitive edge; They help in executing the policies and plans of business. (c) Suppliers: Suppliers provide businesses with the materials they need to carry out their manufacturing and and production activities. If a supplier provides a poor service, this could increase timescales or lower product quality. (d) Shareholders: A shareholder affect the functions of the business. Shareholder pressure to increase profits will affect organizational strategy. (e) Media: Consumer television programmes with a wide and more direct audience can also have a very powerful impact on the success of an organisation. Some business recognizes this and uses media support for building their image and reputation. (f) Competitors: Competitor analysis and monitoring is crucial if an organisation is to maintain or improve its position within the market. If a business is unaware of its competitor's activities, they will find it very difficult to 'beat' them. MACRO ENVIRONMENT When the macro factors become uncontrollable, the success of company depends upon its adaptability to the environment. The acronym for the macro analysis is "STEEP." The five areas of interest are: STEEP Socio-Cultural & Demographics Technology Economic Conditions Ecology & Physical Environment Political and Legal 1. Socio Cultural and Demographics: Societal values and lifestyles change over time, and the most important of these; directly or indirectly leave an impact on the business environment. (a) The changes in culture and lifestyle may come from medical (smoking, exercises); (b) Science (global warming, going green) (c) Economic (people working longer) (d) Cultural diversity (music preferences) (e) Technologies (biodegradable plastic) are examples.

9 [Chapter 1] Business Environment 9 Demographics refer to the size, density, distribution and growth rate of population. All these factors have a bearing on the demand for various goods and services. The high rise of population indicates the easy availability of labour. 2. Technology: Technology is understood as the systematic application of scientific or other organised knowledge to practical tasks. Technological environment include the methods, techniques and approaches adopted for production of goods and services and its distribution. 3. Economic Conditions: The economy goes through a series of fluctuations associated with general booms and recessions in economic activity. Business is influenced by economic aspects like interest rates, wage rates etc. (a) Economic Conditions: The economic conditions of a country refer to a set of economic factors that - have great influence on business organizations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital (b) 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: (i) Industrial Policy (ii) Fiscal Policy (iii) Monetary Policy (iv) Foreign Investment Policy (v) Export Import Policy (EXIM Policy) (c) Economic System: The world economy is primarily governed by three types of economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy. 4. Ecology and Physical Environment: The impact of climate change must be considered: water and fuel costs could change dramatically, if the world warms by only a couple of degrees. These factors include the availability of natural resources, weather and climatic condition, location aspect, topographical factors, etc. 5. Political and Legal: The political environment of a country is influenced by the political organisations such as philosophy of political parties, ideology of government or party in power, nature and extent of bureaucracy influence of primary groups. The stability of the government also influences business and related activities to a great extent. Legal environment includes flexibility and adaptability of law and other legal rules governing the business. A stable political and legal environment is urgent for business growth.

10 10 Soft Tracker on CS Foundation Paper - 1 Liberalisation Liberalisation refers to the process of eliminating unnecessary controls and restrictions on the smooth functioning of business enterprises. It includes: 1. Abolishing industrial licensing requirement in most of the industries 2. Freedom in deciding the scale of business activities 3. Freedom in fixing prices of goods and services 4. Simplifying the procedure for imports and exports Privatisation Privatization, which has become a universal trend, means transfer of ownership and/or management of an enterprise from the public sector to the private sector. It also means the withdrawal of the state from an industry or sector, partially or fully. It is opening up of an industry that has been reserved for the public sector to the private sector. The objects are: 1. To improve the performance of PSUs so as to lessen the financial burden on taxpayers 2. To increase the size and dynamism of the private sector, distributing ownership more widely 3. To encourage and to facilitate private sector investments, from both domestic and foreign sources 4. To generate revenues for the state The important routes of privatization are: 1. Privatization of ownership, through the sales of equity 2. Reprivatisation 3. Franchising- authorizing the delivery of certain services in designated geographical areas is common in utilities and urban transport 4. Contracting- under which government contracts out services to other organizations that produce and deliver them 5. Privatization of management, using leases and management contracts 6. Government withdrawing from the provision of certain goods and services leaving then wholly or partly to the private sector 7. Liquidation, which can be either formal or informal. The benefits of privatization are as follows: 1. Privatization enables the government to mop up funds 2. Privatization helps the state to trim the size of the administrative machinery 3. It enables the government to concentrate more on the essential state The functions of privatization are as follows: 1. It may result in better management of the enterprises 2. It may also encourage entrepreneurship

11 [Chapter 1] Business Environment It helps accelerate the pace of economic developments 4. Privatization may increase the number of workers and common man who are shareholders. The issues of privatisation include: 1. Disinvestment of shares of selected public sector industrial enterprises 2. The post liberalisation phase has witnessed a massive expansion of the private sector business in India 3. Reduction in the number of industries reserved for the public Globalisation India's economic integration with the rest of the world was very limited because of the restrictive economic policies followed until Indian firms confined themselves, by and large, to the home market. Globalization has in fact become a buzzword with Indian firms now and many are expanding their overseas business by different strategies. Globalization may be defined as "the growing economic interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology". Reasons for Globalisation 1. To get technology and managerial know-how Companies often set up overseas plants to reduce high transportation costs 2. Other developments also contribute to the increasing international of business. 3. Companies may choose for going international to find political stability, which is relatively good in other countries 4. Some companies set up plants overseas so as to be close to their raw materials supply and to the markets for their finished products 5. It is necessary to search of international markets and to set up overseas production facilities GLOBALIZATION LEADS TO: (1) New Markets (a) New financial markets-deregulated, globally linked, working around the clock, with action at a distance in real time, with new instruments such as derivatives. (b) Deregulation of anti-trust laws and proliferation of mergers and acquisitions. (c) Growing global markets in services (i) banking, (ii) insurance, (iii) transport.

12 12 Soft Tracker on CS Foundation Paper - 1 (2) New Business Rules (a) Human rights conventions and instruments building up in both coverage and number of signatories (b) Consensus goals and action agenda for development (c) Market economic policies spreading around the world, with greater privatization GLOSSARY Business An economic activity, which is related with continuous and regular production and distribution of goods and services for satisfying human wants. Business environment Business environment may be defined as a set of conditions Social, Legal, Economical, Political or Institutional that are uncontrollable in nature and affects the functioning of organization. It is the surrounding of the business. First Mover advantage A form of competitive advantage that a company earns by being the first to enter a specific market or industry. Being the first allows a company to acquire superior brand recognition and customer loyalty. The company also has more time to perfect its product or service. Image Building The perception that is created in people s mind about the image of the business or entrepreneurial activity that they instantly recognize the name as they hear it. A business s image is composed of an infinite variety of facts, events, personal histories, advertising and goals that work together to make an impression on the public. Mission statement A mission statement is a brief description of a company s fundamental purpose. A mission statement answers the question, Why do we exist? Vision Statement A vision statement is a picture of a company in the future which is a inspirational note and the framework for all strategic planning. A vision statement answers the question, Where do we want to go? Competitive Advantage A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices by providing greater benefits and service that justifies higher prices.

13 [Chapter 1] Business Environment 13 Value system A coherent set of values adopted or evolved by a person, organization, or society as a standard to guide its behavior in preferences in all situation. Industrial licensing It is the policy measure adopted by the government to meet pre defined objectives where specified industries need to take license from government to start business. MULTIPLE CHOICE QUESTIONS Q1. Which statement is false about the business environment? (a) Internal factors include the vision and mission of the organization and other internal mechanism of the organization. (b) External factors are the ones which lie beyond the control of business. (c) External environment relates with the suppliers, customers. (d) None of the above is correct. Q2. Who paid under given statement? The nature of the global business environment guarantees that no matter how hard we work to create a stable and healthy organisation, our organisation will continue to experience dramatic changes far beyond our control. (a) W. Keats (b) Margaret J Wheatley (c) Y. Zenim (d) Johnson Q3. Who said Environment consists of atoms and molecules, agglomeration of things in motion, alive, of men and emotions, of physical and social law, social ideas, norms of actions, of forces and resistance. (a) Barnard (b) Margaret J. Wheatly (c) Johnson (d) W.Keats Q4. The purposes of business that goes beyond earning profits are (a) For the supply of goods and services (b) Creating job opportunities (c) Offering better quality of life Q5. Identify the incorrect statement (a) The success of every business depends on adapting itself to the environment within which it functions.

14 14 Soft Tracker on CS Foundation Paper - 1 (b) The business environment poses threats to a firm or offers immense opportunities for potential market exploitation. (c) A change in the fashion or customers taste may shift the demand in the market for a particular product. (d) None of the above Q6. A Vision Statement describes the desired position of the company. (a) Current (b) Past (c) Future (d) None of the above Q7. The features of business environment are as follows (a) Totality of External Forces (b) Dynamic Nature (c) Uncertainty Q8. Business environment can be understood by the following ways (a) Identification of Threats (b) Giving Direction for Growth (c) Image Building Q9. A defines the company's business, its objectives and its approach to reach those objectives. (a) Vision statement (b) Mission Statement (c) Both (a) & (b) (d) Strategy Q10. Which is not a mission / vision statement? (a) Help define performance standards (b) Guide employee's decision making (c) Help establish a framework for ethical behavior (d) None of theme Q11. Whose mission statement is given below? "To bring inspiration and innovation to every athlete in the world". (a) Face book (b) Nike (c) Google (d) ICSI

15 [Chapter 1] Business Environment 15 Q12. Which mission statement is internal to organisation? (a) enlist external support (b) create better communication with customers and suppliers (c) serves as a public relations tool (d) Nome of them Q13. Which statement is true about vision statement? (a) Your vision statement is where you want your business to reach at (b) It is your future dream for your business (c) It should keep your business reaching for new heights Q14. Whose mission statement is given below? "To give people the power to share and make the world more open and connected". (a) Face book (b) Nike (c) Google (d) ICSI Q15. Whose mission statement is given below? "To organize the world s information and make it universally accessible and useful" (a) Face book (b) Nike (c) Google (d) ICSI Q16. Whose mission statement is given below? "To develop high caliber professionals facilitating good corporate governance" (a) ICSI (b) Face book (c) Nike (d) Google Q17. Competitive Advantage involves (a) identifying the actual competitors (b) assessing competitors' objectives (c) selecting the strategies to deal with competitors Q18. Micro environmental factors includes (a) Employees (b) Suppliers (c) Media

16 16 Soft Tracker on CS Foundation Paper - 1 Q19. Which is not a part of an internal environment? (a) Machinery (b) Loan (c) Marketing resources (d) Money Q20. Internal environment contains (a) the owner (b) the shareholders (c) the non-managers Q21. Which is not a part of an internal environment? (a) Research and development (b) Company image (c) Non competitive advantage (d) Value system Q22. The human resource in any organization must have characteristics like (a) skills (b) quality (c) attitude Q23. Which financial factors don t affect internal environment of a business? (a) Financial policies (b) Budget for next year (c) Financial positions (d) Capital Structure Q24. Which statement is false about shareholders? (a) Balance in favour of business should be more than shareholders. (b) They own shares of the company thereby end up owning the company itself. (c) Shareholder pressure to increase profits will affect organizational strategy (d) To keep shareholder's motivation, appropriate dividends are needed to be distributed. Q25. Which is relevant for competitor from micro environmental factors angle? (a) Does the business have a unique selling point (b) Competitor analysis and monitoring is crucial (c) It should add value to the business

17 [Chapter 1] Business Environment 17 Q26. The acronym for the macro analysis is (a) STEP (b) STEEP (c) STEPP (d) None of the above Q27. Which area of interest does not affect business macro environment? (a) Technology (b) Ecology and Physical Environment (c) Political and Legal (d) None of the above Q28. The social environment of business excludes social factors like (a) Technology (b) values, beliefs (c) poverty, literacy (d) customs, traditions Q29. The changes in culture and lifestyle may come from many sources like (a) Medical Science (b) Physical Science (c) Economic Q30. NAFTA was signed among following countries (a) US, Canada, Mexico (b) India, US, Pakistan (c) US, Canada, UK (d) None of the above ANSWER SHEET 1 (d) 2 (b) 3 (b) 4 (d) 5 (d) 6 (c) 7 (d) 8 (d) 9 (b) 10 (d) 11 (b) 12 (d) 13 (d) 14 (a) 15 (c) 16 (a) 17 (d) 18 (d) 19 (b) 20 (d) 21 (c) 22 (d) 23 (b) 24 (a) 25 (d) 26 (b) 27 (d) 28 (a) 29 (d) 30 (a)

18 18 Soft Tracker on CS Foundation Paper - 1 MY DIFFICULTIES : CONCEPTS AND MCQ

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