Dealing With The Issues Of The Environment Commerce Essay

The dissertation topic deals with the environment of Century Inks which is an SME based in a developing country like India. SME’s i.e. Small-medium sized enterprises have been defined in various ways taking into consideration carious constraints like employment, turnover, investment in land and machinery. For example in UK, under sections 382 and 465 of Companies Act 2006, SME’s have been classified under two categories, namely Small and Medium Size according to their turnover and employment. A small enterprise is one which employs less than 50 people and has a turnover of not more than £6.5 million along with a balance sheet total of not more than £3.26 million. A medium-scale enterprise is one which employs less than 250 people and has a turnover not more than 25.9 million along with a balance sheet total of not more than £12.9 million. In USA, the definition is not the same for all types of industries and depends on the ‘size standard’ of the company. For example most of the manufacturing and mining, industry fall under small enterprises if they employ less than 500 people. However, for Wholesale Trade Industry a small scale enterprise is one which employs less than 100 people. Similarly, in Service Industries and Heavy Construction Industry, the constraint is the annual receipt rather than employment. The definition of small businesses is given by Small Business Administration (SBA) Size Standards Office which is a government department to deal with benefits associated to SME’s(1). In India, MSMED Act 2006, firms have been classified into two categories i.e. Service and Manufacturing. They have been further classified under three categories namely Micro, Small and Medium according to their investment in equipment (for services), plant & machinery (manufacturing). Century Inks falls under the category of Small Scale enterprise engaged in manufacturing activity as it has an investment of more than Rs 25 lakhs (£36,000 approximately) and less than Rs.5 crores(£720,000 approximately) in its plant and machinery.

Hence an SME in USA might not necessarily be regarded as one in India as different countries have different definitions of an SME. Accordingly, they are rendered with certain benefits due to their small size and nature of business. Interestingly, government from various developing and developed countries look to provide certain benefits to SME and start-up organisations as they are believed to generate large employment, bring about innovation in products and services & their contribution to the national income.

Another striking difference between SME’s and MNE’s is the ownership. Most SME’s are initiated by a family member who is an entrepreneur who sets up the business and the ownership is then transferred to a close family member and decision-making is mostly autocratic. This is often the case in countries like India, Pakistan and Bangladesh etc. where the culture is more family-oriented. This forms a key part of the internal business environment for SME firms. The equity of the SME is confined to close members of the family and the decision-making is autocratic. The managerial positions are taken up by family members irrespective of their qualifications or expertise. This is a double-edged sword which has its own advantages and disadvantages. In a family oriented business, decision-making is faster and there is a lot of trust between the members of the organisation which reduces transactional uncertainties. They have long-term goals and do not look for short-term profits. They develop strong ties which are long-lasting with their employees, suppliers and customers. The disadvantages are that shareholders misuse their power for their own benefits rather than looking at overall benefit of the firm. Also, it is not necessary that the successor possesses the expertise and managerial & entrepreneurial skills like the founder family member which might lead to failure or deteriorating performance of the firm. This also limits the opportunity for deserving employees to take up top managerial positions (Wenyi Chu, 2009). MNE’s on the other hand though having large equity holding amongst the founding family members’ show a more corporate governance structure where ownership and management are often different.

The influence of family ownership on SME performance: evidence from public firms in Taiwan Wenyi Chu

http://www.lib.strath.ac.uk/busweb/guides/smedefine.htm

http://www.bankofindia.com/smepol.aspx

India is a developing country and every country has a unique business environment. There are various elements that constitute the business environment of a particular firm or business. The environment includes competitors, buyers, suppliers, financial institutions, government, and law etc. which affects a way a firm conducts its business. The business might be sensitive towards one or more of those elements of the business environment and it might affect their strategy and survival. Hence, it is important to understand and analyse the environment of a particular business and use it our advantage.

High labour regulations, power shortage, access to finance and corruption are four major obstacles affecting small-business growth in India and are a big part of the environment in evolving economy like India. Corruption plays an important role and impacts the other three obstacles and has also led to uneven growth rates of SME. (Maddalena Honnorati & Taye Mengistae, 2007). Corruption is one of the major elements of the business environment in India and more so for Small-scale businesses as they lack the power to influence governments and bureaucrats which MNE’s seem to have a good hold over. Access to finance is another important factor which is a major obstacle to SME’s due to high rates of interests, lack of collateral securities etc. Often, firms remain small throughout due to the lack of adequate finance and conservative nature of Indian firms. Labour regulations & power shortages are more subjective to industry type and the region/state you conduct your manufacturing activity.

Other factors affecting the growth of SME’s in developing countries are access to information, technological advancement, culture, competition, government regulations and environmental constraints. According to Stephenson. K. Arinaitwe of Breyer State University technology, access to finance and infrastructure as the main reasons constraints of SME. He explains why small firms do not invest in technology due to reasons of poor access to finance and volatility in the market. He believes that SME’s were less capable of taking advantage of technological advancement and are still backward in use of accounting system and quality standards (Stephenson. K. Arinaitwe). Culture and Competition are factors which are bound be there in every environment where business is conducted. Environmental constraints is a less relevant factor for firms in developing countries as compared to developed countries as more focus is laid on following environmental regulations in advanced countries where the people are aware and concerned about the environmental issues. Technological advancement and access to information & finance are a key part of the overall business infrastructure which form a part of the macro-environment and is largely affected by government policies.

Government affects the nature and pace of SME development in direct and indirect ways through its policies like tax, interest rates, subsidies, developing infrastructure and even direct support. Previous researches maintained that setup of new SME’s was more due to the result of creativity and commitment of individuals but failed to take into consideration the impact of macro-environment on the strategy and operations of SME’s which was largely dependent on government policies and regulations. The burden of compliance costs i.e. cost associated with understanding government legislations, adhering to them, hiring tax professionals and lawyers or training employees for changing laws on SME’s are more compared to larger firms as they have limited resources compared to MNE’s. “In economies where market reforms are low, not properly installed, it is reflected in the characteristic of and the nature of the SME?. (David Smallbone and Friederike Welter). In a country like India, where the development is uneven the pace of SME development are heavily dependent upon how supportive the local government bodies are as different states have different governments. Government bodies are the single most important element of the business environment that affects the business and even plays an important role in defining the other elements that constitute the environment like tax, power supply, employment regulations, law & order etc.

The dissertation tries to analyse the current strategies of Century Inks along with suggesting future strategic options available to them. It also describes the business environment and its effect on the firm as a whole. The business environment plays a key role in shaping a firm’s current and future strategy.

“The PESTEL framework provides a comprehensive list of influences on the possible success or failure of particular strategies. The PESTEL framework categorises environmental influences into six main types: political, economic, social, technological, environmental and legal. Politics highlights the role of governments; Economics refers to macro-economic factors such as exchange rates, business cycles and differential economic growth rates around the world; Social influences include changing cultures and demographics, for example ageing populations in many Western societies; Technological influences refer to innovations such as the Internet, nanotechnology or the rise of new composite materials; Environmental stands specifically for ‘green’ issues, such as pollution and waste; and finally Legal embraces legislative constraints or changes, such as health and safety legislation or restrictions on company mergers and acquisitions. It is important for managers analyse how these factors are changing now and how they are likely to change in the future, drawing out implications for the organisation. The PESTEL framework can be used to identify how future trends in the political, economic, social, technological, environmental (‘green’) and legal environments might impinge on organisations. This PESTEL analysis provides the broad ‘data’ from which to identify key drivers of change.? (Gerry Johnson, Kevan Scholes, Richard Whittington, 2008). Therefore, to understand the macro-environment environment of a firm PESTEL tool analysis has to be applied.

Since the main purpose of the dissertation is to analyse the current situation of the firm, its environment and strategies while suggesting them future strategic choices it is important to understand the internal capabilities of the firm and the opportunities and threats it has to survive and grow. SWOT analysis is the most widely used tool to understand the strengths, weaknesses, threats and opportunities of the firm. It helps in the initial stages of decision-making and acts as a first step towards strategic planning. (Johnson et al., 1989; Bartol et al., 1991). It considers various internal and external factors and tries to maximise the strength and opportunities while minimising the effect of weaknesses and threats. SWOT balancing then helps match the strengths of the company to the opportunities available to them to create competitive advantage over other firms.

“SWOT summarises the key issues from the business environment and the strategic capability of an organisation that are most likely to impact on strategy development.? It also helps to plan out future strategic options available to a firm for the future. It intends to recognise the extent to which a firm strengths and weaknesses are capable of dealing with the changes occurring in the business environment. However SWOT analysis is subjective and is generally useful when it’s compared to competitors. It analyses the strengths, weaknesses, opportunities and threats only compared to competitors and is not absolute. (Gerry Johnson, Kevan Scholes, Richard Whittington, 2008).

As mentioned earlier, competition in the market or industry is a key factor in determining the strategy for a firm. It is the most important element in the environment of the business after the governing bodies. Competition affects sales, price, product features and practically the whole marketing mix of a firm. Most importantly competition determines how profitable an industry is. Hence, it becomes necessary for a firm to define the competition in its industry/market to develop or plan future strategies.

Porter Five Forces is one of the most efficient tools used by firms and MNE’s to understand the current and future trends in competitive rivalry amongst firms in a particular industry. Porter’s Five Forces include Threat from New Entrants, Power of Buyers, Power of Suppliers, Threat of Substitute Products/Service and Competitive Rivalry.

The configurations of these forces differ from industry to industry. These forces and their origins, discloses the roots of an industry’s current profitability & also provide a framework which helps anticipating and influencing profitability and competition over time. (Michael Porter, 2008)

Porter’s Five Forces help determining the attractiveness of the market in the current situation as well as in the future. Along with that it also highlights the key issues or agenda in the market which a firm should focus and act upon for its survival (Gerry Johnson, Kevan Scholes, Richard Whittington, 2008)

For formulating the strategic plan for Century Inks the core strategy needs to be decided. The core strategy helps the firm deciding the broad term strategy they will follow. Ansoff Matrix is the best tool used by various experts for deciding upon the broad strategy of the firm. The Ansoff product/market growth matrix gives a technique of generating four basic alternative directions for strategic development.( Gerry Johnson, Kevan Scholes, Richard Whittington, 2008 )It divides the strategies into four parts i.e. Market Penetration, Market Development, Product Development, Diversification. The constraints used for this are the markets and products. In market penetration, the firm strategizes to focus on the same product the firm produces and focuses on the same market. The main motive here is to gain significant market share. Similarly in market development the firm focuses on expands their markets with the same product they produce & product development seeks to focus on developing new products for the same markets the firm operates in. Market Diversification as the word suggests focuses on creating an entirely new product for a new market altogether. It’s the most risky options and often taken up by firms when the original markets for the products start to mature.

Strategies are not independently based on a firm’s position or strengths in the market. It is also based on what the competitor’s strategies are and where they are placed. This makes important to analyse your position against your competitors in the market/industry. This helps the firm to know their position in the industry in the market, how would they like to be placed against their competitors and what segment of the market they should focus on. Strategic Group Analysis ( SGA) developed by Hunt in 1972 is a great strategic tool which helps us understand and analyse our positions in the market against our competitors under various constraints.

Strategic group analysis is a part of the industry analysis which specifically focuses various groups of rival firms clustered around a similar competitive approach or strategic position. It helps determining the competitive positions that competitors occupy & determines level of competition amongst the firms in the industry. It also helps to understand the profit potential of the different strategic groups operating within the industry along determining the consequences firms can face.

Strategic group analysis is a comprehensive tool of analysis which incorporates a wide array of possible variables which can be used to demeanour an environmental analysis. ‘It provides several layers of finer analytical procedures’ for making the link from broad industry structure to firm-specific strategic implications. It provides more accurate results for strategic analysis compared to traditional approaches to market segmentation.( Babette Bensoussan, The MindShifts Group and Craig Fleisher, 2003)

Century Inks is an industrial marker manufacturer with wide range of products. Each product is at a different stage of life cycle. Hence, the strategy to adopt for every product is different which depends on the conditions prevailing for that particular product in the market/industry. Hence, it becomes necessary to frame appropriate product strategies. They can be treated as SBU’s. GE matrix is an appropriate tool that helps analyse the current situation of a particular SBU/product of a firm taking into consideration two broad factors which are Long term Industry attractiveness of the marketing they operate in & Strength of the SBU/Product. Long term Industry attractiveness is determined by various factors like growth rate of the market, profitability or future profit potential, intensity of competition, return on investments, PEST etc. SBU strength is determined by factors like brand equity, market share, access to distribution channels, production capacity, cost advantage over competitors etc. It was developed by McKinsey & Co for General Electric for managing its business units. It overcomes some of the shortcomings of BCG matrix as they acknowledge some difficult situations where the company has to be selective and it is based on a wider number of factors other than market growth rate and market share. It helps to provide solutions and strategies to firms by defining their positions in the matrix. For example harvest, divest or invest. (Gerry Johnson, Kevan Scholes, Richard Whittington, 2008) (Quick MBA) (Business Tools & Templates)

Every organisation