MODULE – 1 Overview of business environment

1. MODULE – 1Overview of business environment

2. What is business? Organised efforts of enterprises for the supply of goods and services in a society and making profit in the process. An economic act, carried out by an organization to achieve some targets. Importance of business 1. An important institution in the society. Business and society are dependent on each other 2. Supplies goods and services 3. Creates employment 4. Contributes to the economic growth of a country Characteristics of today’s business Change: modern business is dynamic, new technologies, new products Vastness: Mass production, mass marketing – fetching economies of scale to the manufacturers and the resultant benefits getting passed on to the buyers.

3. 3. Diversification: is a form of growth strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. It also tends to spread the dependency of the business on fewer products. Tata group, a premier business house, is into iron & steel, fertilizers, chemicals, automobiles, telecom, tea, shipping, hotels, information technology, printing, & consultancy. Similar is the story of other business groups as well. There are three types of diversification: concentric, horizontal, and conglomerate. Concentric diversification refers to the process of adding new, but related products or services. Hindustan Unilever Ltd. is the best example of concentric diversification. In one line it has several brands. e.g. in soaps, it has Lux, Liril, Lifebouy, Pears, Rexona, Hamam, Breeze, Dove.

4. Offering new and unrelated products or services to current customers is called horizontal diversification. In a competitive environment, this form of diversification is desirable if the present customers are have a good image of the company’s products and if the new products have good quality, well promoted and priced. In other words, this strategy tends to increase the firm’s dependence on certain market segments. e.g. in consumer non-durables, Hindustan Unilever is offering products like soaps, shampoos, washing powder, hair oils, moisturizing cream, ketchup, jams, tea, atta, salt, and ice creams to the same set of customers. Haldiram’s offerings like traditional Indian sweets, namkeens, and syrups (thandai), alongside following a dual selling approach, i.e. company-owned food outlets, and distributor-retailer system of reaching to the consumers.

5. Conglomerate diversification refers to adding new and unrelated products or services that have no technological or commercial synergies with current products, but which may appeal to new groups of customers. Like the Anil Dhirubhai Ambani group’s presence in varied areas like power generation and distribution, telecom services, cinema production, DTH services, financial products like mutual funds, and life insurance etc. Main reasons of adopting such a strategy is to tap profitability existing in different industries, risk diversification, and better reputation / brand building as the company gets bigger. 4. Globalisation: going international is yet another feature of modern businesses. Production facilities are being set-up in different countries and products being sold world wide. Gradually, businesses are exposed to global competition and risks. Technological innovations, crumbling trade barriers, global flow of capital and technology, information explosion, changing life styles, intensity of market competition, are all strengthening globalisation of businesses.

6. 5. Science: an important force affecting business. Products / services being demanded and offered, means of manufacturing and selling are fast changing. This is primarily because of continuous development in science and technology. 6. Information: Yet another characteristic of contemporary business is the significance of information, which is key to success of every business. Sources of information such as, internet, television, print media etc. play a important role in business decision making. Further, with the scientific advancement, the system of getting and giving information, processing and storing data, preparation of effective records and reports has also changed tremendously. 7. Government interference: makes laws, rules & regulations, polices, levy taxes etc., thereby affecting business.8. Competition: eliminate inefficiencies, cut down costs, improve productivity, and offer competitively in market in order stay fit.

7. Business environment • That which envelops the business firm; • consists of all those factors that have a bearing on the business. • something external, beyond the control of an organization. Points to note: • There exists a symbiotic relationship between business and its environment; i.e, the business is influenced by its environment and in turn, to a certain degree (and along with other firms) it influences the environment. • The business environment always keeps changing (evolving).

8. 3. Therefore, the survival & success of a business firm depends upon • its innate strength – resources at its command, physical resources, human resources, skill and organisation; • its adaptability to the environment; • The extent to which the environment is favourable to the development of the organisation; Two set of factors affecting business: - • The internal factors (present inside the firm); and • The external factors (present outside the firm). 8

9. Factors forming the Internal Environment: 1. Promoters / shareholders values 2. Mission & objectives 3. Management structure & nature 4. Internal human relationships 5. Physical assets and facilities 6. Financial factors / capabilities: financial policies, financial position, capital structure etc.). 7. Human resources: skill, quality, morale, comittment, attitude etc. 8. Company image / brand equity : winning the customer, launching new products, raising finance, forming joint ventures, soliciting / maintaining business associates. 9. Technological Capabilities: company’s ability to innovate, use/ offer the latest & efficient technology for its advantage.

10. Internal factors • Generally regarded as controllable factors because the firm has control over these factors; the firm can alter or modify them to suit the changing external environment. • Form the Strengths and Weaknesses of the business firm. 10

11. External environment Consists of institutions, organizations and forces operating outside the company. The external environment throws Opportunities and Threats on to the business. The success of a business depends upon its successfully grabbing (utilizing) the opportunities and countering the threats by effectively leveraging its strengths and overcoming its weaknesses. In other words, the survival and success of a business firm depend on its ability to use resources at its command (internal strength) and its adaptability to the external environment. 11

12. External Environment – has two layers • Micro (Task / operating) environment: consists of factors in the company’s immediate environment, those having a direct bearing on the performance of the company. It includes customers, suppliers, competitors, marketing intermediaries, publics etc. • Macro (General /Remote) environment: refers to larger societal forces (economic and non-economic) those affect all the factors in the company’s immediate environment, including the company – namely, demographic, economic, political, technological, cultural and legal. They influence business activity in general. 12

13. Micro external environment Customers Suppliers Competitors marketing intermediaries Financiers publics Macro external environment Domestic Macroeconomic environment International factors Cultural factors Political factors Technological factors Legal factors Ecological factors Demographic factors Factors effecting external environment of business