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A business is an open system. It gets resources from the environment and supplies goods and services to the environment. There are different layers of environment forces. Some are internal forces whereas others are external forces. External forces may be related to the national level, regional level or international level. These environmental forces provide various opportunities or threats to the business community. Every business tries to grasp the available opportunities and face the threats emerge from the business environment.
Business environment cannot change the environment but they just react. They change their internal environment to grasp the external opportunities and face the external environmental threats. Therefore it is very important to analyze business environment to survive and to get success for a business in its industry. That is why managers have vital role to analyze business environment so that they can pursue effective business strategy.
An organization gets human resource, technology, capital, information, energy and raw-material from the society. It follows government rules and regulations, social norms and cultural values, economic rules and tax policies of the government. Thus an organization is a dynamic entity because it operates in a dynamic business environment.
COMPONENTS OF BUSINESS ENVIRONMENT
A manager must follow a change in rules, policies & strategies in response to the managing environmental forces. A business firm exists in two types of business environment:
Micro Environment :-
Internal business environment comprises of internal structure, culture, staff, and resources of the organization. This is sometimes identified into the internal functional areas such as marketing, finance, human resource, production and research and development. All these components are fully controllable and manageable at managerial level. These factors have direct impact on organizational strategies. These factors are as follows:
Employees: Employing the correct staff and keeping these staff motivated is the relevant part of the strategic planning process of an organization. Training and development plays an essential role in every sector (particular in service sector marketing) in-order to gain a competitive edge. This is clearly apparent in the airline industry.
Suppliers: Increase in raw- material prices will have a major impact on the marketing mix strategy of an organization. Prices of the product may be forced up as a result. Closer supplier relationships are one of the ways of ensuring competitive and quality products for an organization.
Shareholders: As organization requires greater inward investment for growth they face increasing pressure to move from private ownership to public. However these movements unleash the forces of shareholder pressure on the strategy of organizations. Satisfying shareholder needs may result in a change in tactics which is employed by an organization. Many internet companies who share prices rocketed in year 1999 and early 2000 have seen the share price tumble as they face pressures from shareholders to turn in a profit.
Competitors: The name of the game in marketing is differentiation. What benefit can an organization offer which is better than their competitors? Can they sustain this type of differentiation over a period of time from their competitors? Competitor analysis and monitoring them is crucial if an organization is to maintain its position within the market.
Manufacturer, distributors & retailers: All these people are very close to organizations. Changes in their work policies affect the organization to large extend. Their charges make a lot difference in overall cost of the product.
These factors are not within the control of management of business but still affects the business up to large extends. These factors are almost uncontrollable. The organization has to fit into this environment to survive in this competitive scenario. These factors of macro environment also affects the factors within the organization i.e. factors of micro environment.
There are many factors in the macro-environment that will affect the decisions of the managers of any organization in this whole world. Tax changes, new laws, trade barriers, demographic change and government policy, political changes are all examples of macro change. To analyze these factors managers can categories them using the PESTEL model.
Political factors: This refers to government policy, For example: the degree of intervention in the economy. What goods and services a government wants to provide? Up To what extent does it believe in subsidizing firms? What are its major priorities in terms of business support? Political decisions can impact on many vital areas of business such as the education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the road and rail system.
Economic factors: This includes interest rates, taxation changes, economic growth, inflation and exchange rates. For example:
Higher interest rate may deter the investment because it costs more to borrow.
Inflation may provoke the higher wage demands from employees and raise costs.
Higher national income growth may boost the demand for a firm's products.
Social factors: Changes in social trends can impact on the demand for a firm's products and the availability and willingness of employees to work. For example:
In the UK, the population has been ageing. This has increased the costs for firms who are committed to pension payments for their employees because their staffs are living longer. It also means some firms like ASDA have started to recruit older employees to tap into this growing labor pool. The ageing population also has impact on demand. For example: demand for sheltered accommodation and medicines have increased whereas demand for toys is falling.
Technological factors: New technology creates new products and new processes. MP3 players, computer games, online gambling, i-pods and high definition TVs are all new markets created by technological advances. Online shopping, bar coding and computer aided design are all improvements to the way the businessmen do business as a result of better technology. Technology can reduce costs; improve quality and leads to innovation. These developments can benefit consumers as well as the organizations which providing the products.
Environmental factors: Environmental factor includes the weather and climate change. Changes in temperature can impact on many industries which include farming, tourism and insurance. With major climate changes occurring due to global warming and with greater environmental awareness these external factors are becoming a significant issue for firms to consider. The growing desire to protect the environment is having an impact on many industries like the travel and transportation industries (For example: more taxes being placed on air travel and the success of hybrid cars.) and the general move towards more environmental friendly products and processes is affecting demand patterns and creating business opportunities.
Legal factors: These are related to the legal environment in which firm operates. In recent years in the UK there have been many beneficial legal changes that have affected firms' behavior. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of the recent laws that affect an organisation's actions. Legal changes can affect a firm's costs and demand.
IMPORTANCE OF BUSINESS ENVIRONMENT
Firm to identify opportunities and getting the first mover advantage:
Early identification of opportunities helps an enterprise to be the first to catch them instead of losing them to competitors. For example: Maruti Udyog became the leader in the small car market since it was the first to recognize the need for small cars in India.
Firm to identify threats and early warning signals:
If an Indian firm finds that a foreign multinational company is entering the Indian market it should gives a warning signal and Indian firms can meet the threat by adopting, by improving the quality of the product, reducing cost of the production, engaging in aggressive advertising, and so on.
Coping with rapid changes:
All sizes and all types of industries are facing increasingly dynamic environment. In order to effectively cope with these significant changes, managers must understand and examine the environment and develop suitable courses of action.
The enterprises that continuously monitor their environment and adopt suitable business practices are the ones which not only improve their present performance but also continue to succeed in the market for a longer period of time.
PART-2:- THE ORGANISATIONAL BUSINESS STRATEGY
By using the PESTEL framework a manager can analyze the many different factors in a firm's macro environment. However, it is important not to just list PESTEL factors since this does not in itself tell managers very much. What managers need to do is to think about which factors are most likely to change and which will have the greatest impact on them i.e. each firm must identify the key factors in their own environment. Managers must decide on the relative importance of various factors and one way of doing this is to rank and score the likelihood of a change occurring and also rate the impact if it did The higher the likelihood of a change occurring and the greater the impact of any change the more beneficial this factor will be to the firm's planning.
Strategies of different organization
Economic factors :-
Vodafone: The growth of Asian countries like India and china, have had massive effects on Vodafone. Vodafone can relocate production there to benefit from lower costs; these emerging markets are also providing enormous markets for them to aim their product at. With a population of over 1 billion, for example, the Chinese market is not one that anyone would want to ignore, at the same time Chinese producers should not be ignored either.
Social factors :-
McDonald's: Important strategic decisions are a key factor to Mac Donald's success with consideration for both internal and external factors. When considering the foreign market, companies need to consider there are risks. There must be local marketing to appeal to the local consumers and also to build relationships and trust (Bateman & Scott, 2004). Therefore, the strategic planning for marketing has to be effective enough. McDonald's caters its menu in other countries to the cultures of the regions. For example, in India, the non-vegetarian menu includes chicken and fish items only. Beef is not on the menu in India because are considered sacred.
American auto makers, the electric car and California: Electric cars For whatever reasons, several of the auto manufacturers in the USA began developing which they leased to satisfied customers. Then, California decided that it would be a good idea to mandate to American auto makers that if they expected to sell their cars in California they would have to invent some new technology reducing carbon dioxide. Presumably, California expected to see an increase of the electric cars being sold by auto makers. What happened is quite the opposite and the auto makers took a hard look at their electric car program, uncertain how to market a "clean vehicle" without admitting the piston engine vehicles are dirty, realizing that much of the profit from a piston engine vehicle comes with the replacement of the parts and not so with electric cars and finally, realizing that a State, not even the State of California can make them build technology they don't have, nor can any state even make them keep building the technology they do have, and so, the auto makers killed their own electric car program and this was the impact of a political-legal environment.
NOKIA: The starting models of Nokia had some technical problem with battery backup. People who were using those handsets often complain which had spoil the reputation of the Nokia completely. The sales and market price of Nokia fell down drastically. Then management took serious consideration to these problems, and modifies all the handset with latest technology. Nokia had been successful to regain the trust of its consumers and as a result it enjoys monopoly in market.
Tesco: In 2003, there has been increased pressure on various companies and managers to acknowledge their responsibility to society, and act in a way which benefits society overall. The main societal issue threatening food retailers has been environmental issues, a key area for companies to act in a socially responsible way. Hence by recognizing this trend within the broad ethical stance. Tesco's corporate social responsibility is concerned with the ways in which the organization exceeds the minimum obligations to stakeholders specified through regulation and corporate governance.
Graiser and Scott (2004) states that in 2003 the government has intended to launch a new strategy for sustainable consumption and production to cut waste reduce consumption of resources and minimize environmental damage. The latest legislation has created a new tax on advertising highly processed and fatty foods. The so-called 'fat tax' directly affected the Tesco product ranges that have subsequently been adapted and affecting relationships with both suppliers and customers.
Thus, a business does not function in a vacuum. It has to act and react to what happens outside the factory and office walls of the organization. The internal and external factors affect the main internal functions of the business and possibly the objectives of the business and its strategies. The main factor that affects most business is the degree of competition i.e. how fiercely other businesses compete with the products that another business makes.
To sustain in this competitive scenario, the manager should adopt following aspects to face any kind of environmental challenge:
Competitive Advantage - seeking to identify the sources of competitive advantage.
Adding Value - looking at the ways to add values.
Mass or niche markets? - Which is the best route?
Cost based strategies - focuses on reducing costs to compete and grow.
Market based strategies - focuses on satisfying consumer needs as the
means to growth.
Stephen P. Robbins (Eight edition, Oct 1999) organizational Behavior