CU-BCOM-SEM-III-Business Environment

BACHELOR OF COMMERCE SEMESTER-III BUSINESS ENVIRONMENT BCM113

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Prof. (Dr.) R.S.Bawa Pro Chancellor, Chandigarh University, Gharuan, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Coordinator – Dr. Rupali Arora Coordinator – Dr. Simran Jewandah Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Coordinator – Dr. Raju Kumar Coordinator – Dr. Manisha Malhotra Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Coordinator – Dr. Aman Jindal Coordinator – Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel &Tourism Management) Coordinator – Dr. Samerjeet Kaur Coordinator – Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Coordinator – Dr. Ashita Chadha Coordinator – Ms. Neeraj Gohlan Academic and Administrative Management Prof. (Dr.) R. M. Bhagat Prof. (Dr.) S.S. Sehgal Executive Director – Sciences Registrar Prof. (Dr.) Manaswini Acharya Prof. (Dr.) Gurpreet Singh Executive Director – Liberal Arts Director – IDOL © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: TeamLease Edtech Limited www.teamleaseedtech.com CONTACT NO:01133002345 For: CHANDIGARH UNIVERSITY Institute of Distance and Online Learning 2 CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. CONTENT 3 CU IDOL SELF LEARNING MATERIAL (SLM)

Unit 1: Introduction To Business Environment...................................................................... 5 Unit 2: Different Components Of Business Environment ................................................... 22 Unit 3: Business Environment Scanning.............................................................................. 40 Unit 4-Different Economic Systems And Economic Policies............................................... 56 Unit 5- Different Types Of Economic Policies: ................................................................... 67 Unit 6: Industrial Policy .................................................................................................... 105 Unit 7: Political Environment............................................................................................ 136 Unit 8: Legal Environment ................................................................................................ 153 Unit 9-Social Environment................................................................................................ 171 Unit 10: Consumer Protection Act 1986............................................................................ 194 Unit 11: Technological Environment................................................................................. 211 Unit 12- Global Environment: ........................................................................................... 240 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1: INTRODUCTION TO BUSINESS 5 ENVIRONMENT Structure 1.0 Learning Objectives 1.1 Introduction 1.2 Business 1.2.1 Concept 1.2.2 Characteristics 1.3 Business Environment 1.3.1 Concept 1.3.2 Nature of a business environment 1.3.3 Features of a business environment 1.3.4 Importance of Business Environment 1.4 Types of Business Environment 1.4.1 Internal Business Environment 1.4.2 External Business Environment 1.5 Summary 1.6 Keywords 1.7 Learning Activity 1.8 Unit End Questions 1.9 References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the characteristics of Business.  Highlight the nature and features of Business Environment  Understand the importance of Business Environment  Differentiate between Internal and External Business Environment CU IDOL SELF LEARNING MATERIAL (SLM)

1.1 INTRODUCTION Environment means surrounding or things that exist externally to us. There are different things all around us like landforms, rivers, sun, moon, atmosphere, climatic conditions which are natural and other things like buildings, bridges, offices, highways, trains which are man- made. These all things constitute environment which is either naturally existing or it’s man- made. In same way business is surrounded by environment where it takes birth, progresses or operates and decline. Business shares a strong interaction with environment as it receives input in the form of material, machine, method, money and manpower, etc., processes this input by adding value to it and delivers the finished product in the form of goods and services to the consumers in the environment. For instance, business needs capital to start and ensure its smooth operation, so for this it will raise capital from investors or request for bank loans. Thus, the business depends on norms and conditions of financial institution that will help it to provide capital. To convert an idea into successful business, planning, feasibility study and market survey need to be conducted and again for this business is dependent on Marketing Agencies, Consultants that helps in Start-ups or need to hire such team that will take care of different business function. In all, business is dependent on different elements that exists in its surrounding and they are dynamic in nature. For existence, success and growth business need to recognize different elements of environment, manage and influence them. 1.2 BUSINESS 1.2.1 CONCEPT: A commercial or economic activity engaged in as a means of livelihood or profit, or an entity which engages in such activities or which is related with continuous and regular production and distribution of goods and services for satisfying human wants is known as business. All of us need food, clothing, shelter and many other household requirements that needs to be satisfied in our daily lives. We fulfil these requirements from the shopkeeper or departmental store. These shopkeepers and the departmental store get the products from wholesaler and wholesaler gets it from manufacturer. Thus, the shopkeeper, the wholesaler and the manufacturer are doing business. Stephenson defines business as, “The regular production or purchase and sale of goods undertaken with an objective of earning profit and acquiring wealth through the satisfaction of human wants.” According to Dicksee, “Business refers to a form of activity conducted with an objective of earning profits for the benefit of those on whose behalf the activity is conducted.” Lewis Henry defines business as, “Human activity directed towards producing or acquiring wealth through buying and selling of goods.” 6 CU IDOL SELF LEARNING MATERIAL (SLM)

Thus, the term business means continuous production and distribution of goods and services with the aim of earning profits under uncertain market conditions. It can be privately owned, not-for-profit or state-owned. An example of a corporate business is PepsiCo, while a National Thermal Power Corporation is a Public Sector undertaking. 1.2.2 FEATURES OF BUSINESS: Features of Regularity of Interchange of goods Risk and uncertainty enterprise transactions and services Main Objective is Economic activities Creation of utilities Profit related to production and distribution Fig 1.1: Features of Business Features of enterprise: The driving force behind any business is the courage of entrepreneur or group of investors who anticipates and visualizes business, organizes resources for production such as land, labour and capital, supervises , undertakes risks and bears liabilities. Main Objective is Profit: Profit motive is the most essential characteristic of business that acts as an incentive to be engaged in it. All business activities are directed towards reaping more than what has been invested. If an enterprise fails to make profit in one line of business, it is natural that it will turn to another field before it decides to fold up. Economic activities related to production and distribution: Profit objective can be realized through production and distribution of goods and services. Regularity of transactions: When transactions are regular and continuous, then such transactions are treated as business. Recurrence of transactions, therefore, is a hallmark of business. Interchange of goods and services: Business is all about working with commodities and products. The goods produced by the primary sectors are termed as Commodities i.e. 7 CU IDOL SELF LEARNING MATERIAL (SLM)

agriculture and mining while the goods produced by the secondary sector are termed as products i.e. manufactured or processed goods. Business also provides services like IT enabled sector, Hospitality sector, Banking sector, etc that are invisible and intangible. Risk and uncertainty: The dynamic nature of business environment and uncontrollable external environment makes its very unpredictable. Unpredictability increases the level of risk for businesses. Interaction and interplay of different elements ensures the vigilant and proactiveness in business. Risk Management, Environmental Analysis, Scanning and Forecasting Methods become important skill set for people in business at different level. Element of creation of utilities: Adding value to the products and services is the main function of any business that leads to creation of utility. Utility is the satisfaction experienced by the consumers from goods or services. Business is always engaged in offering different kind of utilities from products and services like time utility, form utility and place utility. When professionals like doctor or an engineer offers their services then service utility is created. 1.3 BUSINESS ENVIRONMENT 1.3.1CONCEPT AND MAENING: To survive and succeed in any type of industry and in any region, business needs to anticipate and adapt to the changes in the environment. The different dimension of business-like type of business, business location, products pricing, supply chain and logistics or the organizational policies is affected by the elements of environment. The capability of any business to modify and reshape itself to the changes in the environment ensures its successful existence. For instance, when new government is elected in central or there is amendment in any economic policies, then businesses need to analyze and adapt to such changes. Whenever there is change in preference or lifestyle of customers that reflects clearly in shift of demand. Like increase demand for jeans can reduced the sale of other traditional wear because the customers feel more comfortable in jeans than any other attire. Business need to implement essential modification as per advancements or development in the existing technology in similar way as Flat screen TV has replaced old CRT TV’s and laptop has replaced heavy bulky personal computer configurations. Such factors are not in the control of any business and they are left with the option of building agility in their operations which is possible when business can establish proper relation with the different elements of business environment. The term ‘business environment’ connotes all those factors, external forces and institutions like customers, competitors, suppliers, government, social factors, technological factors, political factors and legal factors, etc. which acts on business operations and which are not 8 CU IDOL SELF LEARNING MATERIAL (SLM)

manageable by business. Such elements exert direct or indirect influence over the business firm. Thus, business environment may be termed as the set of elements in the surroundings that has a direct or indirect bearing on the performance of the business. It may also be defined as collective action of the external factors, such as economic factors, social factors, political and legal factors, demographic factors, and technical factors etc., that affects the decision making process of an environment. 1.3.2 Interrelationship between business and environment: Business dynamics is dependent on environmental dynamics. The inter-relation of business organization and its environment is obvious from the point of analysis of strengths, weakness, opportunity and threats of business. The organization has certain vision, mission, objectives and goals and a strategy to achieve them. The business environment has a bearing on all these integral and interrelated elements, so it is very important to formulate the vision, mission, objectives and business strategy that should be defined to achieve a perfect organization- environment fit. Organization environment consists of internal environment and external environment. Internal environment factors are easily controllable and manageable in the organization whereas external environment factors are uncontrollable. An organizational structure and functions of business enterprise is influenced from an external environment that offers wide range of opportunities, problems, threats and pressures. Business enterprises can be treated as subsystem which draws certain inputs of resource, information and values from the external environmental system. These inputs are transformed into outputs in the form of products and services, goals and satisfactions and exchange of proper ideas which is transmitted to the business enterprise. 9 CU IDOL SELF LEARNING MATERIAL (SLM)

Environment Business Exchange of Exchange of Exchange of Information Resources influences and power Fig 1.3.1: Inter-relationships between Business and its Environment Figure 1.3.1 indicates the relation between organization and its environment as listed below: • Exchange of Information • Exchange of Resource • Exchange of Influence and Power Exchange of Information It refers to information or data that is exchanged with business enterprise and its internal and external environment. Exchange of information takes place in the following ways as given below: • Business organization access the internal and external environment components and their behaviour, changes and thereby generates important information. This information is very valuable for business which helps in decision making, proper planning and control of environment variables in an organization. • Business organization structure and functions are adjusted according to the external environment information. • Generation of external environment information is complex process and it is one of the major problems which involve uncertainty to business organization. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

• The business project collaborates latest information which is related to demography, competition, technical, legal, political and government policies and procedures and tries to anticipate the future trends of these factors. The business organization also provides its information in the following ways:  Organization transfers its own information to several external agencies either voluntarily, inadvertently or legally.  An organization’s information is available in the form of annual reports, occasional advertisements and media reports etc.  Business organizations are also contacted by different interested organizations and to obtain valuable information which is related with functions, products, services and social responsibility towards stakeholders of the company.  A business organization is accountable to supply valid and reliable information to its stakeholders like government, society, shareholders, financial institution, investors, creditors, debtors, employees, trade unions, business bodies etc. Exchange of Resource The important relation that establishes the integration between any business enterprise its environment is interchange of resources which includes following aspects as:  Business organization procures different forms of like capital, machine, labour and raw material by suppliers, contractors or producer of raw materials.  Conversion of these inputs (raw material) into products and services i.e. output takes place in an organization and employees plays very important and crucial role in it.  For uninterrupted supply of inputs, Organization always maintains good relation with the suppliers and also opt for collaboration to secure a uninterrupted raw material supply and avoid it’s complete reliance on single supplier.  An organization supply its output to large consumer base in the form of products and services in the environment. To maintain accessibility of business offerings in the consumer market and maintaining profit levels continuous scanning is important. Business needs to identify the wants and needs of consumer and provide best utility options through their offerings, continuous interaction is must with the environment. Business is responsible to meet the expectation of different stakeholders along with consumers like clients, customers, employees, shareholders, creditors, suppliers, local community, and general public and so on.  The stakeholder pressurizes the organization to meet their expectations, needs and demands and for upholding their value and interests in the organization resources. 11 CU IDOL SELF LEARNING MATERIAL (SLM)

Exchange of Influence and Power: Exchange of power and influences takes place in the following ways:  Organizations always try to strategize their operations and functions to survive in the dynamic environment.  The stakeholder has various expectations like they expect good dividend and increased profitability from the organization. So, they keep on influencing the organization and sometime uses their powers to ensure that the organization meet their expectations. It became important on the part of Organizations to maintain cordial relationship with the stakeholders and society.  Also, the employees too expect good working conditions, challenging career path, growth opportunities, rewards and recognition, training and development programs. They influence the organization and use their power of Labour union to fulfil their demands.  Organization influences employees by creating attractive rewards and recognition programs to improve their efficiency and productivity.  Organization influences society by creating and maintaining good brand, supplying quality products and services and carrying out impressive CSR (corporate social responsibility) activities. 1.3.4 Features Of A Business Environment: The characteristics of business environment are as follows: (1) Aggregation of External Factors: The external factors do not act upon business in isolation to each other nor they exist mutually exclusive in the environment. That why we have to consider them as an elements of one set i.e., Business Environment and they are not manageable by business, even though businesses always try to influence these factors. So, collective action of many such elements is important feature of Business Environment. (2) Specific and General Forces: The external elements to the business can be categorized as – specific and general. (i) Specific: These are those elements which are industry -specific like customers, investors, suppliers, competitive firms, etc. (ii) General: These are those elements which have general impact on all industries like social, political, legal and technical. (3) Interrelatedness: There exists inter-relation between the different factors of business environment. For instance, a new Government got elected in the center and they approved new amendments in 12 CU IDOL SELF LEARNING MATERIAL (SLM)

Import-Export Policy. The new central government in power is an important political change and amendments in Import-Export Policy is economical change. Thus, changes in one element of business environment either introduce changes or influences another factor. (4) Dynamic Nature: Change is only constant. So, it’s obvious that different elements in the environment are not stable one, they keep on changing and as they are inter-related so they create domino effect on another factor. (5) Unpredictability: There are so many techniques utilized for environmental scanning and forecasting but still there is a scope of unexpected changes that can influence business environment factor. As these factors are dynamic in nature, so the changes introduced in them are quick. For instance, a specific technology that is mostly utilized by organization like SAP module got outdated or new application got introduced with more features. Then within a day or within few hours SAP technology got outdated and if businesses do not respond to this change then they can suffer losses. Even after studying trends and anticipating future status of business environment, unpredictability exists. (6) Entanglement: Business Environment is like a web of factors that not only affect businesses but also each other as well. That’s why their dynamic nature, unpredictability and inter- relation make them very complex for businesses to deal with them smoothly. (7) Multi-faceted: Different kind of environmental changes and development is being perceived differently by different organization based on their existing resources, competitive advantage and capability to withstand the future challenges. For example, Ayurveda is an opportunity for Indian herbal companies while it is a threat for foreign cosmetic brands. (8) Far-reaching impact: There is dependency between business and its environment, so any change in an environment has a direct impact on organization in different ways. (9) Relativity: Business experience more influence from local condition and that’s why there are different elements of Business environment need to be considered in different places or countries. For example, technological factor is very important for business related to IT sector but there will 13 CU IDOL SELF LEARNING MATERIAL (SLM)

be difference in considering technological aspect for small business operating in small town and small business operating in metro city. 1.3.5 Importance Of Business Environment: Business and its environment co-exist, interacts regularly and thus, emphasize to improve core-competency of an organization to ensure optimum utilization of resources. As the elements of business environment are inter-related then it became very essential to understand their implications. There is a close and continuous interaction between the business and its environment that helps in strengthening the business firm and using its resources more efficiently. The business environment is multifaceted, complex, and dynamic in nature and has a far-reaching impact on the survival and growth of the business. Proper anticipation of different factors like social, political, legal and economic environment will be beneficial to business in the following ways:  Management will be more effective if Dynamic Nature of Environment is considered: There is always some changes get introduced in different elements of business environment expecting to modify business accordingly. Like technological changes happens quickly, natural calamities like COVID-19 pandemic, etc.  Economic System: Business is an economic activity, so different types of economic system in different countries have different implications for domestic and international business. Capitalist economic system supports private business and free- will of wealthy entrepreneurs, socialist economic system supports Government controlled economy while mixed supports co-existence of public and private sector.  Identifying Opportunities and Threats: Scanning and analysis of environmental factors helps business to identify the opportunities and manages the threat effectively.  Optimum Utilization of Resources: Without the support of elements of business environment, effective utilization of resource is impossible.  Market Conditions: Business environment provides information about favorable or unfavorable market condition. New business start- up or expansion decision are affected by such market condition and their knowledge helps in improving such decisions.  Attitude of customers: Demand and supply determines the quantity and quality of goods and services to be produced by the businesses. The demand and supply of particular products are dependent directly or indirectly on the needs and wants of the customers. Attitude of customer is very important to manage the demand and supply decision. 14 CU IDOL SELF LEARNING MATERIAL (SLM)

 Giving Direction for Growth: Expansion plans and development of business is drive by the opportunities identified in the interaction with business environment.  Never-Ending Learning: Adaptability and Adjustment capabilities are boosted with proper implementation of Environmental scanning. Environmental scanning also encourages managers to upgrade their understanding, knowledge base and competency to anticipate the changes.  Creating strong Business Image: Keeping track of elements of Business Environment and co-relating their impact on business helps business to respond efficiently to the changes and create positive and strong business image. Like many businesses have incorporated sustainability development in their culture and adopted environmentally friendly technologies and methods to maintain healthy atmospheric conditions.  Managing Competition: Core competency and competitive advantage is must for market success and for this it’s important to analyze competitor’s competitive advantage to improve the existing strategies. 1.4 DIFFERENT TYPES OF BUSINESS ENVIRONMENT: Business Environment is broadly categorized into internal and external environment as follows: Business Environment Different types of Internal External Business Environment Environment Environment Constituents of Micro- Macro- External Environment Environment Environment 15 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 1.4.1: Different Types of Business Environment 1.4.1 Internal Environment: It is defined as all the forces or conditions that are available within the boundaries of an organization that affects its functions and performance. It is also known as controllable factors because business can control them. Managing resources like physical, monetary, labour, technology and other that helps business to perceive strategies are termed as Internal Environment. Elements like factory, machineries are tangible while some elements like culture, teamwork, coordination, efficiency level of employees are intangible. The competitive strategy should always be aligned with the resources of the internal environment. All these elements help the organization to add values to products and services that are being offered to customers. This value addition is the core-competency of an organization and it is reflected in its working culture, values and operations. Core competencies are built over a period of time by proper alignment of resources and planning. Some business offers quality products (like Apple), some offers great customer service (like Maruti Suzuki), some believe in extending real – time supports (Like Milk delivery apps) or prompt delivery services (Like Domino’s), The competitive advantage is built by deploying the internal resources of business in response to the changes in external environment. If the import duty of raw material is increased then organization needs to alter the production method or increase the cost of finished goods. The various factors of Internal Environment are as follows 1. Resources of the Organization. 2. Organization’s image/goodwill. 3. Owners and Share Holders 4. Employees. 5. Organizational Values and Culture. 1.4.2 External Environment: 16 CU IDOL SELF LEARNING MATERIAL (SLM)

External environment refers to external aspects or forces of the surroundings of business enterprise, which have both facilitating and inhibiting influences on the functioning of the business. There are general factors and industry – specific or business specific factors. Factors like political, legal, economic and demographic which are general in nature are difficult to control by specific business or industry. Therefore, one of the important functions of business is to scan or analyze the elements of external environment to understand and respond to the changes. There are many opportunities, untapped market segments, potential for new products or services, threats from competition or outdated technology present in Macro •Economic Political Environment •Social Cultural •Technological Legal Micro •Natural Financial Environment •Demography Global • Suppliers Customers • Market Intermediaries • Competitors Financers • Public Business external environment. Fig 1.4.2: Dimensions of External Environment For instances there is boom in smart phone industry and it presents different opportunities for digital marketing agencies, mobile app development companies, anti-virus apps and so on, while such boom is very big threat for fixed line telephones. Similarly, after de-regulation in Telecom sector, private players had given tough competition to state owned organization. Even the existing private market leaders in telecom has to keep on changing their business model to ensure their market segments and profits. The key dimension of an external environment consists of a micro environment and a macro environment. The macro environment consists of general factors that have direct or indirect impact on the business operation. The micro environment consists of factors that are present in immediate periphery of business and has direct impact on business’s functioning. The micro environment is also termed as Specific or Task oriented environment. Strategist can devise different techniques to deal comfortably with micro environment as they are specific and easily identifiable. While proactiveness and adaptability 17 CU IDOL SELF LEARNING MATERIAL (SLM)

1.5 SUMMARY:  There are so many reasons that emphasized the need to monitor, analysed and understand the business Environment. Business needs to be proactive and well prepared to respond as per the circumstances as well. Business is a continuous economic activity and for ensuring its regularity the system of input and converting it into useful outputs need to be maintained. It becomes very vital for business to always administer the factors like availability of raw materials, negotiation with suppliers, consumer demand, role of distribution and supply. Surroundings are full of opportunities and threats, so business need to be proactive in terms of planning, scanning and appropriately taking strategic decisions. For instance, a new technology can help business to explore cost effective options for enhancing the productivity like introduction of automation process, etc.  There are so many legal provisions that business needs to adhere to. Sometime legal provision provides aids in development and sometime creates hurdles. Maintaining harmony with legal aspects in region where business operates proves very beneficial for short and long -term. It reduces complexities and help to maintain the focus on the main operation.  Profit is the main objective of existence of any business and that is secured through fixed market share, leadership in product and innovation and enhancing competitive advantage. The adaptability of business is important characteristics which maintains competency in the industry. Adaptability is acquired by studying and analysing domestic and international competition in the industry. Market leaders always value their customers that implies establishing a correlation between socio-cultural aspects with the utility offered by the busines.  Survival of the fittest is assured by understanding the implications of business environment. 1.6 KEYWORDS  Environment - means external things like climate, infrastructure, roads, mountains, sun, rain i.e., the surroundings in which we exist.  Environmental factors - The factors, circumstances and events which occurs and influence the way a business operates, either in a positive or a negative way.  Business means continuous production and distribution of goods and services with the aim of earning profits under uncertain market conditions  Business environment may be defined as the total surroundings, which have a direct or indirect bearing on the functioning of business. 18 CU IDOL SELF LEARNING MATERIAL (SLM)

 Business structure refers to the legal structure of an organization that is recognized in a given jurisdiction 1.7 LEARNING ACTIVITY 1. Union Budget is very important economical aspect for any business. Discuss the impact of Union Budget on Business. ___________________________________________________________________________ ___________________________________________________________________________ 2. Justify- Organization influences employees by creating attractive rewards and recognition programs to improve their efficiency and productivity. ___________________________________________________________________________ ___________________________________________________________________________ 1.9 UNIT END QUESTIONS A. Descriptive Questions: Short Answers: 1. What is Business? 2. Define the term ‘Business Environment’. 3. Discuss the need to emphasize the consideration of Business Environment 4. Write a note on Internal Environment 5. Explain Exchange of Information relationship aspect of Business and Environment Long Answers: 1. Explain the importance of Business Environment 2. Discuss the features of Business Environment. 3. Describe the characteristics of Business 4. Why it is important to understand the relationship of Business and its environment. 5. State the difference between Internal and External Environment B: Multiple Choice Questions: 19 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Business organization access the internal and external environment components reflects ___________ aspect of inter-relationship between business and environment. a. Exchange of Information b. Exchange of Power c. Exchange of Influence d. Exchange of Resources 2. Business organization _____________are adjusted according to the external environment information. a. HR Policies b. structure and functions c. Recruitment Policies d. Selection Test 3. Whom the organization is bound to supply valuable information? a. Financial Institutions b. Students c. Colleges d. IT Consultants 4. Internal Environment Comprises of a. Strengths b. Weakness c. Opportunities d. Both a & b 5. Nature of External Environment is______ 20 a. Controllable b. Manageable c. Uncontrollable d. Easily adaptable CU IDOL SELF LEARNING MATERIAL (SLM)

Answers 1 – a; 2- b; 3 – a; 4 – d; 5 – c. 1.9 REFERENCES TextBooks:  Francis Cherunilam , Business and Environment, Text and Cases, [Himalaya Publishing House],  C. Fernando, Business Environment Kindle Edition, Pearson  K.Aswathappa, Essentials Of Business Environment, Himalaya Publishing House  SHAIKH SALEEM, BUSINESS ENVIRONMENT, Pearson  Ian Worthington, Chris Britton, The Business Environment , Financial Times/ Prentice Hall. Reference Books:  Morrison J, The International Business Environment, Palgrave  MISHRA AND PURI, Indian Economy, Himalaya Publishing House, New Delhi  Business Environment Raj Aggarwal Excel Books, Delhi  Strategic Planning for Corporate Ramaswamy V McMillan, New Delhi  Business and society – Lokanathan and Lakshmi Rajan, Emerald Publishers.  Economic Environment of Business – M. Adhikary, Sultan Chand & Sons. Open Text Source:  www.yourarticlelibrary.com  https://courses.lumenlearning.com/ 21 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 2: DIFFERENT COMPONENTS OF BUSINESS ENVIRONMENT Structure 2.0 Learning Objectives 2.1 Introduction 2.2 Constituents of Internal environment, 2.3 Constituents of External Environment, 2.3.1 Constituents of Micro environment, 2.3.2 Constituents of Macro environment. 2.4 Summary 2.5 Keywords 2.6 Learning Activity 2.7 Unit End Questions 2.8 References 2.0 LEARNING OBJECTIVE After studying this Unit, you will be able to  Explain the different factors of Internal Environment  Outline the implications of elements of Internal Environment  Describe the elements of Micro and Macro Environment  Highlight the implications of elements of External Environment  Differentiate the elements of Internal and External Environment 2.1 INTRODUCTION: The factors, circumstances and events which occurs and influence the way a business operates, either in a positive or a negative way and are called as an 'environmental factors.' The environmental factors are categorized as: internal environmental factors and external environmental factors. The occurrence of activities or events which are easily manageable are categorized under Internal environmental factors. The occurrence of activities or events outside the organization which are not easy to manage and anticipate will be categorized as external environmental factors. 22 CU IDOL SELF LEARNING MATERIAL (SLM)

The external environment plays a critical role in shaping the future of individual businesses and of entire industries so it is important for every kind of business operation. External environment aims to facilitate better to understanding of the elements that exist outside boundaries of business and also provide both favorable and unfavorable influences on organizational performance. Elements like Amendments in Economic Policies  Government regulations  Changes in specific Industry  Threats from competition  Political factors Environment Analysis and scanning becomes crucial method for any competitive business to identify, appraise and respond to various opportunities and threats in business environment. The need of an hour is that the businesses need to be proactive and agile to cope up with the rapid changes, improve the performances, tap useful resources, evolve as a strong competitor and ensure sustainable development. Elements of Internal environmental exists within the limits of an organization like workforce, management, and corporate culture (that defines employee behaviour). Some elements of an internal environment affect whole organization while some affects few functions. Generally internal environmental factors are easier to control than external environmental factors. Some examples of internal environmental factors are as follows:  Change in Leadership or Top Management Structure  Employee efficiency and motivation  Culture changes  Change in priorities of Financial Management. The strategy to survive and excel in competition should be in aligned with the resources of internal environment. It is important for ny business to keep track of existing resources and anticipates the need of resources required to take up new project or else performance will not meet the standards. 2.2 CONSTITUENTS OF INTERNAL ENVIRONMENT: The conditions, entities, events and factors within an organization that influences its operational activities and choices, particularly the behaviour of the employees is known as the internal environment. The factors or elements that exists within an organization and can be easily influenced and managed by the organization is known as Internal Environment. 23 CU IDOL SELF LEARNING MATERIAL (SLM)

Business works on targets of production, targets of delivery, targets of performance which is dependent on the optimum utilization of resources like labour, machine and technology, plant layout, production method, availability of working capital and this is the scope of the internal environment of an organization. It includes style of leadership, group efforts, collaborations, employee’s productivity, employee’s compensation and supervision which are intangible elements. Internal Environment ensures integration of resources for implementing strategies. CONSTITUTENTS OF INTERNAL ENVIRONMENT: INTERNAL ENVIRONMENT: It is defined as all the forces or conditions that are available within internal environment of an organization that affects its functions and performance. It is also known as controllable factors because business can control them. The conditions, entities, events, and factors within an organization that influences its operational activities and choices, particularly the behaviour of the employees is known as the internal environment. It is defined as all the forces or conditions that are available within an environment that affects an organization and business. It is also known as controllable factors because business can control them. Internal capability of an organization is termed as the internal environment. Funds are allocated as per budget from time to time to ensure smooth operations of an organization, physical assets like machinery, raw material, building, etc. are used for transforming inputs to outputs and workforce represents skilled and unskilled employees, managers and top management executives who are responsible for decision- making and technological know-how are important aspect of Internal Environment CONSTITUTENTS OF INTERNAL ENVIRONMENT: The following figure describes the elements that make up the internal environment. 24 CU IDOL SELF LEARNING MATERIAL (SLM)

Internal Environment Value Manageme Human Organizatio System nt Resources nal Climate Structure Vision, Internal Company Other Mission and Power Image& Factors Brand Equity Fig 2.2.1 : Constituents of Internal Business Environment VALUE SYSTEM (Organizational Culture) The value system of an organization is like an organization’s personality. Every organization is different from other organization even though it can be from same industry like traits of persons are different which defines distinct personality, of an individual. so does each organization. The value system of an organization distinguishes it from others and shapes the actions of its members. There are four important components that of a Value system or Organizational Culture:  Values  Heroes  Ceremonials  Social network Values are the fundamental faith that define employees' accomplishments in an organization. For instance, many organizations give importance to their employees who are engaged in some sports activities or cultural events. Even such organizations organize sports or cultural events among different branches to motivate and respect the hobbies of employees. In return, 25 CU IDOL SELF LEARNING MATERIAL (SLM)

these organization enjoys employee’s loyalty and increased productivity. So, arranging extra- curricular events reflects organizational values. The next component is heroes. A hero is an idealistic person who echo the organization’s attitudes, image or values and serves as a epitome to other employees. A hero is sometimes the initiator of the organization (think Steve Job of Apple and JRD of Tata). However, the hero of a company can be daily wage worker and not the founder; like as hard‐working paralegal Erin Brockovich, who had a tremendous impact on the organization. Ceremonials, another component, are programmes or ceremonies that is used as important recognizing and rewarding method for outstanding performance of the employees. Awards banquets, company gatherings, and quarterly meetings can acknowledge excellent employees for outstanding service. The honourees are treated as heroes who sets an example and motivate all employees of the company. The final and informal component is the social network that acts as very important channel of communication. It is also referred as company grapevine that simultaneously shares the stories of success and failure. Social network shoulder’s the responsibility of integrating employees into organization's culture and values. Hence concerted behaviour of human capital of an organization is termed as organization’s value or culture. The extent to which the culture of the organization is shared by all, leads to an important factor contributing to success. For example when the Murugappa group has taken over the EID parry group, one of the most profitable business of Parry group i.e. of liquor was sold off as it was against the value system of Murugappa group. So, value system is an important factor evaluated by many companies while selecting the suppliers, distributors and collaborators etc. VISION, MISSION AND OBJECTIVES: Vision means the ability to think about the future with imagination and wisdom. It is an important factor in achieving the objectives of the organization. An organization's mission statement reflects the core purpose of it’s existence and what is their operations meant for. It highlights the core competency of an organization and differentiate it from other organizations of its type. The mission is the medium through which the objectives are achieved. A mission statement is not only text or content on the paper but communicates organization’s belief’s and objectives. This declaration should be a habit which provides guidance and motivation to the employees of an organization. A mission statement is like an answer for, “What are our beliefs?’, “What is our purpose?” This statement directs the strategies of an organization by re-grouping its employees to work collaboratively for common objectives. The effectual mission statements will lead to constructive efforts. Business Environment is very dynamic and consumer are conscious more about quality products, so in such scenario efficacious mission statement's that is meant for catering the expectation of consumers 26 CU IDOL SELF LEARNING MATERIAL (SLM)

effectively is must. A good mission statement is precise in identifying the following intents of a company: Customers — who are end-users Products/services — types and features of products or services. Location — where the production will take place Philosophy — what will be underlying principles Organization’s Vision, mission and objectives guides its priorities, philosophies, policies etc. e.g., Ranbaxy’s mission is to be recognized as world class pharmaceutical company that thrust upon R&D which influences it’s growth strategy. TOP MANAGEMENT STRUCTURE: The official structure of an organization is the hierarchical ordering of people and tasks. This structure ensures dissipation of information within the organization, what tasks will be carried out by different departments and the power level of decision‐making power rests. Top management structure is the configuration of the board of directors, the organizational structure, and the quality of the board. Board Members are the highest decision-making authority of an organization so its quality is considered as a critical factor. Extent of professionalism, stand of nominee of financial institutions and the shareholding pattern could have important managerial implications. All these factors are of great importance from the point of view of the company’s internal environment. Organization chart is referred by some companies to simplify the breakdown of its formal structure. This organizational chart helps to visualize the formal lines of authority and communication within an organization. In some organization promoters owns majority of share like Wipro, Tata group company and such promoter’s stance is at risk. INTERNAL POWER RELATIONSHIP: The internal power relationship between the board of directors and senior executive officers highly affect the decision making process of the organisation. The quality of human resources of a company depends largely on competence, commitment, attitude and motivation which plays an important role in the success of an organisation. The top management enjoys the support from different level of employees and shareholders have an important impact over the decision and their implementation. HUMAN RESOURCES: 27 CU IDOL SELF LEARNING MATERIAL (SLM)

The characteristics of human resource like quality, skills, attitude, morale, commitment, involvement and initiative influences organizational culture, strength and weakness and environment of the organization. Western countries treat their few employees as process improvers and others as workers, while Japanese companies treat their all employees as process improvers. COMPANY IMAGE AND BRAND EQUITY: The image and brand equity of the company helps in raising finance, choosing dealers and suppliers, new product introduction, form alliances with marketing intermediaries, opting for joint ventures and other alliance and entering a sale or purchase contract, etc. ORGANIZATIONAL CLIMATE: One of the important outputs of the company's culture is the organizational climate. The whole theme of the organization and the self-esteem of its employees are components of daily climate. The optimistic or pessimistic outlook of employees affects “climate” of the organization. The day-to-day co-relation and inter-activity of employees are emblematic of an organization's climate. OTHER FACTORS: Belief system of management is the manager's set of personal notions and values about people and work and as such, is something that the manager can dominate. According to McGregor, who emphasized that a manager's ideology creates a self‐fulfilling prediction, which leads to two types of managers. The Theory X managers assumes employees as one who are not interested in their work naturally and need proper command for execution of task, while Theory Y managers assumes employees are responsible and self – motivated for their work so participative style of management is adopted. These managerial beliefs then have a succeeding result on employee behaviour, leading to more precise anticipation. As a result there is always modulation need to be maintained between organizational philosophies and managerial philosophies. Empowerment means assigning the authority of decision‐making to subordinates, that inculcates responsibility and confidence. Most of organizations and managers are adopting participative style of management that encourages engagement and team work. Additionally, element of guidance helps to increase the efficacy of the employees and thus contributing in cost reduction, quality improvement, better customer service and strong employee’s commitment. Also, there will be considerable upgradation in response time as proper information is shared among different levels of management efficiently. Empowerment helps to resolve issue immediately as employees close to situation like machine breakdown in floor 28 CU IDOL SELF LEARNING MATERIAL (SLM)

shop can immediately respond and resolve the issue than the manager who might be not present in that vicinity. Competency of an organization is also influenced by the production capability, technology, R & D work, supply chain and logistics etc. 2.3 CONSTITUENTS OF EXTERNAL ENVIRONMENT External environment refers to external aspects or forces of the surroundings of business enterprise, which have both facilitating and inhibiting influences on the functioning of the business. The key dimension of an external environment consists of a micro environment and a macro environment. The classification of External environment is as follows: Constituent of Micro External Environment Environment Macro Environment Fig 2.3.1: Constituents of External Business Environment 2.3.1 Micro Environment: Micro environment of business enterprise refers to analysis of small area or immediate periphery which comprises of those forces of the business organization that influence it’s functioning. The micro environmental factors are intimately linked. Some of the micro factors may be specific to a firm and it is not necessary that the impact of micro forces will be same in a particular industry. Micro Environment analyzes the following important factors: • Human resource (Employees) of the firm, their characteristics and how they are organized in the firm. • It analyses the way fund is raised from the market. • It analyses the suppliers of raw materials and the supply chain network between the supplier and firm being developed. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

• It analyses the customer base of firm who are major and minor clients of business. • It analyses the local communities of firm where it’s operating. • It analyses the direct competition from the competitors and how they perform in business. The most important performers in the micro environment are as follows: Suppliers Public Customers Financers Micro Market Environment Intermedi Competitors aries 2.3.2: Elements of Micro-Environment  Suppliers: Business enterprises require a number of suppliers, who supply raw materials and components to the company. Unpredictability regarding the supply, dependence on a single supplier and supplier’s terms and conditions has an adverse effect on the cost and production. Because of this, vertical integration, supply management, outsourcing, partnering and relationship marketing has geared popularity in the recent times. Company like Nirma has opted for backward integration because they believe that the captive production plants for the raw materials are the best way to keep a check on the production cost. 30 CU IDOL SELF LEARNING MATERIAL (SLM)

 Customers: In today’s scenario, Customer is a King and central point for any business as they influence business survival and success. All customers expect high quality products, speedy deliveries, comfortable return and exchange policies, offers and after sales service, proper 24 × 7 customer support which has drastically changed the business environment. Success of business largely depends on identifying the needs, desires, tastes liking etc. of a customer. Now days, online shopping portal has gained popularity in the Indian market which has opened new market for the Indian companies. It has not only created an opportunity for new companies but threat to existing shopping malls and retailers. Portals like flipkart, snapdeal, myntra, etc. are taking advantage of this new shift in the customer’s lifestyle of purchasing goods from home i.e. through online websites.  Market Intermediaries: The firms which help the companies in promotions, sales and distribution of the goods to the final buyer are known as market intermediaries. It includes agents, brokers or merchants who associates company and the final consumer. The firms which are in the business of warehouses and transportation, they assist the manufacturing companies to stock and move the goods from their origin to destination. Advertising, market research and media firms help their client companies to promote their product and target the market effectively. Any wrong choice or misunderstanding regarding market intermediaries can result in heavy losses. HUL has confronted issue like collective boycott in Kerala on the issue of trade margin.  Competitor: An opponent is a simple synonym for the competitor. Any business activities that produce same kind of products and services are in direct competition and other firms which are in production of other products and services are in indirect competition. Example a laptop manufacturing firm faces direct competition from other laptop manufacturing firms and indirect competition from mobile manufacturers, tablet manufacturers, smart TV’s manufacturers, etc. A firm also faces desire competition i.e. when customer has many choices for investing his income. Simply, when there is rivalry among such alternatives which meet a particular category of desire and it is very high in the countries with limited disposable incomes and many unsatisfied desires. A firm can face such competition from all those firms who compete for discretionary income of the consumers. For example, the competition for a laptop manufacturer may not only come from other laptop manufacturers but also from two wheelers, refrigerators, cooking ranges, firms offering saving and investment schemes like deposits and issuing shares or debentures, etc. 31 CU IDOL SELF LEARNING MATERIAL (SLM)

If the consumer decides to go in for a laptop, the next query is which type of laptop like with long batteries, advanced graphics and flexible laptop cum tablet and such competition is known as product form competition. Brand Competition is the competition between the different brands of the same product form. Thus, activities of a business adjust according to the actions and reactions of competitors.  Financers: The capability of the financiers is very important for any business organization but beside this, their policies and strategies, attitude (including attitude towards risks), ability to provide non-financial assistance, etc. are also of utmost important.  Public: Any group that has actual or potential interest in or impact on the organization’s ability to achieve its interests is called as a public. Some media public can seriously has an adverse or good impact on company’s brand image, market shares and profit. Like McDonald in India is facing a media’s adverse impact on their image currently as one of the McDonald’s outlet has treated the poor kid badly when he asked for food. Such exposures or campaigns by the media might even influence the government decisions affecting the company. Many companies have undergone drastic change in their operation because of the local public awareness about the environmental pollution, child labour, cruelty against animals, etc. Like many cosmetic companies have stopped testing their products on animals because awareness has been spread by NGO’s regarding the same among local public. Public is not only being assumed to be threat for businesses but also regarded as an opportunity as well. Like some companies use media public to disseminate useful information. 2.3.2 MACRO ENVIRONMENT: Macro environment includes major external and uncontrollable factors that influence an organization’s decision-making and affects its performance and strategies. So, to survive and succeed, the company needs to develop its adaptability towards external environment. It principally consists of economic, technological, and political legal and socio-cultural factors. Macro Environment analyzes the following important factors: • It helps to detect the threats by analyzing the competitors. • It helps to analyses the opportunities and threats linked with the technological changes in the market. 32 CU IDOL SELF LEARNING MATERIAL (SLM)

• It helps to analyze the bargaining power of suppliers and customers. It includes the following factors: Elements of Macro Environment Economical Political Legal Socio-cultural Technological Financial Demography Natural Global Fig 2.3.3: Elements of Macro Environment Economic Environment: The economic environment of the country influences any business enterprise because it conducts its activities in the country’s market system with the objective of profit maximization and treated as economic entity. The economic environment consists of factors like structure and nature of economy, economic policies, economic conditions, global linkages, etc. The developed economies are generally service economies as the service sector generates huge employment opportunities and income. In the developing economies the inequality in the distribution of income is very high and as a result poverty is high. For example, a percentage point reduction in Cash Reserve Ratio or Statutory Reserve Ratio will significantly increase the loan funds with the commercial banking system. Political Environment: The economic and political systems of a country are mutually dependent, as one reflects the ideologies of the other. It comprises of the political stability and the policies of the government. Political environment consists of ideological inclination of political parties, personal interest of politicians, influence of party forums etc. For example, Mamta Banerjee the Chief Minister of Bengal had stopped the Tata’s Nano car production plant in Bengal because of which Tata and its employees suffered a huge loss. Similarly, Narendra Modi had welcomed Tata’s Nano Car production in Gujarat when he was the Chief Minister. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

The Government control over the Indian economy grew enormously in the first four decades since Independence. After 1991, since liberalization has been introduced, there has been a global trend towards decentralization of power and responsibility. Now the State is playing active role in the industrial development by creating conducive environment. Social and Cultural Environment: Socio-cultural environment includes value attitudes, beliefs and customs of people in a given group or society and its dimension like the literacy rate, lifestyle, demographic features and mobility of population influences an organizational performance. It is important for managers to notice the direction in which the society is moving and formulate progressive policies according to the changing social scenario. Technological Environment: It is one of the important key determinants for the success of any firm as well as the economic and social development of a nation. The progress of business depends on the level of technology available in a country which gives a massive impetus to the economic revival. It also indicates the pace of research and development, progress rate of utilizing modern technology in production. Technology is treated as capital intensive and cost-effective alternative to traditional labour intensive method. According to the Porter, technology helps the organization to gain the competitive advantage and also improves overall industry structure. Technology policy of the government plays a crucial role in the Technological environment. Like the absence of product patent in India has an adverse effect on pharmaceutical companies. When the new patent regime stipulated under the WTO, Indian Pharma companies like Ranbaxy and Dr. Reddy’s laboratories started encouraging R & D. Legal Environment: Legal environment deals with establishment of codes and procedures for various types and aspects of business and deals with deviations or infringement law like bribery, product counterfeiting, grey markets, black markets, consumer deception and tax evasions that affects the functioning of an organization. The coverage, efficiency and efficacy of the legal system determine adequacy, cost and speed of economic justice and these factors are of great importance for the growth of business. In every country there exist business legislation that guides, controls and regulate business activity, such as The New Industrial Policy, 1991, MRTP Act, 1969, The Factory Act, 1950, India Trade Mark Act 1969, Essential Commodities Act 1955 and so on. Similarly, there are certain boards and councils came into existence to regulate the specific area of concern for various business categories like The Securities and Exchange board of India (SEBI) which regulates the capital market. 34 CU IDOL SELF LEARNING MATERIAL (SLM)

Reserve Bank of India deals with the commercial banking sector was brought under its effective control with the help of the Banking Companies Act, 1949 and the amendments of the Act in 1956 and 1962 and the Banking Laws (Miscellaneous Provision)Act,1963, etc. Natural Environment: Business cannot get exception from nature. Business has broadly two relationships with natural environment. First, the environment is the source of resource as raw material required for production and secondly, the natural calamities like floods, earthquakes can cause damages to the process of production. Financial Environment: Finance is the backbone of any business and it is concerned with decisions about the investments in the business. Companies can raise the required funds from bond markets, forex markets, stock markets, commodity markets, OTC markets, Real estate markets and cash or spot markets that constitutes financial environment. Demographic Environment: Demography refers to study of the population. Demographic factors are as below:  The population growth  Expansion rate of population  Age composition of the population  Family size  Economic classification of the population  Education levels  Language  Caste  Religion  Race  Age  Income  Educational attainment  Asset ownership  Home ownership  Employment status and location Demographic factors also affect the demand for goods and service. The increase of population and income results in increases demand for goods and services. For instance, developing countries like India, China, etc.; with high population growth rate indicates an enormous increase in labour supply. The occupational and spatial nobilities of population have implications for business. 35 CU IDOL SELF LEARNING MATERIAL (SLM)

As labour being an important resource for business can opt for migration easily so it will affect the labour supply in the industry and also the existing wage rate of the industry. The heterogeneous population with its varied tastes, preferences, beliefs, temperaments, etc. gives rise to different demand patterns and generates need for different marketing strategies. Diversity in workforce also complicates the Personal Management function in an organization. Like Holidays need to be given to employees on Diwali, Id, Christmas, Parsi New Year, etc. These factors are relevant to the business for formulating and implementing the strategies for controlling and accomplishment of the objectives of an organization. Global Environment: It comprises of rules and regulation across the borders of various countries that allows and participate in international trade and foreign investments. It also includes rules and regulations of WTO, IMF, WB, SAARC, G20 and other international conventions /treaties/agreements/declarations/ protocols, etc. which duly affect the business organization operating in any particular country. Like recession, economic conditions, war or political tensions or uncertainties in other countries have direct impact on import export market and also the global business and business in our country. Product patents play an important role in Indian Pharmaceutical Industry. Advent of Technological development in Information and Communication sector has created a huge opportunity for Indian IT industry. 2.4 SUMMARY The internal environment helps to examine the resources and capabilities that allow firms to achieve a sustainable competitive advantage. It focuses only on strategic resources, which are sources of competitive advantage. According to the widely used test proposed by Barney; Resources and capabilities of an organization must be: 1) Valuable. A valuable resource enables a firm to improve its market position relative to competitors; 2) Rare. Resources must be in a short supply relative to demand so that they would be more valuable in sustaining competitive advantage. 3) Isolated from imitation or substitution; and 4) Immobile and costly to imitate or to replicate. The analysis of External Environment helps business to identified different opportunities and channelize the efforts to grab it. In such situation, companies generally opt for aligning their strengths with market opportunities and introduce new product and services or add value to existing products and services. Knowledge of External Environment helps business to design new strategies or modify existing one in response of any threat. Different Factors of External 36 CU IDOL SELF LEARNING MATERIAL (SLM)

Environment helps business to improve the Scanning and Forecasting Process. Business focus to develop agility in the existing system to survive and succeed in the competition. 2.5 KEYWORDS  Developed Economies -Countries with relatively high levels of economic growth and security are considered to have developed economies.  Brand Image - It can be defined as the perception of the brand in the minds of the customers  Brand Competition is the competition between the different brands of the same product form.  Desire competition i.e., when customer has many choices for investing his income.  Product form competition - includes only products or services of the same product type. 2.6 LEARNING ACTIVITY 1. Discuss - Recession, economic conditions, war or political tensions or uncertainties in other countries have direct impact on import export market. ___________________________________________________________________________ ___________________________________________________________________________ 2. How the image and brand equity of the company helps in raising finance? ___________________________________________________________________________ ___________________________________________________________________________ 2.7 UNIT END QUESTIONS A. Descriptive Questions Short Answers 1. Explain Internal environment 2. What is External Environment? 3. Discuss the impact of Top Management Structure on Business. 4. Write a note on how suppliers exert force on business and its operations 5. Brief about the role of Global aspect of External Environment. Long Answers: 1. Discuss - Impact of Technological dimension on Hiring process of an Organization. 37 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Illustrate how opportunities will be identified if manager analyze and understand the Political aspect of External Environment 3. Why Organizational Value System is considered as one of the important factors of environment? 4. Is it possible for an organization to control impact of Financers to some extent? Elaborate it. 5. Explain Micro Environment with examples. B. Multiple Choice Questions 1. _____________is treated as capital intensive and cost-effective alternative to traditional labour intensive method a. Technology b. Finance c. Market Intermediaries d. Labour 2. __________ means the ability to think about the future with imagination and wisdom. a. Targets b. Mission c. Objectives d. Vision 3. _____________helps to analyze the bargaining power of suppliers and customers. a. Organizational Values b. Employees c. Macro-Environment d. Culture 4. Business has broadly _______relationships with natural environment. 38 a. One b. Two c. Three CU IDOL SELF LEARNING MATERIAL (SLM)

d. Four 5. The growth of ___________and income results in increases demand for goods and services. a. Population b. Employment c. Non-working population d. Teenage Answers: 1 – a; 2 – d; 3 -c; 4 – b; 5 – a; 2.8 REFERENCES TextBooks:  Francis Cherunilam , Business and Environment, Text and Cases, [Himalaya Publishing House],  C. Fernando, Business Environment Kindle Edition, Pearson  K.Aswathappa, Essentials Of Business Environment, Himalaya Publishing House  SHAIKH SALEEM, BUSINESS ENVIRONMENT, Pearson  Ian Worthington, Chris Britton, The Business Environment , Financial Times/ Prentice Hall. Reference Books:  Morrison J, The International Business Environment, Palgrave  MISHRA AND PURI, Indian Economy, Himalaya Publishing House, New Delhi  Business Environment Raj Aggarwal Excel Books, Delhi  Strategic Planning for Corporate Ramaswamy V McMillan, New Delhi  Business and society – Lokanathan and Lakshmi Rajan, Emerald Publishers.  Economic Environment of Business – M. Adhikary, Sultan Chand & Sons. Open Text Source:  www.yourarticlelibrary.com  https://courses.lumenlearning.com/ 39 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3: BUSINESS ENVIRONMENT SCANNING Structure 3.0 Learning Objectives 3.1 Introduction 3.2 Environment Scanning – Concept and Approaches 3.3 Process of Environmental Analysis 3.4 Techniques of Environmental Scanning 3.4.1 SWOT 3.4.2 ETOP 3.4.4 Verbal and Written Information 3.4.4 Forecasting 3.5 Summary 3.6 Keywords 3.7 Learning Activity 3.8 Unit End Questions 3.9 References 3.0 LEARNING OBJECTIVES After Studying this Unit, you will be able to  Explain the approaches to Environment Scanning  Understand the application of Environmental Scanning  Illustrate the process of Environmental Scanning  Compare the purpose of Techniques of Environmental Scanning 3.1 INTRODUCTION Business exists and operates in the matrix of internal and external factors of business environment. The interaction and complexity among the various elements of business environment has created the requisite for continuous interchange of information from organization to the environment and vice-a-versa. Also, Organizations has to ascertain the market share and profit margins on one side and identification of opportunities and threats are vital for its survival. Such adaptability of Organization to respond to such dynamic nature of 40 CU IDOL SELF LEARNING MATERIAL (SLM)

environmental factors is supported by Business Scanning or Analysis Process. Business Environmental scanning is also termed as Business Environmental Analysis Process. For any strategic business decision, it’s important to co-relate the core competencies of an organization with the direct and indirect impact of various Environmental factors. Scanning is the consistent and precise process of acquiring and utilizing information about political, legal, economical events and trends that assist management in planning future course of action. Organization undertakes scanning to understand the external forces of change and direct the internal capabilities for such response that secure and improves its position. The scanning is done to recognize the opportunities and threats, gain competitive advantage, improve planning and decision-making process and avoid surprises. 3.2 ENVIRONMENT SCANNING Concept: It is a continuous process wherein the role of manager is to examine the factors of external environment for achieving optimum performance of business. Interchangeably, environment monitoring is used for scanning. It is the process of accumulating or assembling the relevant information of business , examining it and anticipating the impact of all uncertain trends in business environmental . Successful marketing strategies are always dependent on such environmental scanning and marketing programmes always depends on its environmental changes. At the same time, environment scanning points towards interaction among various environmental factors. According to Stephen Robbins, “Environment scanning entails scrutinizing the environment to identify action by competitors, government, union and the like that might impinge on the organization’s operations.” Environment scanning is a step towards corporate planning which fall in the domain of strategic management. Chandler describes strategic management as “The determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and allocation of resources necessary to carry out these goals.” Strategic management or business policy is treated as a means to achieve the organizational purpose. The process of strategic management involves determining the mission and objectives, recognizing the opportunities and threats and evaluating the strength and weaknesses of the enterprise to the opportunities or to combat the threat. It also involves formulation of strategies to achieve the objectives of an organization. Thus, environment scanning leads to a formulation of sound and effective organizational and managerial strategies to meet the demands of an environment and also contribute significantly to reduce uncertainty. 41 CU IDOL SELF LEARNING MATERIAL (SLM)

APPROACHES TO ENVIRONMENTAL SCANNING: Approaches to Outside-in (Macro) Environmental Inside-out(Micro) Scanning Fig 3.1 APPROACHES TO ENVIRONMENTAL SCANNING: Environmental Scanning/Analysis has two approaches: 1. Outside -in (Macro approach): Develops alternative scenarios and their corresponding implications for the industry with a consideration for long term perspective. 2. Inside – out (Micro approach): Forecasts immediate future environment and derives implications of it for the industry and considers only limited view of environmental factors. 3.3 THE PROCESS OF ENVIRONMENTAL ANALYSIS: The process of environmental scanning / analysis is split into four stages: 1.Monitoring 1.Forecasting Assessing the the specific the future current and environmenta environmenta future l trends l changes implications Scanning the environment 42 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 3.2. Stages of Environmental Analysis SCANNING: The method to analyze the environment and recognize the impact of direct or indirect elements of environment on the business. Such factors can appear suddenly or has evolved periodically. The important purpose of the scanning is to recognize the emerging trends in the market. Its main purpose is making organization aware of potentially significant external jolt before it is completely crystallized. It allows organization to take proper strategic action by highlighting possible changes well before its occurrence. MONITORING: It is more focused and systematic step which includes aggressive follow-ups and extensively examining the relevant trends recognized in the above step. Its main purpose is to pooled the required data to study the emerging patterns of the environmental factors. However, the resultant patterns are complex as the scanning process output includes vast data which is vague. There are threefold outputs of monitoring stage: - A distinct elaboration of environmental patterns is accessible for anticipation. - Recognizing trends for continuous monitoring - Recognizing trends for more scanning FORECASTING: It is concerned with the direction, speed, scope and intensity of environmental change. Anticipation is required for recognizing the opportunities and threats. It helps to formulate the strategic plan accordingly. The nature of environmental factors and variables or their trend may undergo change, new factor or variable is identified and the relevance of certain factors may decline. For certain situation when the factors are constantly changing or sudden events like recession or terrorist attack may lead to re-forecasting. ASSESSMENT: It involves highlighting possible implications or impacts i.e. conclusion. Here the efforts are channelized on identifying the results important for an organization rather than considering the reference frame to understand the environment. 3.4 TYPES OF ENVIRONMENTAL SCANNING/ANALYSIS: Environmental scanning is extensively a process or method of information- collecting, searching, organizing and understanding. For this, there are various ways of conducting the process of Scanning. The types of Environmental scanning are established on the way it is being carried out and divided into three types as follows: 43 CU IDOL SELF LEARNING MATERIAL (SLM)

Ad- Hoc Types of Environmental Scanning Continuous Periodic Fig 3.3 Types of Environmental Scanning/Analysis Ad- Hoc: It is conducted to handle specific problem or issue that has arisen because of changes in environmental factors. Existing strategies are evaluated or new strategies are devised according to the scanning. Survey is conducted to co-relate the implications of different environmental factors for short – run. It involves prompt actions and less time from resources. The major concern of this type is to outline the loopholes in Organization’s planning process and its results are ascertain to specific problem or situation. There is no scope of generalization. Periodic: As its name indicates, this type of scanning is conducted at regular intervals like once in a year or once in two year. The scanning considers in-depth perspective and effects of environmental factors for long duration (e.g. 3- 5 years). In this type of scanning efficiency of Organizational Planning is based on timely availability of information and it aids the budgeting process. Sometimes for unforeseen events, Ad- hoc scanning is utilized as support for this type. 44 CU IDOL SELF LEARNING MATERIAL (SLM)

Continuous: It is in-depth form of scanning, where a specialized team is allocated with this job responsibility. It involves very comprehensive and precise data collection process. It is very proactive method as dedicated team scans many sources for relevant data but on the other hand needs dedicated funds and commitment. 3.4.1 SWOT ANALYSIS: Analysis is basically done to evolve a strong business strategy which make sure to explore all elements of business strengths, weaknesses, opportunities and threats are taken into consideration. To carry out such audit and analysis of the business’s strategic position and its environment, SWOT became popular. SWOT is an acronym that stands for: Strengths: It highlights such factors that give an edge to the company in market against competitors. Weakness: It highlights such factors that can be harmful if used against the company by its competitors or the company lags behind in it. Opportunities: These are a kind of favorable situations which can bring a competitive advantage for the company. Threats: These are adverse situations that has negative impact on business. SWOT is the analysis method where an organization’s strengths and weaknesses of the organization is considered that is based on its core-competency’s. Also opportunities and threats present in the external environment that involves the assimilation and presentation of information about internal and external elements which have, or may have, an impact on business. It is a structure that allows managers to incorporate the details obtained from the analysis. Its main purpose is to identify the strategies which will create an organization’s specific business model which will best align an organization’s resources and capabilities to the requirements of the environment in which it operates. Simply, it acts as a tool for gauging the internal potential and limitations and the probable opportunities and threats from the external environment. Thus, it results in such information that helps in forecasting the changing trends in an environment and improve the decision-making process of an organization. Let us consider the overview of four factors involved in SWOT analysis: 1. Strengths - Strengths are the beneficial aspects that enable an organization to accomplish its mission. They are generally the resources and competency of an organization that proves a strong foundation for developing organization’s competitive advantage. It can be either tangible like good quality machinery used in production line or intangible like the 45 CU IDOL SELF LEARNING MATERIAL (SLM)

inherited leadership quality as a personality traits and knowledge inventory built by the employees which defines consistency in the organization. Strengths are the superior factors present in an organization which includes knowledge bank of human competencies, efficiency of process, capital, products and services. Examples of organizational strengths are huge capital pool, customer and brand loyalty, strong distribution networks, patents, variety of product line, patents, no debt, etc. 2. Weaknesses - Weaknesses are the attributes of an organization that stops an organization from accomplishing the mission and utilizing the full potential. Weaknesses can also be treated as absence of the strengths that can result in narrow product range, inefficient research and development facilities, expensive cost structure, no approachability to best natural resource, etc. Weaknesses must be reduced and disappeared. For example – old machinery can get replaced by new machinery to overcome problem of outdated or heavy maintenance demanding equipment. Other examples of organizational weaknesses are huge debts, high attrition rate, a weak brand name, improper scrap management, raw material wastage, etc. 3. Opportunities – When organization can co-relate its strength to the market forces then opportunities are used for gaining advantages by the organization. Opportunities are present or can be created when organization is all set to take advantage of environmental condition and implement its action plan accordingly to earn more profits. Organizations should be careful in recognizing the opportunities so that it can be converted to competitive advantage. Opportunities may emerge from market, competition, industry/government and technology in the form like removal of certain international trade barriers, change in government, unfulfilled customer needs, etc. Increasing demand for internet and wi-fi accompanied by Government promotion of digital economy is a great opportunity for new firms to E-business sector and compete with big and existing player for market share and profit. 4. Threats – Threats are unmanageable condition which arises from external environment that threatens the authenticity and profitability of the organization’s business. They can be vulnerable when linked with the weaknesses of the business that can put stability and survival at a stake. Examples of threats are – change in trade barriers, vigorous technology; emergence of substitute products, price wars and reducing overall profits of industry, etc. SWOT Analysis Example of AIRBUS: 46 CU IDOL SELF LEARNING MATERIAL (SLM)

Strengths Weakness Manufacturer of Largest airlines Production cost is high International presence Inefficiencies in Operations Strong R& D Delay in Aircraft deliveries Follows and implement Eco-efficiency Opportunities Threats Increased demand of aircrafts Boeing- the strongest competitor COVID-19 Pandemic Upgradation of Technology Fig 3.4 SWOT STRENGTHS: • Airbus is the market leader as being the manufacturer of the largest aircraft with approximately 63% of market share. • Air bus has an incredible international presence as the business operation spread in Europe, the Americas, Africa, The Middle East and Asia. • Airbus has channelized the huge investment in innovation and technology to be ready for future generation • The company has been recognized is a leader in offering solutions for sustainable aviation. WEAKNESS • The production cost is very high as very big investment is required to maintain the market leader position. • Airbus has lots of backlog as there is accumulated delivery of orders as it took more orders for aircraft delivery. • Airbus got into the trend of delaying its new launch as recently of Airbus A380 was delayed by more than one year. It highlights the operational inefficiencies of Airbus. OPPORTUNITIES 47 CU IDOL SELF LEARNING MATERIAL (SLM)

• Air traffic is anticipated to grow by 4.3% annually in coming years. Middle class evolved as a new market segment for airline industry because of affordable air ticket. Over the next 20 years, 39,200 new passengers will need dedicated freighter aircraft. • Various development in Technology had improved the aircrafts experience more comfortable and enjoyable during travel. More people are attracted to travel from airlines. Airbus has always focused on improving the design and features of their aircrafts helped them to evolved as Market Leader. THREATS • Boeing is very strong competitor of Airbus and they share combined market share of 91% for the whole commercial aircraft market globally. So, far the commercial airline industry is considered as duopoly as small competitors are quite weak as compared to Airbus and Boeing. • Because of Lockdown in 2020 in various countries across the Whole World as most of countries suffered from the COVID-19 pandemic situation, the travel industry has a bad hit. Suddenly, people have stopped travelling. Even though this phase is temporary, but Airbus will need almost one year to recover the losses because of such situation. • Countries like China and Russia are also planning to manufacture their own commercial aircraft which will probably turned out to be the potential rival. So, there are possibilities of shrinking of market share for Airbus. 3.4.2 ETOP ETOP stands for Environmental Threats and Opportunity Profile – It is the method in which external environment of business is structured by considering its factors. Firstly, the various factors of external environment are considered and then analysis is conducted to understand the influence of each factor on business. For more precise result sub factors are also taken into consideration and implications of each factor is defined in the statement. Let’s consider the following table : 48 CU IDOL SELF LEARNING MATERIAL (SLM)

(Source: https://www.yourarticlelibrary.com/) Table 3.1 As shown in the above table, we have considered social, political, economic, regulatory, market, supplier and Technological factors or sectors of Business Environment. After analysis of these factors, we concluded the impact and expressed it in the form of statements. Another step for business would be recognizing opportunities available in the environment like there is growing demand and thrust on exports. There going to be increase in motorbikes demand. For this, motorbike manufacturing companies can invest more in R& D, buy new and improved machineries, channelize resource to improve the existing designs or can come up with new designs and so on. Also, there is threat of new entrant in the market. So existing companies can look forward for Mergers or Joint Venture as an important aspect to ensure the market share. ETOP provides great foundation for strategic decision – making and 49 CU IDOL SELF LEARNING MATERIAL (SLM)

implementing the same. For this, there are some important areas that need to take care by management while conducting ETOP analysis as follows: 1. Quality of Data: Data should be collected in quantity and of good quality to ensure the accuracy in the analysis. The reliability and validity of data needs to be checked before analysis or else all efforts will go in veins. 2. Consideration of Important factors: Factors of Business Environment should be selected after complete understanding that for which reason the environment analysis is carried out. Other wise there will be analysis on the basis of less priority factors or un-related factors. 3. Objective Impact Studies: It is very crucial to analyze and compare the effects of different factors on the operation, efficiency and profit of business. So, the process should be very objective and focused more on core competency, competitive advantage, aligning strengths and weaknesses with favorable factors that will result in increase in profits and market share. 4. Operational Flexibility – Business needs to be agile so that they can deal effectively with the uncertainties and risk associated with the change of business environment. Organization should be pro active and ensure the allocation of resources whenever it is required to achieve the targets. 3.4 3 Verbal and Written Information: Information holds very important place in business. Different methods of Scanning also rely heavily on information. Information is divided into two categories viz., Written and Verbal. There are so many published or unpublished documents available on various matter or topic is available. But while considering written source, certain important factors need to be considered like when the information was collected, method of collection, reliability of source, individual/organization’s orientation. Similarly, such factors need to be considered while referring verbal information as well. There will be so many instances, where written information will be unavailable. In such situation, it’s become essential to contact and consider the opinions and view of experts on specific matter. Sources of verbal information are personal contacts, seminars, workshops, electronic media, etc. 3.4.4 Forecasting: Environmental forecasting is all about anticipating the future performance of an organization, changes expected in environmental factors, opportunities and threats and aligning resources to meet the expected performance standards. Let’s understand the steps in Forecasting 50 CU IDOL SELF LEARNING MATERIAL (SLM)