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External Environment

Scanning

Unit 3
Environmental Analysis
The environment of business is the
aggregate of conditions, events and
influences that surround and affect it.
The organisation is the part of a broader
social system, it has to work within the
framework provided by the society and
its constituents
Business Environment

External Environment Internal Environment

External Micro Envn.


External Macro Envn.
External Environmental Analysis
Environmental Analysis is the process through which
strategists monitor the economic, govt. / legal,
technological and socio – cultural environment to
determine opportunities and threats to their firms
Through this
1) Check Present Strategy with present environment
2) Compatibility of Present Strategy with future
environment
3) Gaps, revision
Necessity
• Helps organisation to ward off threats with
an early warning system.
• Improve performance by making
managers aware of issues that arise in
firms environment
• Helps strategists to focus on alternatives
that help achieve predetermined goals and
eliminate options that are not in line with
External Environment
• Factors Influencing Business are: -
(STEPIN)

1. Social and Cultural Factors


2. Technological Factors
3. Economical Factors
4. Political Factors
5. International Factors
6. Natural Factors
Socio-Cultural Environment

Factors like Consumption and buying


behaviour of population, demographic
characteristics of population like age, sex,
customs and traditions, tastes and
preferences influences the business.

Eg. Beef products are not acceptable in


Indian markets.
Increase in working womens have raised the
demand for frozen food
Technological Factor
Consists of resources that are related to the
knowledge applied and material and m/c used
in the production. Factors influencing includes:
-
1. Source of Technology: Company source,
external source, foreign source, cost of
technology acquisition, collaborations or
mergers.
2. Technological developments, stages of dev,
change and rate of change of tech., further
research and dev.
3. Impact of technology on human beings, man –
m/c system, environment effects of technology
Economic Factors
Factors like: -
1. Interest Rates
2. Exchange Rates
3. Unemployment
4. Inflation
5. Net disposable income have their impact on
the business

Inflation and interest rates affect the availability


and cost of capital. Low interest rates
Equity market or mutual funds
Economic Factors
Similarly, privatization and liberalization helped
pvt. Companies to enter the areas where there
was monopoly of govt. undertakings or few
companies because of licensing requirements.

With open economy, multinationals and foreign


direct investments are invited. Strong
competition is there for domestic companies.
Political / Legal Factors
Political factors that pose threats or
opportunities are: -

1. Form of govt.
2. Political stability
3. Attitude towards foreign companies
4. Laws on various matters
• Legislations regarding price control, tax policy,
wages, licensing policy, export – import
influence how mangers will formulate and
implement strategies
• Regulations relating to customer protection or
environmental protection and maintaining
ecological balance have created complication for
business
• Changes in indl. Policies, fiscal policy directly
affect the business. For eg. Liberalization
created opportunities to diversify and expand
and at the same time created threat by
increased competition.
International Business
Multinational organisation operates in more complex
environment, as they have to keep in mind the global events
and changes taking place in their host countries as well.
Important factors includes:-
1. Economic conditions of the host country
2. Cultural factors
3. Availability of raw material and manpower
4. Laws of host country
5. Political stability and regulatory mechanisms.

The purchasing power of Indian middle class has forced the


companies like Nike, Reebok to enter into collaboration with
Chinese companies to make available quality products at
reasonable prices. Global village concept has emerged and
mgrs. Have to think on global events while making strategic
decisions.
Nature and Ecological Factors
1. Concerns over Air Pollution, Water Pollution and Land
Pollution caused by industries has been raised
2. Business are now being held liable for disturbing the
ecological business and are thus been forced to adopt
measures to curb the environmental damage.
3. Companies are spending good amount of money to install
equipments leading to pollution control
4. R & D are taking place to innovate products which will
reduce rate of pollution for eg. Emission control system in
cars, use of un-leaded petrol

Hence managers to give top priority to such issues


External Micro Environment /
Industry Environment

Supplier

Customer Marketing
Intermediaries
Industry
Environment
Financial Institutions
/ Creditors Competitor

Skilled
Workforce
Supplier

• The suppliers include all business firms


and individuals who provide resources
like raw material, components and parts,
m/c, fuel electricity etc.
• Dependence on a single supplier always
poses threat to continuous production
• Firm should answer following questions
while deciding upon supplier: -
Supplier
a) Are the supplier’s prices competitive
b) Do the supplier is offering any discount
c) How much is the transportation cost
d) Are the suppliers reciprocally dependent
on the firm
Customers
• Customer Needs = Product Supply
• Develop a profile of present customers
and also of prospective customers
• Continuous interaction with customers
helps to plan strategically in order to
anticipate changes in the size of market
and re-allocation of resources.
• Market Research and Industry Surveys
help us in realistic assessments
Competitors
Competitors actions and reactions also is an
important component. The analysis
focuses on their marketing skills,
financial resources, operating facilities,
brand image, levels of integration,
managerial talent etc.
1. Firm should compare their internal
strengths and weakness with those of
the competitors
Creditors
Analysis of creditors help a firm to forecast the
availability of resources it will need to
implement strategy and sustain its competitive
position. The firm should address following
issues: -

1. Creditors perception about the firm


2. Terms of credit and its compatibility with firm’s
profitability objectives
3. Whether creditors are able to extend
necessary lines of credit.
Labour Market

Firms ability to attract, recruit and retain employees is


essential for its success. This depends on: -

1. The firm’s reputation as an employer


2. Availability of skilled and experienced personnel
3. Attractive compensation
Distributors and Retailers

1. They help the firm by making available


company’s product to its end user.
2. Helps in marketing the product
3. Provides information about the customers
demand and expectations to firm
Industry- a group of firms that produces a similar
product or service.

According to Michael Porter, Attractiveness of a firm


depends upon following forces. Higher force will
be threat while lower force will be opportunity.
Porter’s 5 forces : Profitability
– Threat of new entrants
– Rivalry among existing firms
– Threat of substitute products
– Bargaining power of buyers
– Bargaining power of suppliers

Prentice Hall, Inc. ©2009 4-23


Prentice Hall, Inc. ©2009 4-24
Threat of new entrants- new entrants to an
industry bring new capacity, a desire to gain
market share and substantial resources

Prentice Hall, Inc. ©2009 4-25


Entry barrier- an obstruction that makes it difficult for
a company to enter an industry

• Economies of scale •Access to distribution


• Product differentiation channels
• Capital requirements •Cost disadvantages
independent of
• Switching costs
size
•Government policies

Prentice Hall, Inc. ©2009 4-26


Rivalry Among Existing Firms-

• Number of competitors
• Rate of industry growth
• Product or service characteristics
• Amount of fixed costs
• Capacity
• Diversity of rivals: Raymond's or Reebok
Threat of Substitute Products or Services-
products that appear different but can satisfy the
same need as another product

Prentice Hall, Inc. ©2009 4-28


Bargaining Power of Buyers- ability of buyers to
force prices down, bargain for higher quality, play
competitors against each other

• Large purchases
• Backward integration
• Alternative suppliers
• Low cost to change suppliers
• Buyer earns low profits
• Product is unimportant to buyer

Prentice Hall, Inc. ©2009 4-29


Bargaining Power of Suppliers- ability of suppliers
to raise prices or reduce quality

• Industry is dominated by a few companies


• Unique product or service
• Substitutes are not readily available
• Ability to forward integrate
• Importance of product or service to the industry

Prentice Hall, Inc. ©2009 4-30

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