Chapter I

Sampath Academy, Bangalore.
Faculty, K.Veerendra Patil
CHAPTER-I
BUSINESS ENVIRONMENT
I. CONCEPT OF BUSINESS
Introduction:
Business is one of the economic activities. In the modern times, business has
become one of the most important economic activities and means to achieve
material prosperity and human welfare. The systematic development of
Business is of paramount significance for achieving desired economic growth
and development of economies in the context of liberalization, privatization
and globalization.
Economic activities refer to those human activities which are undertaken
with the object of satisfying material and economic needs. Economic
activities are concerned with production and distribution of wealth i.e. goods
and services, for sale to others at a profit. They are influenced mainly by material
or economic considerations.
Meaning and Definition of Business:

Etymologically, Business means the state of being busy. In this sense, any
economic activity with human beings keep themselves busy can be regarded as
business. But such a view is too general to serve any purpose.
In the general sense, business is identified with exchange of goods and
services. In this sense, business refers to mere trading i.e. buying and selling of
goods. This view is too narrow because scope of modern business is quite
wide.
In its practical sense, business refers to all those economic activities
which are concerned with the production or purchase of goods and
services for the purpose of sale at a profit. In this sense, business includes
activities like manufacturing, trading, transportation, warehousing, banking and
finance, insurance, advertising, etc.
According to Prof. R. N. Owens “Busines s is an enterpris e engaged in
the production and distribution of goods for sale in a market or rendering
of services for a price”.
According to L.R. Dicksee, “Business is a form o f activity pursued
primarily with t h e o b j e c t o f earning profits for the benefit of those on
whose behalf t h e activity is conducted”.
According to Urwick and Hunt , “Business is any enterprise which
makes, distributes or provides any article or service which other members
of the community need and are willing to pay for”
According to Haney , “Business may be defined as human activity
directed towards producing or acquiring wealth through buying and selling
o f goods”.
Interpretations of the term ‘Business’:
The t e r m business literally meant the s t a t e of being b u s y f o r an
individual , group, organisatio n or s o c i e t y .
Business is i n t e r p r e t e d as o n e ’ s r e g u l a r occupation or p r o f e s s i o n or
economic activities.
Strategic Management 1.1

Business Environment
Business is also understood as a particula r entity , company ,

organisation , enterprise, firms or corporation.
Business is also interpreted as particular market segment secto r
like Real estate business , textile business etc.
Characteristics of business:
1.Business is an economic activity:
Every business is an economic activity leading to the creation of utility of
one kind or another. Creation of utility can be form utility, place utility, time utility
etc.
2.Business involves sale, transfer or exchange for value:
Business involves sale, transfer or exchange of goods or services for
value. Therefore, only the production or purchase of goods or services with the
object of selling them or exchanging them for value comes under business.
3.Business is created and managed by people:
According to Peter F. Drucker, “Business is created and m anag ed by
the p eo p l e k n ow n a s e nt re p r e n e u r s. A group of people who will take
decision s will determine whether an organisatio n is going to prosper or
decline, whether it will survive or will eventually perish in market. This
conclusion is true of every business.
4.Business is conducted with profit motive:
Business is conducted with the object of making profit. Earning of profits by a
business is necessary for its very survival. Without profit business cannot
survive for long.
5.Business involves element of risk:
Business involves risk i.e. possibility of loss arising from uncertainty.
However, the degree of risk differs from business to business. Generally capital
investment decides the degree of risk, larger the capital investment, greater is the
risk of business and vice versa.
Objectives of business:
Business is an economic activity carried on by the people (i.e.
entrepreneurs and managers) through people (i.e. the employees) for
the people (i.e. consumers and the society at large). Therefore, business
cannot be carried on in isolation of society. It will be influenced by political,
economical and social environment. The business too will influence the
environment, particularly the economic and social environment. This implies
that the objectives of business are determined by the interaction
between the business and the environment.
The objectives of modern business are influenced by many types of environment;
therefore, businesses have many categories of business objectives. The objectives
of a modern business may be broadly classified as follows:
A. Economic objectives
B. Social objectives
C.Human objectives
A. Economic objectives:

Business is basically an economic activity therefore its primary objectives will

be the economic objectives. The main economic objectives of the business are
as follows:
1.Survival:
Survival is the most fundamental and natural objective of business.
Survival is the will and desire to forge into future as long as is possible. It
gains more value and prominence during the initial stages of establishment of
business and during economic crises. The ability to survive depends upon nature
of ownership, ability of management, economic conditions, financial strength,
profitability etc. however, in the long run, every business will think beyond mere
survival in the market.
2.Profitability:
Making Profit has been one of most important objectives of business
since ages. However, it is not the sole objective of the business. Earning
of profits by a business is necessary for the following reasons:
a) Profit is the reward to the entrepreneur for undertaking the risk of business.
b) Certain minimum profit is necessary even for the very survival of business.
According to Peter F. Drucker, “the problem of any business is not the
maximization of profit but the achievement of sufficient profit to cover the risks
of economic activity and thus avoid loss”.
c) Profit helps to generate sufficient resources to finance further expansion
and growth.
d) Profit is the measuring rod of business performance and the test of
effective business operations.
e) Profit ensures stability and prosperity of the organisation.
Thus, the profit of any business must be reasonable. It must be sufficient to
enable the business to cover its costs and stay in the business.
3.Stability:
Stability means the ability of business to continue its business
operations in an effective manner in different economic conditions. In
other words, business should manage to function effectively during boom,
recession or depression, it should have ability to benefit from favorable conditions
and counter or cope with adverse situations. A business should achieve stability in
terms of profitability, market share, customer satisfaction, creditworthiness,
employee satisfaction, Business growth etc.
4. Efficiency:
Efficiency is the fundamental requirement of growth. According to Peter
F. Drucker, Efficiency is doing right thing in a right way. Efficiency
implies optimum utilization of productive capacity of the business and
scarce resources available with the business. Efficiency helps in achieving
the sustained development of business, reduction in wastage of resources, cost
leadership in the market, etc.
5.Creation of customers:
Business activity of an enterprise can be sustained only if there are
enough customers to buy the products and services offered by
enterprise. Without a sufficient base of customers, a business enterprise

cannot survive. According to Peter F Drucker, “there is only one valid definition
of business purpose: to create more and more customers…it is the customer who
determines what a business is… the customer is the foundation of business and
keeps it in existence, and it is to supply the customer that society entrusts wealth-
producing resources to the business enterprise.” To create a customer business
has to understand what customer wants and wants of customers can be
understood with the help of marketing research.
6. Innovation:
In a dynamic business world, change is order of the day. Therefore, there must be
change in every business in tune with change in environment. A business can
create customers and earn profits only when it produces newer and
better products and services, and this is possible only through constant
innovation. Innovation in business means adaption to the changes taking
place in the environment. Innovation may take the form of using new
techniques, adopting new processes, introducing new designs, providing newer
and better products and suggesting new uses for the products. Innovation helps
the business in achieving competitive advantage and build favourable image of
the business in the minds of customers.
7. Growth:
Growth is a dynamic objective of business. It relates to the future of business and
encompasses all the activities which lead to achievement of greater heights in
business. Growth in business can take many forms like increase in assets,
manufacturing facilities, and increase in sales volume in existing
product, improvement in profits and market share, expansion of business
etc. Growth may take the business into relatively unknown and risky paths, full of
promises and pitfalls. The pursuit of growth may lead to business prosperity or
become reason of perishing of business enterprise.
B. Social objectives
Business activities cannot be carried on in isolation. They have to be carried on in
a social environment and social environment imposes certain social
responsibilities on business. Thus, business to fulfill its social responsibilities
creates social objectives. The following are the important social objectives of
business:
1.Supply of goods which society wants:
Business thrives on the goodwill of the community in which it is carried out. A
business can enjoy the goodwill of the community if it fulfills the responsibility
of supplying goods and services of standard quality which community
wants.
2.Social welfare:
A good business aims to participate actively in the social welfare
activities of the area in which it functions. A business can contribute to social
welfare by running schools & colleges, hospitals, prevention of pollution,
avoidance of profiteering & anti-social practices, production according to national
priorities, upholding moral & ethical norms of society, ensuring balanced
development of all regions etc.
C. Human objectives:

Human resource is the most important asset of any business. All other resources
can be effectively used only through human resource. Human resource is the only
asset in the organisation which improves and gets appreciated over a period of
time and use. Business has human objectives to ensure continuous availability of
appropriate human resource always:
1.Providing employment:
One of the important human objectives of a business is to provide employment in
the society. This objective may, sometimes conflict with the economic objective of
cutting down cost and increasing profits through mechanization and automation.
However, business can plan and ensure mechanization and automation is
implemented smoothly in phases to avoid loss of jobs to people in the society.
2. Development of human resource :
The objective of development of human resource is to ensure the smooth
functioning, growth and development of business. Human resource can be
developed by a business by giving opportunities to its employees for developing
new skills and abilities and individual development.
3. Paying equitable remuneration and providing benefits to employees:
Business always aims to pay wages and provide benefits to employees according
to their ability to contribute to the development of business. Payment of fair
wages and providing benefits will keep employees contended and help the
business to run smoothly and efficiently.
II. BUSINESS ENVIRONMENT

Introduction:
Business c a n not function in an isolated vacuum. Businesses function within
a whole gambit of relevant environment and have to negotiate their way
through it. The extent to which the business thrives depends on the manner
in which it interacts with its environment. A business which continually remains
passive to the relevant changes in the environment is destined to gradually fade away
from market. To be successful business has to not only recognize different elements of
the environment but also respect, adapt to or have to manage and influence them.
The business must continuously monitor and adapt to the environment if it is to
survive and prosper. Disturbances in the environment may spell extreme threats or
open up new opportunities for the firm. A successful business has to identify,
appraise, and respond to the various opportunities and threats in its environment.
Meaning of Business Environment:
Environment' literally means the surrounding objects, influences or
circumstances that encompass something within which it exists. The
environment of any organisation is "the sum total of all the aggregate
conditions, events and influences that affect it".
Environment is anything and everything which affect the functioning of
business either directly or indirectly. It is the sum of many external
and internal factors.
Business environment refers to all factors that have an effect on
business decisions, its performance and organisation. According to
Arthur M. Weimer, "Business environment encompasses the climate or set of
conditions in which business operations are conducted".

Environmental influences on business:

Enterprises operate within an environmental framework. Although
environment and the enterprise influence each other, the influence of
environment on enterprises is more pronounced and prominent. The
external environment of an organisation consists of all such forces and events that
are external to and beyond the control of individual business enterprises and their
management. These forces and events are given within which the firms and their
management have to operate, adapt and adjust in order to survive.
There is a continuous interaction between the organisation and its environment.
The interaction suggests a relationship between the two. This relationship can be
viewed and analysed in three ways:
1. Organisation as input-output sub-system of the broader environment:
2.Organisation as a central focus for realisation of contributions of
groups
3. Organisation as source of opportunities and threats
1. Organisation as Input-Output Sub-System of the Broader
Environment:
The organisation can be viewed as an input-output sub-system of a broader
environment. It takes various inputs viz, human, capital, technical from
the environment. These inputs are transformed by the business through
various processes into outputs viz, goods, services. The outputs are then
exchanged with customers and the exchange may bring in some benefits in the
form of profits, reputation, goodwill etc. to the business which could be stored and
used for further development and growth. What kind of inputs are taken,
processes are adopted and outputs are given by the organisation are determined
by nature of organisation and environment.
2. Organisation as a Central Focus for Realisation of Contributions
of Groups:
The organisation can be viewed as the central focus for realizing the
contributions of many groups both within and outside the organisation.
When these groups contribute to the well-being of the organisation, they must
have legitimate share in organizational outputs. These groups may be employees,
consumers, suppliers, shareholders, government, and the society in general. Thus,
the organizational functioning is affected by the expectations of these groups and
the organisation has to take these factors into account.
3. Organisation as a player or performer in the environment:

The organisation can be treated as player operating in environment
presenting opportunities and threats to it. How best the organisation uses
opportunities provided and threats imposed on it is a matter of prime concern for
it. Thus, organisation looks on the environment as posing threat or offering
immense opportunities for it for exploitation.
Problems in understanding the Environmental influences:

Managers have to develop an understanding of the environment and use
this understanding while making strategic decisions. However, in trying to
understand the environment, managers face different problems which are listed as
follows:

1. Environment is Combination of Many Diverse Factors and Influences:

The environment is combination of many diverse factors and influences.
It is highly difficult to find out how these diverse factors and influences should be
used as information for appropriate strategic decision making. Mere listing of
environmental influences may not be useful for strategic decision making
if overall picture of environmental influences on organisation does not
emerge.
2. Changes in Environment are Highly Uncertain:
The pace advancement in science and technology has made change order of the
day. Continuous change in the environmental factors and influences make it
very difficult for manager to predict the future events and influences on business
and uncertainty about future increases.
3. Managers Tend to Be Biased while Analysing Environment:
Managers are also human beings; they are also biased in some way or the other.
Managers try to understand and simplify the environmental aspects and influences
in a biased manner.
They tend to give more importance to those aspects of environment which were
important historically and confirm the established views. A strategic manager
has to overcome such a biased approach to analysis and be more logical
and creative in analysing the environment.
Framework to Understand the Environmental Influences:

In spite of problems in understanding the business environment, organisations
cannot ignore it. Organisations need to create a framework to understand
the environment and its influences on organisation. This will help in
identifying key issues, find means and ways of coping up with external
environment and assist in strategic thinking.
A general framework consists of following steps:
Step 1: Environmental scanning:
Environmental scanning is the process of understanding an
organisation’s environment in terms of nature, behaviour and
complexity, i.e. whether it is certain or uncertain, relatively static or dynamic,
simple or turbulent, easy or complex etc. environmental scanning helps in
deciding what focus the rest of analysis should take.
Step 2: Monitoring and auditing of Environmental influences:

Environmental monitoring and auditing is the process of identifying how
the environmental influences, events, trends, issues, expectations etc.,
affect the organisation’s performance and development. This is done by
considering the way in which the political, economic, social, ecological and
technological influences have bearing on organisations. They help in devising
strategic alternatives for the organisation.
Step 3: Analysis of key factors in environment directly affecting the
organisation:

The organisation has to focus on those key factors in the environment

which are in immediate proximity and directly affecting the organisation.
The organisation has to make an attempt to understand why certain forces are of
strategic relevance and importance. The aim is to ascertain and analyse the
competitive position of the organisation.
Environmental analysis:
Meaning of environmental analysis:
Environmental analysis or external analysis or environmental appraisal is
the process through which organisation monitors and comprehends
various environmental factors and determines the opportunities and
threats that are provided by these factors. There are two aspects involved in
environmental analysis, viz.,
1. Monitoring the environment.
2. Identifying opportunities and threats based on environmental monitoring.
Features of environmental analysis:
1. Environmental analysis is a holistic exercise:
Environmental analysis is holistic exercise in which total view of
environment is taken rather than viewing trends piecemeal. This is necessary
because some elements may indicate opportunities while others may indicate
threats.
2.Environmental analysis is explanatory process:
Environmental analysis is heuristic process or explanatory process. While
monitoring aspect is concerned with present developments, a large part of
process seeks to explore unknown terrain, the dimensions of possible
futures.
3.Environmental analysis is continuous process:
Environmental analysis is a continuous process rather than a one-shot deal.
The continuous scanning of environment enables the strategic managers pick
up the signals or triggers in the overall pattern of developing trends.
Need for environmental analysis:

Role or importance of environmental analysis in strategic management is quite
crucial. Based on observation of strategic management practices of different
companies, a perception has emerged that those companies which give high
importance to environmental analysis show better performance than
those companies which do not give high importance. This is so because
without proper environmental analysis, no meaningful strategic action can be
taken. The need for environmental analysis in strategic management will be clear
from the following important reasons:
1. The environment changes so fast that new opportunities and threats are created
which may result disequilibrium in organisation’s existing equilibrium.
2. Environmental analysis gives strategists time to anticipate opportunities to
plan to take optional responses to these opportunities.
3. Environmental analysis helps strategists to develop an early warning system
to prevent threats or develop strategies which can turn threats to the
organisation’s advantage.

4. Environmental analysis helps strategists to narrow the range of available

alternatives and eliminate options that are clearly inconsistent with
forecast opportunities and threats. The analysis helps in eliminating
unsuitable alternatives and to process most promising alternatives. Thus, it
helps strategists to reduce time pressure and to concentrate on those which are
more important.
Objectives and Goals of Environmental Analysis:

Environmental analysis has the following important goals:
1.To provide an understanding of current and potential changes in the
environment:
Environmental analysis should provide an understanding of current and potential
changes taking place in the environment. It is important for the strategic
managers to be fully aware of the existing environment and at the same time
have a long term perspective about the future.
2. To provide input for strategic decision making:
Environmental analysis should provide inputs for strategic decision making. Mere
collection of data is not enough. The information collected must be useful for
strategic decision making.
3. To facilitate strategic thinking:
Environmental analysis should facilitate and promote strategic thinking in
organisations. It should become the basis for developing new and creative
viewpoints in strategic thinking.
4. To find out correct ‘fit’ between the firm and its environment:
Environmental analysis should help strategic manager to find out the correct ‘fit’
between the firm and its environment, so that strategic managers can formulate
strategies to take advantage of opportunities and avoid or reduce the impact of
threats.
Characteristics of Business Environment:

The difficulty in studying the environment arises due to the following important
characteristics of the business environment:
1. Environment is complex:
Environment consists of a number of forces that interact with each other
to create entirely new set of forces, which make it complex. The more
complex the environment, the more variables have to be taken into consideration
and hence more difficult to make effective decisions. The difficulty in coping with
the wide range of environmental influences is what makes the strategic
management complex.
2. Environment is dynamic:
The environment of an organization is never static. It is constantly
changing. Changes in technology, government regulations, competitive forces
etc., compel organizations to shift gears and change direction quite often. At
times, there could be too many changes in too little time, leading to surprises in
the marketplace.
3. Environment is uncertain:

Environmental uncertainty means the degree of complexity plus the

degree of change existing in organization's external environment. As
more and more markets become global, the number of factors a company must
consider become huge – that is, it becomes more uncertain. With new
technologies being discovered every year, markets change and products must also
change with them.
On the one hand, environmental uncertainty is a threat to strategic managers
because it hampers their ability to develop long-range plans and to make strategic
decisions to achieve a fit between the organization and the environment. On the
other hand, environmental uncertainty is also an opportunity because it creates a
new playing field in which creativity and innovation can have a major part in
strategic decisions.
4. Environment is Turbulent:
When the rate of change in the environmental factors is so fast that it
makes the environment unpredictable, such a phenomenon is called
"turbulence". Peter F Drucker called this phenomenon "discontinuity", because
the things happening around the firm are almost totally disconnected from the
past experience of the firm.
5. Environment is Multi-faceted:
The shape and character an environment assumes depends upon the perception
of the observer. A particular change in the environment or a new development
may be viewed differently by different observers. This is evident when the
same development is welcomed as an opportunity by one organisation and as a
threat by another organisation.
6. Environment is Far reaching impact:
The environment has a far reaching impact on organisations. The growth and
profitability of an organisation depends critically on the environment in which it
exists any change in environment has an impact on the organisation in a many
ways.
Components of Business Environment:

Organisations do not function in an isolated vacuum. They are managed by two
environments. A conscious identification of the relevant environment enables the
organisation to focus its attention on those factors that are initially related to its
mission, purpose, objectives and strategies. Depending on its priorities, the
business entity will take into account the particular environment which is affecting
it at that time.
The environment in which organisation exists and operates could be broadly
divided into two parts the internal and the external. This type of division enables
us to understand the complete environment in an easier way and equips an
organisation to deal with it better.
Internal Factors:
The internal factors are inherent to a business. They are totally under the
control of the business. Internal factors can be understood and
manipulated easily. They hold a major part in influencing business decisions and
play a big role in determining the success of any decision. These factors are also

called controllable factors. They can be modified and altered at wish so that it
becomes easier to adapt to the hostile-external environment.
The elements of the internal environment are within the organisations'
boundaries. The internal environment includes factors like:
1. The objectives of the business:
These are decided by the business itself. They plan about what they want
to achieve, both in the short and long-term. These objectives help to shape
the decisions that the company will take in order to achieve the set
goals. Decisions are required on a variety of aspects, e.g., resource
requirement, time frames of working, types of products/services, technology
needs, training needs, etc.
2.The people employed in the business

The employees, both white and blue collared, are a very important asset of any
company. The technical skills that they possess, their attitude towards work
and the organisation, their demands from the company, the level of their
experience, their image in the industry, etc., are all very important internal
factors that may affect the performance and growth of any concern.
3.The company image
Each human being occupies a certain image in the minds of others. Similarly,
people perceive every organisation in different ways. The company image can
be based on the past performance, diversification levels, R&D, advertisement
expenses, quality orientation, employee emoluments, etc. Depending on the
image of the company, the future growth and progress gets affected.
This is because of the impact of the internal environment.
4.The management
The management is the driving force, which decides the pace and
direction of growth. Optimistic and enterprising management sets the tone
for future expansion and high volume growth. On the other hand, a laid-back
and staid management will be content with the state of affairs of the business
and will not prefer to change anything in a hurry—be it employees, technology,
focus areas, etc., there are still others who believe in a constant slow pace of
growth. All this will in turn determine the profile of the business in the
future with respect to its performance, competitors, profits, turnover,
etc.
5. The value systems of the organisation:
The values refer to the ethics of business as followed by an
organisation. Different sets of values give rise to very different ways of doing
business. What may be right for one business may be totally unacceptable for
another business. This is, in fact, a very important determinant in the internal
environment, which will shape the business in the future.
6. The assets owned by the company:
If the business has a strong asset base, in the sense that their production or R&D
capacity is big, they are in a better position to take advantages of any
sudden opportunities in the environment. Another company, which does not

have an existing strong asset base, will take a longer time to first set it up
and then supply the order. They can also look at outsourcing to augment the
extra demand, but that again calls for adjustment and planning.
7. The financial strength of the organisation:
The financial base and the strength of a business will go a long way in
helping any company to adjust with the business environment. In case
there are sudden requirements for funds for the purpose of investment and
availing beneficial schemes, a financially sound company will have a competitive
advantage. They may be able to grab the opportunity faster than another
company, which has to first organise the finances and then only avail the
opportunity.
8. The marketing resources and setup:
A company can rely on its own marketing resources and this is a major
strength for any organisation. FMCG companies, which have their own
extensive distribution system, find it easier to make forays into the markets,
especially the rural and interior areas of a place. This is also achieved at a faster
pace. On the other hand, if a new company has to outsource the marketing
system, it may not be easy, as competitor preference may erode the
company's possibilities to capture a big market share.
9. The focus on research and development:
Research oriented companies very often are able to bring out new and
innovative products or change their existing product profile easily.
They have an ample money and time spend on these activities, and very often
emerge as market leaders for new products.
10. The organizational structure in the company:
In case the organizational structure of a company is very intricate
and structured, it may become very tedious to take fast decisions.
Many layers in the hierarchy may prevent speedier work and there is more
danger of the issue becoming outdated before it sees the light of the day. More
people mean more contrasting opinions and contrasting views. This may prove
to be detrimental to the progress of an organisation. On the other hand, if the
organizational structure is flat, and delegation of authority is practiced in the
company, things can be done at a faster rate, although it is not necessary that
the right things are done.
11. The culture of the organisation:
The culture plays a vital role in the growth and development of a company.
Organisations present varied types of cultures. They may be open and informal,
where the higher levels are addressed by their first names or it may be very
stiff and formal, where every conversation and meeting requires special
permissions and time delays. Open cultures normally nurture progressive
ideas and creativity flourishes, which may be beneficial to the
company. Employees are also more comfortable in such environments and
may tend to stay longer. This loyalty may give other tangential benefits to both
the organisation and the employee.
External Factors:

These are not part of the internal system of the company and are really the
Actual environment. External factors are beyond the control of the organisation.
They are the part of the outside uncontrollable environment and need
to be understood in long-term perspective, if the organisation has to make
changes in their strategies to remain successful. The external environment
consists of all the factors which provide opportunities or pose threats
to an organisation. External environment can be divided into micro and
macro environment.
1. Micro environment
These factors are present in the immediate environment of a company.
Though they are external, i.e., don't form part of the company, they are more
controllable i.e. easy to adapt and adjust than the larger macro factors. The
micro factors influence a firm closely, regularly and directly. They
affect the performance of a company as they are `close' to the organisation.
The micro factors are very intimately linked with the day-to-day working and
performance of the company. They can be different for different industries or
even varied for different companies. The success of a firm can rely
heavily on the way any business deals with the various micro forces
that are at play, the micro environment is composed of the following:
1. Customers
The prime task for any business is to attract company and retain
customers. This is to ensure their long-term profitability and existence in
the market. It therefore follows that the need and the desire of the customer
should be monitored minutely to ensure customer delight, which will lead to the
firm having an increasing number of loyal customers. Changing tastes and
preferences of the customer should not only be observed as they happen, but
forecasted before, and necessary corrections should be made in the
product/service profile by the company. Customers are the backbone of a
company and very reason for company’s existence. They are the people who
pay money in return for products or services that any company offers.
Customers are focal point of all business activities. Thus, it is clear
that organisation cannot afford to neglect customers’ interest and they
automatically become major forces of environment.
2.Suppliers:
Suppliers are people who supply raw materials and components and
machines to the organisation. The suppliers should be reliable and act as
business partners, working in co-ordination to fulfill the ultimate consumer
expectations. If the suppliers are reliable, there is no need to keep heavy
inventory stocks and costs and losses relating to inventory can be minimized.
3.Marketing Intermediaries:
Marketing intermediaries are the middlemen who form part of
distribution channel and those who help reach products and services to
the ultimate consumer. If this chain hassle free and functions without
hurdles, it eventually helps the organisation and vice versa.
4.Competitors:

Competitors are the other business entities manufacturing similar

products and compete with a company for market share and turnover.
Competitors have to be managed well and market intelligence is required to find
out about their future plans.
5.General Public:
They refer to immediate physical environment of any organisation. People
who live around an office or a factory area, exert considerable influence with
regard to disposal mechanisms of waste, production practices employed, noise
pollution generated, nuisance etc. these people cannot be ignored or else
they may also go as far as getting the business closed down.
Macro Environment:
The macro environment is the larger uncontrollable environment
consisting of societal forces that affect all the other environments.
They offer tremendous opportunities for any business and also present
threats that can harm a business in a major way. This environment
becomes crucially important to understand and study for the purpose of
strategic planning and decision-making. It has broader dimensions than
the micro environment. It consists. The external environment is actually the real
environmental factor that influences the growth and structure of any business
to the greatest degree. All its activities are shaped and guided by the effect of
the macro- external environment. It is made up of the following components:
A. Economic Environment:
Economics environment consists of macro-level parameters related to the
areas of production and distribution of wealth that have an impact on the
business of an organisation. Some of the specific factors are as follows:
1. The stage of development of the economy, e.g., underdeveloped, developing
or highly developed economy.
2. The central planning mechanism, e.g., 5-year planning in India.
3. The economic indices, e.g., national income, GDP, GNP, per capita income,
disposable personal income of people, inflation, rate of saving, balance of
payments, etc.
4. The type of economic structure prevailing in the country, e.g., capitalism,
socialism or mixed economy.
5. Economic policies of the government, e.g., industrial policy, monetary policy,
etc.
6. The demand dynamics of the products of the firm.
7. Conditions in resource markets, e.g., money market, manpower market, raw
material components, service, supply market, etc.
8. Conditions in the related industries.
9. The general economic condition in the region.
B. Political Environment:
Political environment refers to the political situation that is prevailing
in a country at any point of time. The factors consist of the management of
public affairs and their impact on the business of any organisation. The
political system has a close relationship with the economic policies of a place.
For example, communist countries have a centrally planned economic system.
Some aspects of the political environment are as follows:

1. The general state of political development.

2. The degree of politicalisation of business and economic issues.
3. The level of political morality.
4. The law and order situation.
5. Political stability.
6. Political ideology and practices of the ruling party.
C. Government Environment:
In any type of economy, the government plays a vital and influencing role in
regulating the businesses in a country. It plays a developmental and regulatory
role apart from being a guide and setting the general parameters within which
businesses are supposed to function. Some of the specific factors are as
following:
1. The purposefulness and efficiency of the government agencies.
2. The extent and nature of governmental intervention in the economy and
industry.
3. The overall policies of the government regarding development o f the
industry.
4. The tenure of the ruling government.
5. The people comprising the government.
D. Financial Environment:
Financial environment sets the basis for developmental activity of the business
system. There are numerous elements that form a part of this environment.
S o m e o f them are as follows:
1. The Central Bank of the country, e.g., Reserve Bank of India.
2. The health and vision of the commercial banks.
3. The presence and focus of the developmental banks.
4. Non-banking financial institutions.
5. Prevailing interest rates.
6. Policies governing disbursement of loans.
E. Socio-Cultural Environment:
Socio-culture environment consists of the society and culture of a place
where the organisation intends to do business. It is a general entity, and
influences almost all firms in a similar manner. It is a complex of related
factors concerning population dynamics. These factors have a very important
impact on the products and services the company offers, the way in which they
are packed, the pricing and other features of the marketing mix etc., some of
the specific issues that can be studied under this are as following:
1. Social attitudes of the people.
2. Educational levels.
3. Awareness of the population.
4. Role of women in the society.
5. The consumption habits of people.
6. Customs and traditions of a place.
7. The language.
8. Beliefs and value systems.
9. Family structures.

10. Local festivals.

11. Degree and rate of urbanisation.
12. Levels and standards of literacy.
F. Natural or Ecological Environment:
Natural or ecological environment very often sets the basis of whether
it is possible to do a particular business in a place or not. The natural or
ecological features may allow only a particular type of business to thrive and
do very well. It may be totally non-conducive to another type of business. The
natural features of a place may thus have an over-riding influence on the
company. Some of the factors are as follows:
1. The climate of a place.
2. The physical features of the location.
3. The type of crops those are grown there.
4. The water supply conditions.
5. The traditional work culture of the place.
6. The soil conditions.
7. Location of the place.
G. International Environment:
The world is operating like a global village. Political boundaries are
vanishing and international trade barriers have reduced, making trade
easier between countries. Keeping this in mind, it becomes imperative for
companies to study a wide variety of differences that exist between the
countries, so that they may be able to do business in an easy and simpler way.
Certain factors that need to be studied include the following:
1. The culture of a place.
2. The accepted practices and norms of that country.
3. Work timings.
4. Ways of greeting people.
5. Specific manners and mannerisms.
6. The climate of that place.
7. The language of that place.
8. Specific taxes and import/export tariffs.
9. Tastes and preferences of the people.
H. Technological Environment:
For many organisations, technology is the most dynamic of all
environmental factors. An individual firm is concerned with its product
and process technology. Technological environment consists of those
factors that involve any type of technology advancement or lack of the same.
Some of the specific factors are as follows:
1. Rate of change of technology, especially in tech-dependent companies.
2. Internal sources of technology.
3. Capability and focus towards research and development.
4. Environmental effects of technology.
5. Technology in areas like communication, infrastructure and day-to-day
living.
6. Technological obsolescence.
7. Technology adopted by the competitors and the industry in general.
8. Innovations in products and processes.

I. Legal Environment:
Legal environment consists of factors related to the planning,
promotion and regulation of business activities in a country or a region.
There are various Acts that are formulated and amended, which
specifically relate to particular industries. This is partly general to all
similar enterprises and partly specific to individual enterprises. It includes the
following:
1. Specific legal enactments.
2. Laws/Acts imparting a particular business.
3. Broad frameworks within which the businesses have to function.
4. Special legal provisions relating to infrastructures, procedures, permits,
licenses, patents, trademarks, etc.
5. Policies relating to imports and exports.
6. The constitutional framework, Directive Principles of state policy,
Fundamental Rights and distribution of legislative power between central and
state governments.
7. Policies relating to licensing, monopolies, foreign investment and financing of
industries.
8. Policies relating to Small Scale Industries, sick companies, consumer
protection and environmental pollution.
J. Demographic Environment:
Demographic environment deals with the composition and
characteristics of the population of a place. All the relevant descriptions
of the population of a place with respect to its demographic profile will affect
business decisions drastically. It would be in the interest of any firm to consider
these aspects in detail before planning the strategy. It includes factors such as:
1. Family size
2. Size of population
3. Educational levels.
4. Economic stratification of the population
5. Job profiles
6. Gender ratio, composition of the population
7. Life expectancy
8. Religion and caste
9. Spatial mobility of the population.
Environment-Organisation Relationship
In relation to an individual business, the surrounding environment offers a
range of opportunities, constraints, threats and pressures, and thereby
influences the structure and functioning of the enterprise. As a sub-system,
the business enterprise draws certain inputs of resources, information and
values from the larger environment system. It transforms there into outputs of
products, services, goals and satisfactions and exchanges them with or
transmits them into the environment. In the process, it generates energy and
sustains itself. The relationship between a business and its environment may
be discussed under the major areas as listed here:
1. Exchange of information:

The organisation scans the environmental variables and generates

important information and uses it for planning, decision-making and
control purposes. Information generation is one way of getting over the
problems of uncertainty and complexity of the environmental components.
Information is to be generated on economic activity and market conditions,
related technological developments, social and demographic variables,
political-governmental policies and postures and competitive information,
among others. Both current and projected information is important for the
organisation. The organisation engages in forecasting for making assumptions
about the future conditions. In the course of this process, there is an
interaction between the organisation, its environment and other .factors. Also
the business entity itself transmits information to several agencies either
voluntarily, inadvertently or legally. Also, there may be a compulsory
requirement of furnishing information to some parts of the environment,
namely, government, law, suppliers, customers, etc.
2. Exchange of resources:
The organisation receives inputs like finance, materials, manpower,
equipment, etc., from the environment—both external and internal. It
sustains itself by employing the above inputs for involving or
producing output of product and services. The organisation interacts
with the factor markets for purposes of getting its inputs; it competes
sometimes and collaborates sometimes with other organisations in the
process of ensuring a consistent supply of inputs. The business concern is
dependent on the environment for disposal of its output of products and
services to a wide range of clientele. This is also an interaction process--
perceiving the needs of the environment and catering to them, satisfying the
expectations and demands of the clientele groups, such as customers,
employees, shareholders, creditors, suppliers, local community, general
public, etc. These groups tend to press on the organisation for meeting their
expectations, needs and demands, and for upholding their values and
interests. The organisation is obliged to allocate or divert some of its
surpluses for meeting these demands.
3. Exchange of influence and power:
Another area of organisational—environmental interaction is in the exchange of
power and influence. The environment holds considerable power over
the organisation by virtue of its control over the resources,
information and other inputs. It offers a range of opportunities, incentives
and rewards on one hand and a set of constraints, threats and restrictions on
the other. In both ways, the organisation is conditioned and constrained. The
environment is also in a position to impose its will over the company and force
it to fall in line. Government control over the company is an example of one
such power relationship. Other environmental factors, both macro and micro
exert considerable influence over the planning and decision-making process of
any organisation.
It follows that the dependence and influence between the organisation and
the environment is reciprocal to a very large extent. They are dependent,
inter-dependent and independent in different spheres. Similarly, they seek to
exercise power, influence and control over each other, in both benevolent

and malevolent ways. Dependence and power are reciprocals. Organisational

dependence on the environment means environmental power and control
over the organisation. The converse is also true. Dependence also means
some amount of conflict. Inter-dependence sometimes brings about
collaboration and cooperation between the organisation and the
environment.
Globalisation:
Introduction:
Globalisation gathered momentum since 1980 due to political and economic
changes that took place in the communist and socialist
countries, the economic reforms introduced in developing countries, the latest
multilateral trade agreement and the technological and communication
revolutions in the world.
Meaning and Definition of Globalisation:
Globalisation is defined the Wikipedia as “increasing global connectivity,
integration and interdependence in the economic, social, technological, cultural,
political and ecological spheres.”
The International Monetary Fund (IMF) has defined globalisation 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. Thus, globalisation
refers to process of integration of the world into one huge global market.
At the organisation level, globalisation means two things: (a) the
organisation commits itself heavily with several manufacturing
locations around the world and offers products and services in several
countries; (b) It also means ability to compete in domestic markets
with foreign competitors.
Multinational company (MNC) or Transnational Company (TNC):
A multinational or Transnational company is a company which operates in more
than one country to gain production, marketing, technology, financial, human
resource, and research and development advantages in its costs and reputation
over the domestic competitors.
Features of Multinational or global company:
1. Global company is a conglomerate of multiple units but all the units are
linked by common ownership.
2. Multiple units draw from a common of resources, such as money, credit,
information, patents trade names and control systems.
3. The multiple units respond to some common strategy.
Reasons for companies going global

Companies go global due to the following reasons:
1. Rapid shrinking of time and distance across the globe owing to the significant
development of transportation and telecommunication facilities.
2. Inadequacy of and low purchasing ability in the domestic markets.
3. The short span of product life-cycle in the domestic market.
4. To have diversified portfolio of markets.

5. To secure reliable and cheap inputs like raw material, finance and human
resources.
6. Due to political stability in some countries and political disturbances in other
countries.
7. To reduce high transportation costs.
8. To set up plants close to the raw material.
Stages of Globalisation:
There are four stages of globalisation:
Stage 1: Companies have only passive dealings with foreign individuals and
organisations.
Stage2: Companies deal directly with their overseas interests.
Stage 3: Company's international interests shape its overall make-up in an
important way.
Stage 4: Company sees its activities as essentially multinational as opposed to
domestic.
Impact of International Environment on Domestic Business

Global environment consists of international political environment, policies of
various governments, level of technology, social and cultural factors, level of
economic development of countries, level of industrial development, etc, has its
impact on the business organisations of a domestic country. The impact is as
follows:
1. Configuring anywhere in the world:
A Multinational company (MNC) can choose the location of its plants or business
units in different countries on the basis of availability of raw material, consumer
markets, availability of cheap labour, etc. Thus, a Multinational company competes
with the domestic company for inputs as well as selling the output.
2.Interlinked and interdependent economies:
Economic policy of most of the nations is to develop the countries through inter-
linkage and interdependence. Each country’s prosperity is interlinked with the rest
of the world. Therefore, no nation can exist in isolation and grow in globalised
economy.
3. Minimization of trade and tariff barriers:
The recent trend towards globalisation in most t the nations in the world resulted in
minimization of trade and tariff barriers. Consequently, the protection provided to
the home industry has been withdrawn. Therefore, the domestic industry is
affected by the quality, price and convenience of the foreign products and
services.
4. Effect on related industries and ancillary units:
Globalisation may render many companies sick and defunct. This effect is more in
case of ancillary industrial units and small scale Industrial units compared to large
scale industrial units. Globalisation of Indian economy n 1991 affected badly many
ancillary industrial units.
5. Infrastructural resources and inputs at international prices:
The prices of infrastructural resources like banking, financing, transportation
and telecommunications and inputs like raw materials and human resources

adjust at international prices. In other words, prices of these factors which were
lower before globalisation would increase due to increase in demand for the
same.
6. Increasing trend towards privatization:
Governments in many countries recently started withdrawing their capital from
public sector industrial units and/or privatizing these units after globalisation.
7.Entrepreneur and his unit have a central economic role:
The trend of shifting the business from the bureaucrat to the entrepreneur has
started consequent upon globalisation of business.
8.Mobility of skilled resources:
The traditional factors of production viz., land, labour, capital and organisation
are no more immobile. Globalisation has resulted in the inflow of these factors
into the potential developing countries.
9.Market side efficiency:
Integration of global markets implies that costs, quality, processing time and
terms of business become dominant competitive drivers.
10. Formation of regional blocks:
A final corollary to globalisation is the formation of tr. blocks like North American
Free Trade Area (USA, Canada and Mexico), European Economic Community and
South Asian Preferential Trading Agreements. These regional blocks provide the
opportunities to the business from within and create threats to the business
from other areas.
Strategic Responses to the Environment:

There is a deep relationship between an organisation and the environment
hence, any change in the environment will have a definite impact on the
organisation. The organisation is compelled to respond to the changes in the
environment. The response can be of three forms:
1.Minimum resistance or conservative response:
Organisations which adopt satisfying approach to changes in environment are
known as conservative enterprises. They are goal maintaining enterprises. Such
organisations simply prefer to survive by way of coping with their external
environmental changes. They are passive in their behaviour.
2. Cautious response:
Organisations which intelligently respond to changes in environment are known
as cautious response organisations. They are also known as adaptive
organisations because they quickly adapt to changes in environment. Such
organisations seek to monitor the changes in the environment, analyse their
impact on the goals and activities and translate their assessment into strategies
for survival, stability and strength.
3. Dynamic or aggressive response:
Organisations which adopt optimising approach to achieve their goals with the
changes in environment are known as aggressive enterprises. Their feedback
systems are highly dynamic and powerful. They not only ward off threats but
also convert threats into opportunities. They are very much aware of their
strengths and weakness.

Competitive Environment:
In addition to the general and operating environment as well as the industry
environment, managers should also analyse the competitive environment
because the nature of competition in an industry and its profit potential are
directly influenced by the competitive forces operating in that industry.
The degree of competition in an industry is influenced by a number of forces. To
establish a strategic agenda for dealing with these forces and grow despite them,
a firm must understand:
1.How these forces work in an industry?

2. How they affect the firm in its particular situation?
The essence of strategy formulation is coping with competition. Intense
competition in an
Industry is neither coincidence nor bad luck. Every business faces stiff
competition.
Whatever their collective strength the corporate strategist's goal is to find a
position in the industry where his or her company can best defend itself against
these forces or can influence them in its favour. The strategist must delve below
the surface and analyze the underlying sources of competition. Knowledge of
these underlying sources of competition helps:
1. To provide the groundwork for a strategic agenda
2. To highlight the competitive strengths and weaknesses of the company
3. To animate the positioning of the company in its industry
4. To clarify the areas where strategic changes may yield the greatest payoff and
5. To highlight the sources of greatest significance, either as opportunity or threat.
Understanding these sources will also help in considering areas for
diversification.
The strongest competitive forces determine the profitability of an industry, so
competitive analysis is of crucial importance in strategy formulation. A better
understanding of the nature of competition can be done by examining the
following aspects:
1. The type of competitors
2. Competitors’ strategy
3. Competitor’s performance
4. Competitor’s strengths and weakness
5. Competitor’s reaction
Co-operation in competitive environment:

The classical view of competition highlights that in a competition “one’s loss is
another’s gain. Classical view of competition has been supplement by theories
that incorporate the element of co-operation along with competition. This seems
like a paradox. However, cooperation among business entities in a competitive
environment is a fact today and it has become possible due to organisation’s
ability to evolve and co-exist.
Co-operation in a competitive environment among the business entities bring in
the following mutual advantages:

1. Co-operative links with other firms, enable an enterprise to focus in

developing its core competence.
2. Co-operative Research and development, with merger of technologies and
production skills of different firms, enhances innovativeness of both firms.
3. Co-operative relationship among firms, help them to overcome problems
across manufacturing, marketing, product development, cost minimization
etc.
Co-operation in competitive environment can be of three types:

1. Cartelization or understanding among oligopolists
2. Kieretsus
3. Family ownership co-operation
1.Cartelization or understanding among oligopolists
Cartelization is coming together of a few manufacturers or sellers of products or
service in a oligopolistic market to maximize their profits and minimize costs.
Indirectly it leads to a monopoly situation. Organisation of the oil exporting
countries is a good example of cartel.
Cartels are formed to decide market shares, prices and profits for mutual
benefit and gain.
2.Kieretsus
Kieretsus is a large co-operative network of businesses. Kieretsus greatly
enhances individual member’s ability to compete efficiently in their respective
industries. This type of co-operative business is fair and ethical. A Kieretsu is a
loosely-coupled group of companies, usually in related industries. For example,
Pizza hut selling coca cola products, Book stalls selling stationery products etc.
Kieretsu members are peers and may own significant amounts of each other’s
stock and have many board members in common. However, Kieretsus are different
from conglomerates. In case of conglomerates same owner owns a substantial
capital in different companies. In Kieretsu members remain independent
companies in their own right; its primary purpose is not to share information or
agree industry standards but to share purchasing distribution or any other
function. The only strategy they have in common is to prefer to do business with
other Kieretsu members, both when buying and when selling.
3.Family ownership co-operation
Traditionally, a large number of businesses were controlled and managed by
families. Even to this date in India, a large number of businesses are family
managed businesses. For example, Tata companies, Reliance group, Birla group
etc. Co-operation in business owned by same family is normally a natural
process. Many important decisions are made by family members who manage
the business. The ideologies and interest of family members play a significant
role in influencing the managerial decisions and other activities of the business.
Sometimes, quarrels and conflicts among the managing members of the family
on family matters may disturb them which may have adverse effect on the
business. Succession is a sensitive issue in business. History has proved time
and again that successions in business were full of conflicts but in some cases it
has taken place in a smooth and peaceful manner.
Porter’s Five Forces Model – Competitive Analysis:

Introduction:
In essence, the job of the strategist is to understand and cope with competition.
However, mangers define competition too narrowly, as if it occurs only among
today's direct competitors. Yet competition for profits goes beyond established
industry rivals. It includes four other competitive forces as well: customers,
suppliers, potential entrants and substitutes.
The Five Forces model developed by Michael E. Porter has been the most
commonly used analytical tool for examining competitive environment. According
to this model, the intensity of competition in an industry depends on five basic
forces. These five forces are:
1. Threat of new entrants
2. Intensity of rivalry among industry competitors
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Threat of substitute products and services.
Each of these forces affects a firm's ability to compete in a given market.
Together, they determine the profit potential for a particular industry. To
understand industry competition and profitability, one must analyze the industry's
underlying structure in terms of the five forces, as shown in the figure below:
Potential new
entrants
Industry competitors
Bargaining Bargaining power
power of Rivalry among of buyers
suppliers existing firms
Threat of
Substitute
products or
Porter’s Five Forces Model of Competition

According to Porter, the stronger each of these forces are, the more limited is the
ability of established companies to raise prices and earn greater profits.
With Porter's framework, a strong competitive force can be regarded as a threat
because it depresses profits. A weak competitive force can be viewed as an
opportunity because it allows a company to earn greater profits. The strength of
the five forces may change with time as industry conditions change.
Understanding the competitive forces, and their underlying causes, reveals the
roots of an industry's current profitability, while providing a framework for
anticipating and influencing competition and profitability over time. Understanding
industry structure is also essential to effective strategic positioning.

Steps for Competitive Analysis sby Porter’s Five Forces Model:

The competitive analysis is performed by using porter’s five forces model in three
steps:
Step 1: Identify the specific competitive pressures associated with each of the
five forces.
Step 2: Determine how strong the pressures comprising each of the five forces
are (fierce,
strong, moderate to normal, or weak).
Step 3: Determine whether the collective strength of the five competitive forces
is conducive
to earning attractive profits.
Forces that Shape Competition

The configurations of the five forces differ from industry to industry. The strongest
competitive force or forces determine the profitability of an industry and becomes
the most important to strategy formulation.
1. The Threat of New Entrants:

The first of Porter's Five Forces model is the threat of new entrants. New entrants
bring new capacity and often substantial resources to an industry with a desire to
gain market share. Established companies already operating in an industry often
attempt to discourage new entrants from entering the industry to protect their
share of the market and profits.
Barriers to Entry:
Entry barriers depend on the advantages that existing companies have relative to
new entrants. There are seven major sources:
1.Economies of scale:
These are relative cost advantages associated with large volumes of production,
that lower a company's cost structure. The cost of product per unit declines as the
volume of production increases. This discourages new entrants to enter on a large
scale. If the new entrant decides to enter on a large-scale to obtain economies of
scale, it has to bear high risks associated with a large investment. A further risk is
that the increased supply of products will depress prices and results in vigorous
retaliation by established companies. For these reasons, the threat of new
entrants is reduced when established companies have economies of scale
2. Product differentiation:
Brand loyalty is buyer's preference for the differentiated products of any
established company. Strong brand loyalty makes it difficult for new entrants to
take market share away from established companies. It reduces threat of entry
because the task of breaking down well-established customer preferences is too
costly for them.
3. Capital requirements:
The need to invest large financial resources in order to conipete can deter new
entrants. Capital may be necessary not only for fixed assets, but also to extend
customer credit, build inventories and fund start-up losses. The barrier is
particularly great if the capital is required for unrecoverable expenditure, such as
up-front advertising or research and development. While major corporations have

the financial resources to invade almost any industry, the capital requirements in
certain fields limit the pool of likely entrants.
4.Switching costs:
Switching costs are the one-time costs that a customer has to bear to switch from
one product to another. When switching costs are high, customers can be locked
up in the existing product, even if new entrants offer a better product. Thus, the
higher the switching costs are, the higher is the barrier to entry.
5. Access to distribution channels:
The new entrant's need to secure distribution channel for the product can create a
barrier to entry. The established companies have already tied up with distribution
channels. For example, a new food item may have to displace others from the
supermarket shelf via price breaks, promotions, intense selling efforts or some
other means. The more limited the wholesale or retail channels are, tougher will
be the entry into an industry.
6. Cost disadvantages independent of size:
Some existing companies may have advantages other than size or economies of
scale. These are derived from:
a. Proprietary technology
b. Preferential access to raw material sources
c. Government subsidies
d. Favorable geographical locations
e. Established brand identities
f. Cumulative experience
g. New entrants may not have these advantages.
7.Government policy:
Historically, government regulations have constituted a major entry barrier into
many industries. The government can limit or even foreclose entry into industries,
with such controls as license requirements and limits on access to raw materials.
The liberalization policy of the Indian government relating to deregulation,
delicensing and decontrol of prices opened up the economy to many new
entrepreneurs.
2. Intensity of Rivalry among Competitors:

The second of Porter's Five Forces model is the intensity of rivalry among
established companies within an industry. Rivalry means the competitive struggle
between companies in an industry gain market share from each other. Intense
rivalry lowers prices and raises costs. It squeezes profits out of an industry. Thus,
intense rivalry among established companies constitutes a strong threat to
profitability. Alternatively, if rivalry less intense, companies may have the
opportunity to raise prices or reduce spending on advertising etc. which leads to
higher level of industry profits.
Intensity of rivalry is greatest under the following conditions:
1. Numerous competitors or equally powerful competitors:
When there are many competitors in an industry or if the competitors are roughly
of equal size and power, 'the intensity of rivalry will be more. Any move by one

firm is matched by an equal countermove. In such situations rivals find it hard to

avoid poaching business.
2. Slow industry growth:
Slow industry growth turns competition into fight because the only path to growth
is to take sales away from a competitor.
3. High fixed but low marginal costs:
This creates intense pressure for competitors to cut prices below their average
costs even close to their marginal costs, to steal customers.
4. Lack of differentiation or switching costs:
If products or services of rivals are nearly identical and there are few switching
costs, this encourages competitors to cut prices to win new customers.
5. Capacity augmentation in large increments:
If the only way a manufacturer can increase capacity is in a large increment, such
as building a new plant, it will run that new plant at full capacity to keep its unit
costs low. Such capacity additions can be very disruptive to the supply/demand
balance and cause the selling prices to fall throughout the industry.
6.High exit barriers:
Exit barriers keep a company from leaving the industry. Exit barriers can be
economic, strategic or emotional factors that keep firms competing even though
they may be earning low or negative returns on their investments. If exit barriers
are high, companies become locked up in a non-profitable industry where overall
demand is static or declining. Excess capacity remains in use, and the profitability
of healthy competitors suffers as the sick ones hang on.
Common exit barriers:
1. Investment in specialized assets like plant and machinery are of little or no
value, and cannot be put to alternative use. So, they have to be continued.
2. High costs of exit such as retrenchment benefits, etc. that have to be paid to the
redundant workers when a company ceases to operate.
3. Emotional attachment to an industry keeps owners or employees unwilling to
exit from an industry for sentimental reasons.
4. Economic dependence on the industry when the firm depends on a single
industry for revenue and profit.
5. Government and social pressures discourage exit of industries out of concern for
job loss.
6. Strategic interrelationships between business units and others prevent exit
because of shared facilities, image and so on.
3. Bargaining Power of Buyers

The third of Porter's five competitive forces is the bargaining power of buyers.
Bargaining power of buyers refers to the ability of buyers to bargain down prices
charged by firms in the industry or driving up the costs of the firm by demanding
better product quality and service. By forcing lower prices and raising costs,
powerful buyers can squeeze profits out of an industry. According to porter, buyers
are most powerful under the following conditions:
1.There are few buyers:

If there are few buyers or each one does bulk purchases, then they have more
bargaining power. Large buyers are particularly powerful in industries like
telecommunication equipment, off-shore drilling, and bulk chemicals. High fixed
costs and low marginal costs increase the pressure on rivals to keep capacity
filling through discounts.
2. The products are standard or undifferentiated:
If the products purchased from the firm are standard or undifferentiated, the
buyers can easily find alternative sources of supplies. Then buyers can play one
company against the other, as in commodity grain markets.
3. The buyer faces low switching costs:
Switching costs lock the buyer to a particular firm. If switching costs are low,
buyers can easily switch from one firm's product to another.
4. The buyer earns low profits:
If the buyer is under pressure to trim its purchasing costs, the buyer is price
sensitive and bargains more.
5. The quality of buyer's products:
If the quality of buyer's product is little affected by industry's products, buyers are
more price sensitive.
Most of the above sources of buyer power can be attributed to consumers as a
group as well as to industrial and commercial buyers.
4. Bargaining Power of Suppliers:

The fourth of Porter's Five Forces model is the bargaining power of suppliers.
Suppliers are companies that supply raw materials, components, equipment,
machinery and associated products. Powerful suppliers make more profits by
charging higher prices, limiting quality or services or shifting the costs to industry
participants. Powerful suppliers squeeze profits out of an industry and thus, they
are a threat.
A supplier's bargaining power will be high under the following
conditions:
1. Few suppliers:
When the supplier group is dominated by few companies and is more
concentrated than the firms to whom it sells, an industry is called concentrated.
The suppliers can then dictate prices, quality and terms.
2.Product is differentiated:
When suppliers offer products that are unique or differentiated or built-up
switching costs, it cuts off the firm's options to play one supplier against the
other.
3. Dependence of supplier group on the firm:
When suppliers sell to several firms and the firm does not represent a significant
fraction of its sales, suppliers are prone to exert power. In other words, the
supplier group does not depend heavily on the industry for revenues. Suppliers
serving many industries will not hesitate to extract maximum profits from each
one.

4.Importance of the product of the firm:

When the product is an important input to the firm's business or when such inputs
are important to the success of a firm's manufacturing process or product quality,
the bargaining power of suppliers is high.
5.Threat of forward integration:
When the supplier poses a credible threat of integrating forward, this provides a
check against the firm's ability to improve the terms by which it purchases.
6. Lack of substitutes:
The power of even large, powerful suppliers can be checked if they compete with
substitutes. But, if they are not obliged to compete with substitutes as they are
not readily available, the suppliers can exert power.
5. Threat of Substitute Products

The fifth of Porter's Five Forces model is the threat of substitute products. A
substitute performs the same or a similar function as an industry's product. Video
conferences are a substitute for ravel. Plastic is a substitute for aluminum. E-mail
is a substitute for a mail. All firms within an industry compete with industries
producing substitute products. The existence of close substitutes is a strong
competitive threat because this limits the price that companies in one industry
can charge for their product.
If an industry does not ward off the substitutes through product performance,
marketing, price or other means, it will suffer in terms of profitability and growth
potential in the following circumstances:
1. The producers of substitute offer an attractive price and performance.
2. The buyer’s switching costs to substitutes is low comparatively.
Merits of Porter’s Five Forces Model:

1. The five forces model is a powerful tool that helps managers to think
strategically.
2. It leads managers to think systematically about the way their strategic choices
will both be affected by the forces of competition and how their choices will
affect the five forces and change conditions in the industry.
3. It helps a firm not only to evaluate the profit potential of an industry but also to
consider various ways to strengthen its position vis-a-vis the five forces.
4. The model helps managers to assess how to improve the firm's competitive
position with regard to each of the five forces.
5. It provides the rationale for increasing or decreasing resources commitment.
6. It helps managers to decide whether the firm should remain in or exit from the
industry.
Limitations of Porter’s Five Forces Model:

Despite being the most popular and widely used framework for competitive
analysis, Porter's Forces model suffers from the following limitations:
1. It assumes the existence of a clear, recognizable industry. As complexity
associated with industry definition increases, the ability to draw coherent
conclusions from the model diminishes.

2. It presents a static view of competition among the firms in the industry rather
than a dynamic interaction of competitive forces.
3. It is short-sighted and implicitly assumes a zero-sum game. It overlooks the
many potential benefits of developing constructive win-win partnerships with
suppliers and customers. Establishing long-term mutually beneficial
relationships with suppliers improves a firm's ability to implement just-in-time
inventory systems. Further, by working together as partners, suppliers and
manufactures can provide the greatest value at the lowest possible cost.
4. The model does not take into account the fact that some firms, most notably the
large ones, can often take steps to modify the industry structure, thereby
increasing their prospects for profits.
5. The model assumes that industry factors, not firm resources, comprise the
primary determinants of firm profits. This limitation reflects the ongoing debate
between 10 theorists who emphasize Porter's model and RBV theorists who
emphasize firm — specific resources.
6. A firm that competes in many countries typically must be concerned with
multiple industry structures. The nature of industry competition in the
international area differs among nations, and may present challenges that are
not present in a firm's host country.
The limitations notwithstanding, a thorough analysis of the industry through the

five forces model is a critical first step in understanding competitive behaviour
within an industry In a general sense, Porter's five forces model provides insights
into profit — seeking opportunities, as well as potential challenges, within an
industry. For the above reasons, Porter's Five Forces model has been acclaimed as
the most popular and useful model for competitive analysis of an industry.


Chapter I

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Chapter I

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Sampath Academy, Bangalore.

Faculty, K.Veerendra Patil

Meaning and Definition of Business:

Strategic Management 1.1

Business is also understood as a particula r entity , company ,

Strategic Management 1.2

Business is basically an economic activity therefore its primary objectives will

Strategic Management 1.3

Strategic Management 1.4

II. BUSINESS ENVIRONMENT

Strategic Management 1.5

Environmental influences on business:

3. Organisation as a player or performer in the environment:

Problems in understanding the Environmental influences:

Strategic Management 1.6

1. Environment is Combination of Many Diverse Factors and Influences:

Framework to Understand the Environmental Influences:

Step 2: Monitoring and auditing of Environmental influences:

Strategic Management 1.7

The organisation has to focus on those key factors in the environment

Need for environmental analysis:

Strategic Management 1.8

4. Environmental analysis helps strategists to narrow the range of available

Objectives and Goals of Environmental Analysis:

Characteristics of Business Environment:

Strategic Management 1.9

Environmental uncertainty means the degree of complexity plus the

Components of Business Environment:

Strategic Management 1.10

2.The people employed in the business

Strategic Management 1.11

Strategic Management 1.12

Strategic Management 1.13

Competitors are the other business entities manufacturing similar

Strategic Management 1.14

1. The general state of political development.

Strategic Management 1.15

10. Local festivals.

Strategic Management 1.16

Strategic Management 1.17

The organisation scans the environmental variables and generates

Strategic Management 1.18

and malevolent ways. Dependence and power are reciprocals. Organisational

Reasons for companies going global

Strategic Management 1.19

Impact of International Environment on Domestic Business

Strategic Management 1.20

Strategic Responses to the Environment:

Strategic Management 1.21

1.How these forces work in an industry?

Co-operation in competitive environment:

Strategic Management 1.22

1. Co-operative links with other firms, enable an enterprise to focus in

Co-operation in competitive environment can be of three types:

Porter’s Five Forces Model – Competitive Analysis:

Strategic Management 1.23

Porter’s Five Forces Model of Competition

Strategic Management 1.24

Steps for Competitive Analysis sby Porter’s Five Forces Model:

Forces that Shape Competition

1. The Threat of New Entrants:

Strategic Management 1.25