Unit
1 Introduction to Business Environment
Contents
1.1.2 Characteristics of Business Environment
1.1.3 Scope of
Business Environment
1.1.3
Significance of Business Environment
1.2 Components of the business environment: Micro and
macro environment.
1.2.1 Relationship between Business Environment and
Strategic Management
1.3 Analysis of business environment: SWOT analysis.
Porter's Model
1.3.1 Analysis of business environment
1.3.2 Steps in
Business Environmental Analysis
1.3.3 SWOT Analysis
1.3.4 Porter’s Model or Diamond Model Analysis
Summary
The phenomenon of the environment is intricate and
multifaceted. The term 'environment' encompasses various subsets such as the
economic environment, socio-cultural environment, politico-legal environment,
technological environment, and more. This broad term signifies the entirety of
all environmental aspects that exert influence on businesses. Primarily, the
environment exists external to the firm, with business entities generally
possessing minimal sway over external forces. The composition and nature of different
environmental subsets contribute to the varying nature of the business
environment across different countries and even within the same country over
time. The process of identifying, describing, explaining, and predicting
environmental factors presents numerous challenges. Environmental factors are
dynamic, making it arduous to conceptualize, quantify, or anticipate the extent
and direction of changes in these factors. Given that the environment and
economic institutional framework impact business organizations significantly,
it is crucial for management to conduct thorough environmental scans before
making decisions. The success of any business entity to a large extent hinges
on a comprehensive understanding of the business environment.
1.1
Introduction
Businesses,
just as human beings, do not operate in isolation. Business is a subset of
various relevant environments and has to negotiate its way through it. The
degree of success that a business attains depends on the way it reacts with its
environment. A business that consistently fails to respond to pertinent
environmental changes will eventually perish into obscurity. For prosperity
purposes, businesses need to recognize what exists in the environment and have
an obligation to deal with them appropriately or manage them. Therefore, a
business must be able to keep itself constantly updated about any changes
within the environment and adjust accordingly for it to survive and thrive.
1.1.1
Meaning of Business Environment
The
phrase "business environment" refers to the entirety of all people,
organizations, rival businesses, governmental bodies, legal systems, media
outlets, investors, and other elements that are not under the control of
corporate entities but nevertheless have an impact on business operations.
Consequently, there have been modifications to governmental economic policies,
swift advancements in technology, shifts in consumer inclinations, heightened
competition in the market, etc. are beyond the authority of business
organizations, yet they have a significant impact on business performance. For
instance, a rise in government taxes drives up prices everywhere; technological
advancements can render an old product obsolete; political unpredictability
inspires fear among investors; heightened competition among rivals in the
market can impact company earnings; shifting consumer preferences and demand
can necessitate the introduction of new products and reduce the market for
older ones.
Definitions
of Business Environment
Keith Davis, “The business environment is the
aggregate of all conditions, events, and influences that surround and affect
the business.”
Arthur M. Weimer, “the business environment
includes the “climate” or set of conditions—economic, social, political, or
institutional—in which business operations take place.”
1.1.2 Characteristics of Business Environment
·
Dnyamic Nature
The ever-changing business landscape involves ongoing and
unforeseeable alterations happening within and surrounding a business.
Different sources, like technological advancements, economic shifts, regulatory
updates, and changing consumer preferences, can lead to these changes. It is
essential for businesses to comprehend the ever-changing business environment
to stay competitive and adjust to new challenges and opportunities.
·
Complexity
The
intricacy of the business environment stems from the various interconnected
factors impacting a company's operations. This intricate nature creates
difficulty in accurately forecasting alterations and their consequences. An
alteration in one component impacts the other components. The economic
conditions are impacted by the economic environment and vice versa, influencing
the non-economic environment.
·
Uncertainty
Lack of
clear information and unpredictability in the business environment can impact a
company's operations, performance, and strategic decisions. This
unpredictability arises from the dynamic and intricate nature of the business
environment, with multiple elements always changing and interacting in
unforeseeable ways.
·
Multifaceted
The term
means "having numerous parts or facets".
Because
of the intricate, unpredictable, and ever-changing nature of the business
environment, there is constant variation in its structure, nature, and range.
The observer's perception plays a crucial role as a new change can present
opportunities for one and threats for another. The diverse business environment
involves many different influencers impacting a business from various
directions. These factors can be grouped into different dimensions, each with
their own factors and effects on companies.
·
Interrelated
The
different components of the business environment are interconnected, so any
alteration in one component will impact the rest of the business environment.
Currently, there is a growing focus on health and fitness in society, leading
to an increased demand for products and services such as low-fat cooking oil,
low-fat milk, sugar-free products, yoga centers, and health retreats.
Conversely, the demand for spicy and oily foods has declined somewhat.
1.1.3 Scope of Business Environment
1.
Internal and external environment
The internal environment refers to elements within an
organization that impact its strengths or weaknesses, like high-quality raw
materials or unskilled human resources. Conversely, the external environment
includes factors outside the organization’s control that present opportunities
and threats, such as shifts in political and economic conditions or
technological advancements.
2.
Micro-environment and macro-environment
Sometimes
the internal and external environments are referred to as the micro and macro
environments respectively. The micro-environment affects how a specific
business operates. It has a direct impact on business activities and includes
customers, suppliers, market intermediaries, and competitors. These factors are
somewhat controllable. The macro environment is the broader context that
affects all businesses. It is uncontrollable and exerts an indirect influence.
Elements like political conditions, the economy, and technology are part of the
macro environment. For instance, technological advancements like blockchain and
Artificial Intelligence (AI) have transformed business operations.
3.
Controllable and Uncontrollable environment
All
business-governed factors fall under a controllable environment. Internal
factors, like money, employees, materials, and machines, are also controllable.
External factors, which are uncontrollable, include global, technological,
legal, and natural changes. For instance, the recent COVID-19 pandemic is a
notable example of an uncontrollable factor. It has significantly affected
businesses and prompted changes in operational strategies.
4.
Specific and general environment
The
concept of the specific environment pertains to the external influences that
have a direct impact on the decisions and behaviors of business entities,
playing a crucial role in the attainment of organizational objectives. Within
this realm, the primary factors at play include customers, suppliers,
competitors, and pressure groups, all of which wield considerable influence
over the operations of enterprises. On the other hand, the general environment
encompasses a broader spectrum of forces such as economic conditions,
politico-legal frameworks, socio-cultural trends, technological advancements,
demographic shifts, and global circumstances, all of which bear indirect
effects on organizations. These external forces, though not directly in the
forefront, necessitate that organizations engage in meticulous planning,
strategic organization, effective leadership, and stringent control mechanisms
to effectively incorporate and navigate through these multifaceted factors.
1.1.4 Significance of Business Environment
In the
context of a highly interconnected global economy, it is crucial to recognize
the pivotal role that the business environment plays in shaping the operations
and strategies of various business entities. The dynamics of the business
environment can significantly impact the decision-making processes and overall
performance of organizations operating in diverse industries.
1.
Strategic Planning
The
strategic planning process benefits from the business environment, which offers
valuable insights into both internal and external factors that impact an
organization's activities, including market trends, economic conditions,
regulations, technology developments, and competitive landscape, allowing
businesses to recognize growth opportunities and potential risks, make informed
decisions, allocate resources efficiently, and adjust strategies to stay
competitive and resilient in the long run.
2.
Decision Making
Decision-making
is an essential aspect of a robust business setting as it allows organizations
to adeptly address the ever-evolving external circumstances. In the face of
constant changes within business environments, managers and leaders can utilize
well-informed decision-making to optimize possibilities and tackle obstacles
efficiently. The process of decision-making encompasses the identification of
issues, data collection, assessment of various options, selection of choices,
execution of decisions, and evaluation of results.
3.
Risk Management
Risk
management involves a methodical approach to recognizing, evaluating, and
reducing potential dangers or uncertainties that may impact a company. It
includes assessing the probability and consequences of risks, creating plans to
reduce damage, and evaluating the success of actions. By taking measures to
handle risks in advance, companies can reduce financial losses, safeguard their
reputation, guarantee safety, and make well-informed choices, resulting in
enhanced performance and a competitive edge. In the business setting, the first
step in recognizing risks involves key stakeholders and management establishing
the organization's goals. After implementing a risk management program, the
goals are carefully examined for any potential risks.
4.
Competitive Advantage
By
recognizing influences like market conditions, industry trends, and regulatory
changes, businesses can pinpoint potential advantages and risks. By utilizing
this information, they have the ability to customize their tactics, be
creative, and distinguish themselves from rivals. For example, a business in a
constantly changing industry may choose to allocate resources to research and
development in order to maintain a competitive edge, whereas a company in a
steady market may prioritize cost effectiveness. In the end, when organizations
align with the business environment, they can create distinct value
propositions and stay competitive.
5.
Sustainability/ Growth
The
internal and external factors within the business environment are essential for
nurturing sustainability and growth in organizations. It offers the environment
in which companies function, presenting possibilities, hurdles, and assets that
influence strategic choices. An advantageous business climate can offer skilled
workforce access, technological advancements, and supportive regulations to
help companies establish sustainable practices and grow their businesses. At
the same time, businesses are pushed to innovate, enhance efficiency, and
adjust to changing circumstances by market demands and competitive pressures.
Companies can discover new growth prospects, improve their operations, and
enhance resilience by examining and reacting to environmental factors like
economic trends, consumer preferences, and technological advancements. This
active interchange between companies and their surroundings forms a loop of
communication that, if managed effectively, encourages both the adoption of
sustainable methods and ongoing expansion.
6.
Stakeholder Management
In the current business landscape, it is essential for
the success of any project or product development effort to comprehend and
synchronize with stakeholder expectations, given the emphasis on
customer-centric and community-focused strategies. Efficiently managing
stakeholders is key to fostering good relationships, preventing conflicts,
obtaining support from important stakeholders, and guaranteeing effective
communication and expectation handling. Customers, employees, suppliers,
communities, and investors all influence each other, underscoring the
importance of holistic approaches that extend beyond a focus on shareholders.
1.2 Components of Business Environment: Micro and
Macro Environment
The components of business environment are classified
into two broad categories.
1. Internal Environment
2. External Environment
1.
Internal Environment: It refers to all the manageable factors and situations in a
company that impact how the organization operates. The internal environment of
an organization comprises the following components:
a.
Employees: They
are the primary elements and valuable possessions of companies. It is their
duty to follow the company's direction, goals, rules, and regulations.
Organizations need to motivate and satisfy them with fair reward policies for
better performance. The dedication, loyalty, and cooperation of employees are
the only ways to increase the productivity of organizations.
b.
Shareholder and Board of Directors: As the owners of the business,
shareholders hold a direct stake in the organization's performance. The board
of directors, who are elected by shareholders, represent the interests of
shareholders on the board. The board's duty is to oversee the company and
create suitable strategies. They assess the overall performance of the
organization and offer guidance to senior management for organizational growth.
c.
Organizational culture: Each business has its unique
culture. Culture is the collection of values, beliefs, and norms that shape how
an organization functions. It aids in uniting staff and adhering to company
policies and laws. Culture exerts a strong impact on the process of changing
organizations and making decisions.
d.
Labour Union:
A labour union represents the workers employed in a company or organization.
Issues and concerns of the workers are brought to management for productive
resolutions. A positive relationship between labor unions and management
prevents unnecessary disruptions within organizations.
e.
Organizational Structure: Structure serves as the organizational framework, delineating roles and
responsibilities, defining the hierarchy of management, and coordinating
business activities. It clarifies authority and responsibility relationships,
ensuring smooth and efficient operations within the company.
f.
Organizational Policies: Examining the business environment is crucial for organizational
policies. Formulating its values, vision and mission. It helps identify risks,
weaknesses, and growth opportunities. Policies provide direction, maintain
uniformity, legal compliance, and risk control, protecting the organization's
image and prosperity.
2.
External Environment: External
environment is the condition and forces outside the organization that are
relevant to its operation and influence the organizational activities. There
are two categories of external environment.
1. Micro-Environment
2. Macro-Environment
1.
Micro- Environment: The micro-marketing environment demands special attention. It
encompasses the actors and forces directly influencing your day-to-day
marketing operations. This is where practical implementation occurs, shaping
how you engage with customers and achieve marketing objectives. Now, let’s
explore the key players within this microcosm
a)
Customers: Clients
trade assets, typically money, for a company's goods and services. A customer
can be an individual, a family, a business, or an institution. Customers not
only make purchases, they also provide valuable input, feedback, and opinions
regarding the product or service. Therefore, managers should cultivate a strong
connection with their employees.
b)
Competitors:
It pertains to companies that vie for resources against other companies and
offer similar or alternative products and services to the same demographic. The
company needs to assess their rivals and create well-defined marketing plans to
enhance customer satisfaction and boost their market presence.
c)
Suppliers: Suppliers are the firms that supply
resources such as materials, labor, and equipment to other businesses. The
business firm seeks to acquire raw materials at lower costs, with superior
quality, and quick delivery, as they directly impact the output quality and
price. This enhances the competitive stance of organizations.
d)
Government:
The government is responsible for overseeing the business system and
safeguarding the welfare of customers and the public. It establishes guidelines
for firms to follow, such as rules, regulations, and business policies. Hence,
the government significantly affects the corporate policies, procedures, and
business practices of contemporary organizations.
e)
Financial institutions: Organizations depends on a variety of financial institutions such as:
banks, insurance companies, capital markets, etc to supply fund for maintaining
and expanding their business activities. The terms and conditions of loans and
advances and quality of promptness of their services have an impact on the
performance of business firms.
2.
Macro- Environment: The marketing
space encompasses more than just the immediate competitors you engage with on a
regular basis. The macro-marketing environment is situated past the
micro-environment. This bigger picture includes the wider social and economic
factors that impact the industry as a whole. Comprehending these factors is
essential for creating flexible and long-lasting marketing plans.
Let's examine the major influences that impact the
macro-marketing environment, frequently assessed using the PESTEL model.
a)
Political: Political factors refer to
the extent and way a government involves itself in economic matters. More
precisely, political factors encompass tax policy, labour law, environmental
law, trade restrictions, tariffs, and political stability. These factors also
involve government provision of goods and services they deem beneficial (merit
goods) and those they do not want provided (demerit goods or merit bads). In
addition, governments wield significant power over the healthcare, schooling,
and public works of a country.
b)
Economic: Incorporate factors such as
economic expansion, interest rates, currency values, and inflation levels.
These elements significantly influence the way businesses function and
formulate decisions. For instance, the cost of capital for a company is
influenced by interest rates, consequently impacting the growth and expansion
of the business. Fluctuations in exchange rates impact the expenses of
exporting products as well as the availability and cost of imported goods
within an economy.
c)
Society: It encompass cultural
elements such as health awareness, population growth rate, age distribution,
career values, and focus on safety. Changes in societal factors impact the need
for a company's goods and services as well as its operational strategies. As an
illustration, a population that is getting older could lead to a workforce that
is both smaller and less eager to work (resulting in higher labor costs).
Additionally, businesses can adjust different management approaches in response
to these social trends, like hiring older employees.
d)
Technology: Technological factors
encompass environmental and ecological elements like research and development
efforts, automation, technology rewards, and the pace of technological
advancements. They are able to identify obstacles to entering a market, the
minimum level of production efficiency, and impact decisions on outsourcing.
Additionally, changes in technology can impact expenses, excellence, and result
in originality.
e)
Environmental: Environmental
regulations and factors like weather, climate, and climate change
are environmental factors that can impact industries such as tourism, farming,
and insurance. The increasing awareness of climate change is also influencing
companies' operations and the products they provide, leading to the emergence
of new markets and the decline of existing ones
f)
Legal: Laws and regulations on
consumer protection, advertising, intellectual property, and legal frameworks
set the limits for conducting business efforts. Incorporate laws regarding
discrimination, consumer rights, competition, workplace regulations, and health
and safety. These factors can affect the company operations, management, costs
and the demand for its products.
1.2.1
Relationship between Business Environment
and Strategic Management
Strategic management is the process of making decisions
and taking actions to create and carry out plans that aim to achieve a
company's goals. A manager's strategic decisions rely on predictions rather
than facts. Strategic choices have intricate consequences for multiple aspects
of the company. The features of strategic management decisions change depending
on the level of strategic management being conducted.
·
Strategic management is useful for establishing
goals and guidelines for the company. To develop a strategy, a company must
analyze its surroundings.
·
When creating a plan, those making strategic
decisions need to evaluate both internal and external factors in the
surrounding environment, as outlined in the.
The sections that come after:
o Analyzing
both the internal and external environment allows managers to identify suitable
goals and mission statements, as well as examine the strategic alternatives at
their disposal.
o Analysis
of the business environment should form the basis of strategic planning.
Currently, the world is undergoing rapid change. Therefore, it is vital for
companies to thoroughly analyze the business environment and develop strategic
plans that are adaptable to the changes.
o The
landscape is evolving, and the strategy that works for businesses now could
pose a risk in the future. A strategy is only successful if it is adaptable.
1.3.1
Analysis of business environment
An environmental analysis is a strategic method utilized
to pinpoint all internal and external factors that may impact a company’s
ability to succeed. The strengths and weaknesses of a company are exposed
through internal components, while external components indicate the
opportunities and threats. This is located beyond the company's walls.
Environmental scanning is another term for analyzing
trends and key factors at a high level.
For instance, the impact of interest rates on a company's
activities. These examinations can assist companies in achieving appeal within
their industry.
Following are four basic components of business
environment analysis:
1.
Scanning: The term 'scanning' refers
to examining every part or element of something to uncover certain
characteristics of it. This is the initial stage of the environmental analysis
process, which examines the organizational environmental factors. The objective
of scanning is as stated:
·
Analyzing aids in detecting potential
environmental shifts that could impact an organization's operations.
·
Understanding the current environmental
modifications.
Scanning is essentially an unstructured task. This is
because the data available for scanning is vast, albeit vague and lacking
precision. Therefore, it is challenging to differentiate between pertinent and
irrelevant data. The main challenge in the environmental analysis process is to
gather the appropriate data and maximize its effectiveness.
2.
Monitoring: 'Monitoring' refers to
continuously observing or overseeing something. Therefore, environmental
analysis utilizes monitoring to periodically track changes in the environment.
For instance, employees, natural resources, and government along with their policies
continue to change.
Therefore, following the scanning process, it is
important to continuously observe the changes occurring in the environment and
the potential effects on the organization's operations. Continuous monitoring
guarantees that business individuals are conscious and react to potential
changes in the business environment.
3.
Forecasting: Scanning and monitoring
are irreversible actions in the past for the organization. Considering outlook
and focus is crucial when developing a strategy. Prediction is key in analyzing
the business environment and making future projections, encompassing various
aspects like technology introductions, government tax policies, consumer
preferences, and product receptions. Forecasting aims to address these
questions, which involves a more complex process compared to analyzing and
observing. The accuracy of monitoring and scanning results is ensured through
thorough examination of the current situation, while forecasting's precision
and narrow scope make predicting the future uncertain. Brainstorming is
essential in the complicated process of predicting future outcomes.
4.
Assessing: Following an analysis of
the business environment through scanning, monitoring, and forecasting,
organizations need to adequately assess the data collected in the previous
steps. The organization must also assess the effects it will have on
operations. Evaluation will offer solutions to the subsequent inquiries:
·
What plan is required for the organization to
operate effectively?
·
What alterations could an organization consider
making to its current strategy?
·
What other options does an organization have if
the environment experiences negative changes?
·
How will the organization confront the upcoming
changes?
1.3.2
Steps in Business Environmental Analysis
1.
Identification of factors: The
organization's environment is made up of several different parts. However, not
every factor and aspect will have equal or any significance for the
organization's operations. A skilled strategist always recognizes the important
aspects and carefully examines them. They search for all necessary elements of
the environment and analyze the related factors thoroughly. In this manner,
he/she gathers the necessary materials and will deliver a scanned report.
2.
Grouping of identified factors: The
initial stage involves collecting the necessary raw data. During this stage,
the gathered elements will be categorized by factors such as their impact on
stability, sales, growth, etc. This categorization involves all the information
that has been gathered.
3.
Observing internal factors: Once the
strategist identifies and categorizes the important elements of the external
environment, they then examine the internal components of the organization. For
instance, the way employees respond to environmental changes and how well an
organization operates as external factors change in the environment.
4.
Monitoring external factors: Since
the environment is not constant, it undergoes continual changes such as shifts
in government policies, fluctuations in customer preferences, and variations in
supplier rates. Therefore, conducting a single scan is not a beneficial
activity for the organization. An organization must continually monitor and
keep informed about the changes that are coming.
5. Drafting
of variable analysis: Variables are the elements that are
accountable for causing a shift in an outside setting. Various factors such as
national minimum wage, GDP, tax policies, competitors’ policies, and customers’
preferences must be identified and regularly analyzed by a strategist in order
to make any required adjustments in operations.
6. Usage
of various techqiues for analysis: Various methods like
benchmarking, scenario building, and network techniques are used for a
comprehensive environmental analysis. Benchmarking sets industry standards to
evaluate company performance. Scenario building provides a comprehensive
overview of an organization's system and its influencing factors. The intricate
network method assesses external surroundings, identifying market opportunities
and threats. It also evaluates the impact of the environment on internal
strengths and weaknesses, aided by the Delphi method, conceptualization,
investigation, and research.
7. Predicting
results: In the analysis of a business environment, it is
crucial to forecast future results. An effective strategist will consistently
forecast how environmental factors could impact the organization's operations.
In this stage, an evaluation of previous outcomes can also be conducted.
8. Strategies
formulation: Analyzing the business environment is
crucial in developing operational strategies. Before devising a successful
strategy, a SWOT analysis is performed, evaluating the organization's
strengths, weaknesses, opportunities, and threats. Strategic Advantages
Profiles (SAP) document internal components, while Environmental Threat and
Opportunity Profiles (ETOP) focus on external elements. Both profiles can be
combined into a SWOT profile. The External Factor Evaluation (EFE) matrix is
used by strategists to assess internal and external factors.
9. Execution
of formulated strategies: Following the steps, a strategist
puts into action and carries out the developed strategies. The strategist
regularly assesses the strategy he created and how it can be successfully
executed. Additionally, he/she predicts the necessary future outcomes. This
procedure is frequently called the SWOT analysis process as well.
10. Monitoring:
The strategist needs to continue monitoring the external surroundings. It is
important to constantly monitor the changes in the environment and make
necessary adjustments to the plan or strategy.
SWOT analysis is a tool used to recognize and evaluate an
organization's internal strengths, weaknesses, as well as external
opportunities and threats. These words form the SWOT abbreviation.
Albert Humphrey is recognized as the creator of the SWOT framework, which he
trialed at the Stanford Research Institute during the 1960s and 1970s. SWOT
analysis was initially created for use in business, utilizing information
collected from Fortune 500 companies. All kinds of organizations have embraced
it as a tool for generating ideas when making decisions in business.
The main aim of conducting a SWOT analysis is to enhance understanding of the
elements involved in making business choices or setting up a business plan.
SWOT examines the internal and external factors that can affect the feasibility
of a decision.
SWOT analysis is frequently employed by businesses, and it is also utilized by
nonprofit organizations and individuals for self-evaluation. SWOT is also
applied for evaluating initiatives, products, or projects. For instance, SWOT
can be utilized by CIOs to develop a strategic business planning framework or
conduct a competitive analysis.
·
Strength: The term 'strengths'
essentially refers to the things you excel at or your abilities. In the
business environment, it refers to the fundamental skills or abilities of a
company that allow it to secure strategic benefits over its rivals. Even if it
doesn't have any competitive edge, it showcases an organization's strengths and
positive attributes. Every organization needs strength in order to achieve a
competitive edge. Some companies may consider their employees a strong point,
while others may see their low production costs as an advantage.
·
Weakness: Weakness are the exact opposite
to strength. Strengths represent competitive benefits, while weaknesses
indicate competitive drawbacks within an organization. An organization's
weaknesses lead to its downfall. The term 'weakness' also encompasses the areas
where the organization lacks proficiency. For instance, a company may lack
superior marketing tactics when compared to its rivals. In that situation,
marketing would be its downfall.
·
Opportunity: The term 'opportunity'
refers to a favourable moment to seize. This is a beneficial situation or
conditions existing in the outside surroundings that the organization should
take advantage of to enhance its strengths and gain a competitive edge. An
organization's strategist needs to be alert to upcoming opportunities in the
market in order to capitalize on them promptly and increase revenues and
profits. Examples include a sudden increase in customer demand, new government
policies benefiting the organization, and emerging technologies.
·
Threats: The term 'threat' refers to the act of
revealing a weakness that could lead to negative consequences. Changes in an
external environment that are not beneficial to the organization are considered
threats. Changes in customer preferences and unfavourable government policies
are viewed as potential threats to the organization.
An organization doesn't have to rely solely on one
strength. An organization could possess multiple strengths simultaneously. An
increased amount of strengths would provide a company with a greater number of
competitive advantages. An organization could have weaknesses that harm its
competitive position in the market. The organization's growth would be hindered
by its own weaknesses. The strengths and weaknesses of an organization can be
evaluated together, resulting in a collective impact known as a synergistic
effect within the organization. The idea of synergy suggests that combining two
things may result in a greater or lesser effect. When the strengths and
weaknesses of a company are comprehended simultaneously, they have the
potential to generate either a strength or a weakness. This could also be
interpreted as 'two plus two could equal five or three'.
The SWOT analysis is a method used to assess the
strengths, weaknesses, opportunities, and threats facing an organization. Every
organization must ensure they conduct this analysis with great efficiency, as a
thorough understanding of all these areas is essential. A plan would be created
solely based on these factors. A thorough examination of an organization's
internal and external factors can be conducted using SWOT analysis.
The SWOT analysis aligns the organization's strengths and weaknesses with the market's
opportunities and threats. Using its strengths to take advantage of market
opportunities is advantageous for the organization. Additionally, a company
should address its weaknesses and mitigate potential threats in its external
environment. A SWOT analysis is being carried out using a matrix containing
four cells. In this grid, the cells are denoted as strengths, weaknesses,
opportunities, and threats.
Swot Analysis of Apple Inc.
·
Strengths:
Strong Brand
Recognition and Loyal Customer Base: Apple has a powerful brand image associated with innovation, premium
quality, and status. This attracts a loyal customer base willing to pay a
premium for Apple products.
Premium
Product Portfolio: Apple
offers a well-regarded range of iPhones, iPads, MacBooks, and other devices
known for their design, user experience, and performance.
Strong
Ecosystem: Apple's
ecosystem integrates hardware, software, and services seamlessly, creating a
locked-in user base that is less likely to switch to competitors.
Focus on
Innovation: Apple invests
heavily in research and development, consistently pushing the boundaries of
technology and design.
Shifting
Manufacturing Focus:
Apple's decision to manufacture some products in India helps reduce costs and
potentially make them more affordable for Indian consumers.
·
Weaknesses:
High Price
Point: Apple products are
generally considered expensive compared to competitors, potentially limiting
their reach in a price-sensitive market like India.
Limited
Retail Presence: While
Apple has opened flagship stores in India, its overall retail presence is still
smaller compared to some competitors.
Reliance on
Premium Segment: Apple's
focus on the high-end market may leave them vulnerable to competition in the
rapidly growing mid-range smartphone segment in India.
Limited
Customization Options:
Unlike some competitors, Apple offers less customization for its devices, which
may not appeal to all Indian consumers.
·
Opportunities:
Growing
Middle Class: India's
expanding middle class presents a significant opportunity for Apple to increase
its market share by offering more affordable product options.
Rising
Smartphone Penetration: The
increasing use of smartphones in India provides a potential customer base for
Apple products.
Government
Initiatives: Government
initiatives like "Make in India" can benefit Apple by reducing
production costs and increasing affordability.
E-commerce
Growth: The growing
popularity of e-commerce platforms can help Apple reach a wider audience in
India, particularly in smaller cities and towns.
Focus on
Online Services: Apple can
expand its services like Apple Music, Apple TV+, and iCloud to generate
recurring revenue streams.
·
Threats:
Intense
Competition: The Indian
smartphone market is highly competitive, with established players like Samsung
and Xiaomi offering feature-rich devices at lower price points.
Economic
Fluctuations: Economic
slowdowns in India could impact consumer spending and affect demand for Apple's
premium products.
Import
Duties: High import duties
can increase the cost of Apple products, further limiting their affordability.
Intellectual
Property Concerns:
Counterfeiting and intellectual property theft can be a challenge for Apple in
India.
Changing
Consumer Preferences:
Shifting consumer preferences towards features like larger screens and longer
battery life could put Apple at a disadvantage if they don't adapt their
offerings.
1.3.4 Porter’s Model or
Diamond Model Analysis
The Porter Diamond Theory of National Advantage, also
known as the Porter Diamond Model, explains how nations or groups can gain a
competitive edge through factors they have access to. The theory outlines ways
in which governments can enhance a country's standing in a globally competitive
economy.
Created by Michael Porter, founder of the Institute for
Strategy and Competitiveness at the Harvard Business School, the Porter Diamond
Model is considered a proactive economic theory.
The Porter Diamond model provides a successful method for
examining a country's competitiveness. It is possible to evaluate the firm's
international success by considering the traits of the country where it is
based.
The Porter Diamond model emphasizes the importance of the home country's
characteristics in determining a firm's global competitiveness. Therefore, it
claims that the success of a company in other markets is determined by the
quality of the environment in its home country.
The Porter Diamond model bases its assessment on 6
elements:
1.
Factor Conditions
2.
Demand Conditions
3.
Related and Supporting Conditions
4.
Firm Strategy, Structure and Rivalry
5.
Chance
6.
Government
We will now understand each one in detail,
1.
Factor Conditions: Factor conditions in a
specific nation pertain to the available natural, capital, and human resources.
Certain countries, like Saudi Arabia, possess abundant natural resources, like
oil, for instance. This is the reason why Saudi Arabia is one of the biggest
oil exporters globally. By human resources, we refer to established elements
like a proficient workforce, quality infrastructure, and a foundation of
scientific knowledge. Porter contends that factor conditions that are
deliberately developed are crucial, rather than relying on pre-existing natural
factor conditions. It is crucial that the existing factor conditions are
constantly improved by enhancing skills and generating new knowledge.
Competitive advantage comes from having top-notch institutions that develop
specialized factors and constantly improve them. Countries excel in industries
where they have a strong ability to create factors.
2.
Demand Conditions: The industries within
a nation are greatly influenced by the level of domestic demand. A bigger
market presents greater difficulties, but also offers chances to expand and
enhance company performance. Local customer demand conditions that are
sophisticated drive companies to expand, innovate, and enhance quality. Aiming
to meet the needs of a challenging local market pushes businesses to reach
higher levels and potentially understand the future demands of customers in
other countries sooner. Countries gain a competitive edge in sectors where
domestic customers offer companies a better understanding or earlier insight
into evolving consumer demands, and where customers push companies to innovate
rapidly and gain more sustainable competitive advantages compared to
international competitors.
3.
Related and Supporting Conditions: The
existence of connected and ancillary sectors forms the basis for the focal
industry to thrive. Like the Value Net has shown, firms frequently rely on
forming alliances and partnerships with other firms to enhance customer value
and gain a competitive edge. Suppliers play a vital role in boosting innovation
by providing better quality inputs, giving prompt feedback, and maintaining
open communication channels. A country's businesses gain the most advantage
when their suppliers are also global rivals. It frequently requires many years
(sometimes even decades) of dedication and financial investments to develop
robust linked and auxiliary industries that help local businesses compete on a
global scale. Yet, once these elements are established, the entire area or
country can frequently experience advantages from having them. This can be seen
in Silicon Valley, where various tech giants and startups are located closely
together to exchange ideas and drive innovation.
4.
Firm Strategy, Structure and Rivalry: The
environment of a country greatly influences the establishment, structure, and
management of companies, impacting their strategies and organizational setup.
Additionally, competition within a country plays a crucial role in global
competitiveness by compelling businesses to cultivate distinctive and enduring
strengths and abilities. The stronger the competition among businesses within
the country, the more pressure there is for companies to come up with new ideas
and enhance their offerings to stay ahead. Ultimately, this will benefit
businesses when expanding into the global market. An excellent illustration is
the intense competition within the Japanese auto industry, involving companies
like Nissan, Honda, Toyota, Suzuki, Mitsubishi, and Subaru. Due to intense
competition within their own country, they have improved their ability to
compete in global markets too.
5.
Government: The government's role in
Porter's Diamond Model is defined as both a 'catalyst and challenger'. Porter
does not support the idea of a free market where the government allows
everything in the economy to be determined by the 'invisible hand'.
Nevertheless, Porter does not view the government as a necessary ally and
advocate for industries either. Governments are unable to establish competitive
industries; only companies can do so. Instead of that, governments should
motivate and urge companies to raise their ambitions and strive for increased
levels of competitiveness. Encouraging early demand for advanced products,
focusing on specialized factors like infrastructure and education, promoting
domestic competition through anti-trust laws, and supporting change can achieve
this goal. The government can help promote the growth of the four mentioned
factors to benefit industries in a specific country.
6.
Chance: While Porter initially did
not mention chance or luck in his writings, the Diamond Model frequently
incorporates the concept of chance as the probability of external occurrences
like wars and disasters impacting a country or industry positively or negatively.
However, it also encompasses unpredictable occurrences like the location and
timing of fundamental scientific breakthroughs. These occurrences are outside
the government's or individual companies' control. The increased border
security following the September 11 attacks in the US significantly reduced
imports from Mexico, greatly affecting Mexican exporters. Chance-created
discontinuities can offer benefits to certain companies while posing challenges
for others. Certain companies could achieve a competitive edge, while others
could fall behind. Although these factors are fixed, they should still be
observed to be able to adjust decisions accordingly in response to fluctuating
market conditions.
·
Case study of Adani group by Diamond Porter’s
model
The Adani Group is a multinational conglomerate with a
diverse portfolio of businesses spanning across energy, resources, logistics,
and defense. Founded by Gautam Adani in 1988, the group has grown exponentially
to become one of India's largest business houses. This case study will analyze
the Adani Group using the Diamond Porter Model, which evaluates the
competitiveness of a nation or organization based on six interrelated
components: Factor Conditions, Demand Conditions, Related and Supporting Industries,
Firm Strategy, Structure, and Rivalry, Government, and Chance.
1.
Factor Conditions
Factor conditions refer to the availability of resources
and inputs that a firm or nation needs to compete. In the case of the Adani
Group:
o Natural
Resources: The Adani Group has access to India's rich natural
resources, including coal, iron ore, and other minerals. Its mines in India,
Australia, and Indonesia provide a steady supply of raw materials.
o Human
Resources: India has a large pool of skilled and unskilled labor,
which the Adani Group can tap into. The company has invested heavily in
employee training and development to enhance its human capital.
o Financial
Resources: The Adani Group has access to a large pool of capital,
thanks to its strong relationships with banks, financial institutions, and
investors.
o Infrastructure: India's
infrastructure is improving rapidly, and the Adani Group has invested heavily
in building ports, roads, and railways to support its businesses.
2.
Demand Conditions
Demand conditions refer to the nature of the demand for a
firm's or nation's products and services. In the case of the Adani Group:
o Domestic
Demand: India's growing economy and increasing demand for energy,
resources, and infrastructure have created a large domestic market for the
Adani Group's products and services.
o Export
Demand: The Adani Group has also been successful in exporting its
products, particularly coal and iron ore, to countries like China, Japan, and
South Korea.
o Sophistication
of Demand: The Indian market is becoming increasingly sophisticated,
with customers demanding higher-quality products and services. The Adani Group
has responded by investing in research and development to improve its
offerings.
3.
Related and Supporting Industries
Related and supporting industries refer to the presence
of industries that are related to or support the firm's or nation's core
business. In the case of the Adani Group:
o Energy
and Resources: The Adani Group's businesses in energy, resources, and
logistics are closely related, allowing for synergies and cost savings.
o Infrastructure
Development: The company's investments in infrastructure development,
such as ports and roads, support its core businesses and create opportunities
for growth.
o Technology
and Innovation: The Adani Group has partnered with technology
companies to improve its operations and develop new products and services.
4.
Firm Strategy, Structure, and Rivalry
Firm strategy, structure, and rivalry refer to the
competitive dynamics within an industry. In the case of the Adani Group:
o Business
Diversification: The Adani Group has diversified its businesses across
energy, resources, logistics, and defense, reducing its dependence on any one
industry.
o Vertical
Integration: The company has integrated its businesses vertically,
controlling key aspects of its supply chain and reducing costs.
o Investment
in Technology: The Adani Group has invested heavily in technology to
improve its operations and develop new products and services.
o Competition: The
Adani Group faces competition from domestic and international players, but its
strong brand, diversified businesses, and commitment to innovation have helped
it maintain a competitive edge.
5.
Government
The government plays a significant role in shaping the
business environment and competitiveness of a firm or nation. In the case of
the Adani Group:
o Regulatory
Support: The Indian government has provided regulatory support to the
Adani Group, particularly in the energy and resources sectors.
o Infrastructure
Development: The government has invested heavily in infrastructure
development, which has benefited the Adani Group's businesses.
o Tax
Incentives: The government has offered tax incentives to the Adani
Group, encouraging investment in key sectors like renewable energy.
6.
Chance
Chance events can have a significant impact on a firm's
or nation's competitiveness. In the case of the Adani Group:
o Global
Economic Trends: The Adani Group has benefited from global economic
trends, particularly the growth of the Asian economy and the increasing demand
for energy and resources.
o Technological
Advancements: The company has leveraged technological advancements,
such as the development of renewable energy technologies, to improve its
operations and develop new products and services.
o Climate
Change: The Adani Group has faced challenges due to climate change,
particularly in the coal and resources sectors. However, the company has
responded by investing in renewable energy and reducing its carbon footprint.
Conclusion
The Adani Group's competitiveness can be attributed to
its favorable factor conditions, strong demand conditions, presence of related
and supporting industries, effective firm strategy, structure, and rivalry,
supportive government policies, and adaptability to chance events. The
company's diversified businesses, commitment to innovation, and investments in
technology and infrastructure have enabled it to maintain a competitive edge in
the Indian market and expand globally.
Key takeaways
Meaning: Business environment encompasses all external factors (e.g.,
economic, socio-cultural, politico-legal, technological) influencing business
operations.
·
Characteristics:
o Dynamic
Nature: Constantly changing due to technological, economic, regulatory, and
consumer preference shifts.
o Complexity:
Interconnected factors make forecasting and decision-making challenging.
o Uncertainty:
Unpredictable changes can impact operations and strategies.
o Multifaceted:
Multiple dimensions with different influencers affecting businesses.
o Interrelated:
Changes in one component affect the entire business environment.
·
Scope:
o Internal
Environment: Elements within the organization, like employees, culture,
structure, and policies.
o External
Environment: Factors outside the organization, categorized into micro
(customers, competitors, suppliers) and macro (political, economic, social,
technological, environmental, legal) environments.
·
Significance:
o Strategic
Planning: Provides insights for informed decision-making and resource
allocation.
o Decision
Making: Helps address evolving external circumstances.
o Risk
Management: Identifies and mitigates potential risks.
o Competitive
Advantage: Aligning with the environment helps differentiate from rivals.
o Sustainability/Growth:
Encourages innovation and adaptation to changing conditions.
o Stakeholder
Management: Essential for aligning with expectations and preventing
conflicts.
Components of Business Environment: Micro and Macro
Environment
·
Micro-Environment: Directly influences
day-to-day operations.
o Customers:
Trade assets for goods/services and provide feedback.
o Competitors:
Rival businesses offering similar or alternative products/services.
o Suppliers:
Provide resources necessary for production.
o Government:
Sets regulations and policies impacting business operations.
o Financial
Institutions: Supply funds for business activities.
·
Macro-Environment: Broader social and
economic factors impacting the industry.
o Political:
Government involvement in economic matters, regulations, and policies.
o Economic:
Factors like economic growth, interest rates, and inflation.
o Society:
Cultural elements, health awareness, and demographic shifts.
o Technology:
Technological advancements and their impact on business operations.
o Environmental:
Environmental regulations and climate factors.
o Legal:
Consumer protection laws, advertising regulations, and legal frameworks.
Analysis of Business Environment
·
SWOT Analysis: Identifying strengths,
weaknesses, opportunities, and threats.
·
Porter's Model: Analyzing competitive
forces within the industry.
Relationship between Business Environment and Strategic
Management
·
Strategic Management: Making decisions
and actions to achieve company goals.
·
Environmental Analysis: Essential for
forming strategic plans adaptable to changing conditions.
Steps in Business Environmental Analysis
1.
Scanning: Examining organizational
environmental factors.
2.
Monitoring: Continuously observing
changes in the environment.
3.
Forecasting: Making future projections
based on environmental analysis.
4.
Assessing: Evaluating the data collected
and its impact on operations.
Exercises
Short Notes:
1.
Define the term "business environment"
as per Keith Davis.
2.
List the characteristics of the business
environment.
3.
What are the components of the
micro-environment?
4.
Mention the factors included in the
macro-environment using the PESTEL model.
5.
Identify the primary elements of the internal
environment of an organization.
6.
Define SWOT analysis.
7.
State the significance of strategic planning in
the context of the business environment.
8.
What does 'environmental scanning' refer to in
business?
9.
Explain the difference between the internal and
external environment with examples.
10. Discuss
how technological advancements impact business performance.
11. Describe
the process of environmental scanning and its importance in strategic
management.
Long Answers:
1.
Using Porter's Five Forces Model,
analyze the competitive environment of a retail business.
2.
Apply the SWOT analysis to a hypothetical
business and identify its strengths, weaknesses, opportunities, and threats.
3.
Analyze the impact of socio-cultural environment
on the strategic decisions of a multinational company.
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