Paper: Business Environment Lesson: Business Environment: An Introduction

Lesson Developer: Ms. Romila Aggarwal, Mr. Anurag Maurya

College/Dept: Bharati College

Reviewer: Prof. K.M. Upadhyay

Lesson: Business Environment: An Introduction

Table of Contents:

1. Learning Outcomes

2. Introduction

3. Relationship between Environment and Business

4. Characteristics of Modern Business Environment

5. Business Environment in India

6. Concept of Environment Analysis 6.1: Approaches of Business Environment Analysis

6.2: Objectives/Importance of Environment Analysis 6.3: Process of Environment Analysis

6.4: Limitations of Environment Analysis 7. Competitive Structure of Industry

8. Role of Environment Analysis in Strategic Management

9. Role of Government: Monetary and Fiscal Policies

Summary Exercises

Glossary

References

1. Learning Outcomes:

After reading this lesson, you will be able to:

understand the meaning and relationship of environment and business,

know the characteristics of modern business,

explain the competitive structure of an industry,

understand the fiscal and monetary policies and their impact on business.

2. Concept of Business Environment:

The term business environment refers to the combination of various factors and forces

which have direct and indirect influence on the functioning and growth of individual

business. These factors may be internal or external to a business unit.

According to Keith Davis, “Business environment is aggregate of all conditions, events

and influences that surround and affect the business”.

Bayord O. Wheeler defines business environment as „the total of all the things, external

to a business firm, which affect the organisation and its operations‟.

Arthur M. Weimer explains, “Business environment encompasses the climate or set of

conditions- economic, social, political, or institutional- in which business is conducted”.

Thus, business environment can be explained as a combination of internal and external

factors that have an impact on business.

Nature of Business Environment:

Business environment has the following features:

1. Aggregative: Business environment is an aggregate of various internal and

external forces which influence operations and decision making of a business.

2. Inter-related: Different elements of business environment are interdependent. A

change in one element causes change in other element of the environment. For

example, a change in political environment, due to change in government, leads to

change in economic environment through the new fiscal and monetary policy of the

government.

3. Dynamic: Business environment is dynamic in nature as it keeps on changing over

the period of time.

4. General and Specific Forces: Business environment consists of various general

and specific forces. General forces, such as, economic, political, natural forces affect

all the business enterprises in the economy in the same manner; while specific

forces, such as, competition, availability of raw material, customers, etc., influence

only a particular business unit.

5. Relative: Business environment is a relative concept. It differs from country to

country and region to region. The effect of environment on business depends on type

of economic system and governmental set up of the country.

3. Relationship between Environment and Business:

As we know, business is a transformation process which converts inputs into outputs. As

per complementary approach, business does not work in isolation. It interacts with

environmental factors in two different ways. It takes inputs, such as, capital, labour,

material etc., from the environment, converts these inputs into finished goods and

returns these goods to the environment, in the form of goods and services, profits etc.

Figure 1: Relationship between Business and Environment

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4. Characteristics of Modern Business Environment:

The environment is ever changing and dynamic in nature. In last few decades, the

modern business environment has changed drastically and shaped entirely, in a very

different manner. Now, it has become a challenge for business managers to understand

their business environment and formulate business plans and policies accordingly.

The following characteristics of new modern business environment have emerged:

Figure 2: Characteristics of Modern Business

1. Bulk Size of Business: The mass production has become an integral part of modern

business. As volume with expected lower costs rises, it helps to attain higher rates of

output at low unit cost. It has become a common strategy to cope up with competition

and earn higher profits.

2. Diversification: presently, every businessman invests his capital in diversified

economic activities so that he can avoid negative effects of market fluctuations. Many

firms invest their funds in different market locations and foreign economies in order to

avoid the impact of adverse business situations, such as, recession, high inflation,

lockout, strikes etc.

3. Change in Consumers’ Taste and Preference: The tastes and preferences of

modern consumers have completely changed because of change in standard of living,

consumption pattern, technology advancement etc. Now, people spend more money on

services. A large proportion of consumers‟ income has been spent on entertainment,

electronic gadgets, and luxuries. Modern customer prefers quality products rather than

cheap one.

4. Change in Distribution Channel: The revolutionary change in technology has

drastically changed the conventional distribution system. Introduction of e- commerce

has narrowed down the distribution channel. Nowadays, firms offer their product

directly to the consumer through the websites or their own outlets.

5. Globalisation of Business: Modern business has now become global. MNC‟s are

dominating the global markets. The Government of different countries are also

liberalising their economies by allowing foreign countries to enter their domestic

markets. The mergers and acquisitions across the national boundaries have also been

increasing the presence of business firms in international market.

6. Emergence of International Organisations: With the increase in cross border

trade, the role of various international institutions, such as, WTO, IMF, World Bank,

and regional organisations, like, SAARC, EU, and NAFTA has also increased. These

organisations set rules and regulations for international trade.

7. Intense Competition: Globalisation of economies has increased the competition in

international as well as domestic markets. In present business scenario, no firm wants

to remain within the regional boundaries of a country. They enter international market

to explore new business possibilities.

5. Business Environment in India:

The characteristics of each dimension of Indian business environment are as follows:

1. Demographic Environment: With the population growth rate of 1.2% (on 2013)

and about 127 billion people, India is second most populous country of the world. It

provides a huge market to the business firms for their products. In India, 56.9 %

population lies between the age group of 15 to 59 years, with a literacy rate of

74.04% (2011 census). It signifies that India is a large potential source of cheap and

efficient workforce. The urban population in the country is also increasing at a fast

rate i.e. 2.4% (census 2011). The 31.3% (census 2011) share of total population

lives in urban areas.

2. Cultural & Social Environment: The cultural and social environment is a very

important aspect of business environment. It influences all the 4P‟s of marketing (i.e.

product, price, promotion and place) which play a crucial role in the success of a

business firm.

In India, there is huge diversity in terms of caste and religion. There is a great

linguistic heterogeneity as more than 200 languages are spoken by different groups

in the country.

3. Economic Environment: After opening up the FDI in different sectors, India has

become one of the attractive investment destinations of the world. India holds 6.43%

(in 2011) share of world GDP. According to the World Bank report, it is third biggest

economy in terms of purchase power parity (PPP). The present Industrial growth rate

of India is 3.4%. As per the latest report of PwC (Price water house coopers), India

will become third largest economy of the world by 2030.

4. Technological Environment: The technological growth rate of India lies between

0.7%- 1.1%, which is comparatively 3% lower than other economies. The per capita

R&D expenditure was also very low as $9.5 in 2009-10. It was 2.4% of World Gross

Expenditure on R&D in 2009-10. As per the study of US based National Science

Foundation, India is far behind in term of technology competitiveness from its Asian

compatriots. India scored only 33 points out of 100 points scale as against 83.7

points for Japan and 42.6 points for South Korea.

5. Political Environment: India has a parliamentary system of government that

decides the regulatory and legal framework of the country. In India, a business is

regulated by different bodies, such as, SEBI, IRDA, CBDT, FIPB, etc. Recently, the

government has replaced 56 years old Companies Act with new Companies Act 2013.

The government is also planning to adopt uniform direct tax system i.e. called Direct

Tax Code (DTC). The new NDA government has changed the 64 years old Planning

Commission with a new body. Since the independence, GOI has signed more than 50

trade agreements with other countries in order to facilitate foreign trade.

Value Addition1: Search and Learn

Regulatory Environment The World Bank Group has ranked all the economies of the world on their ease of

doing business from 1-189. A high rank means the environment is more conducive

for setting up and running a business. The rankings of the countries are based on 10

different parameters. In the list, India stands at 134th place after its neighbouring

countries china, Nepal and Bangladesh. As per the ranking, Singapore is the most

favourable place for doing business. The whole list of 189 countries is available at

following link:

http://www.doingbusiness.org/rankings

Value Addition 2: Do You Know?

Economic Reforms

In India, The reforms were initiated in 1991 with the objective to save the economy

from crisis and accelerate economic growth. Under this policy, most of the quotas and

licenses requirements were abolished and some industries were opened for foreign

investment. The Industrial policy was also reformed by deregulating selected public

undertakings in order to increase efficiency and competitiveness of Indian industries. In

the new trade policy, requirement of import license were abolished. In 2001, after ten

years of reforms, quantitative restriction from import of consumer and agriculture

product were removed. To continuing the process of economic reforms, In 2012

government allowed FDI in following major sectors:

Up to 100% in single brand retailing

Up to 100% in telecom sector

Up to 49% in Insurance sector

Up to 100% in courier services

In 2014, the new NDA led government also announced some changes in FDI policy.

They increased the limit of FDI in Following sectors

49% from 26%in defence sector

100% in Railways infrastructural projects

Source: http://timesofindia.indiatimes.com/business/india-business/Govt-steps-up-

reforms-raises-FDI-limit-in-defence-opens-up-railways/articleshow/39784232.cms

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6. Environment Analysis: As we know, modern business environment is dynamic and keeps on changing with the

time. So, it becomes very important to analyze the environment in order to identify each

and every environmental factor that can influence the business. After identifying these

factors and their impact, we frame plan and policies accordingly.

Environmental analysis is a systematic process of identifying and predicting the potential

environment variables that can influence the functioning and profitability of a firm

directly or indirectly. Environment analysis helps in finding out the strengths and

weaknesses, opportunities and threats from internal and external business environment

respectively. Under the environment analysis, various data, pertinent to a particular

firm, is collected and used by the managers to determine the best strategies in order to

capitalise the opportunities and earn higher return.

6.1. Approaches for Environmental Analysis:

There are different approaches which are adopted by the analysts for the purpose of

environmental analysis. The two main approaches i.e. systematic approach and ad hoc

approach, are as follows:

Figure 3: Approaches of Environment Analysis

Systematic Approach: Under the systematic method, information for the purpose of

environment scanning is collected in a systematic way. Information which directly affects

the business activities, such as, government rules and regulations, market conditions,

customers‟ taste and preference, etc., are collected on a continuous basis to monitor the

environment changes and act accordingly.

Ad hoc Approach: Under this approach, different surveys and studies are conducted

time to time by an organisation in order to deal with a specific issue. Such studies or

surveys are conducted at the time of starting a new project, restructuring the plans and

policies, etc.

Since both the approaches are followed in environment scanning to understand the

relevant environment forces and formulate strategies, Ad hoc approach may be adopted

as a reactive measure in the critical situation, While systematic approach is undertaken

as a proactive measure to anticipate changes in the environment and react accordingly.

6.2. Objectives of Environment Analysis:

Environment analysis has following objectives:

1. To Identify Threats, Opportunities, Strengths & Weaknesses: The main

objective of environment analysis is to identify the threats and opportunities that

exist in the external business environment. It also helps a firm to identify its

strengths and weaknesses that exist in the internal environment.

2. To Understand the Change in Environment: Environment analysis helps in

understanding the current business environment and probable future changes, such

as, change in legal environment, technology, demand, etc.

3. To Provide Inputs for Decision Making: under the process of environment

analysis, information, related to different aspects of business environment, is

collected. This information is used by the managers for the purpose of decision

making. Different capital and investment decisions are taken on the basis of such

information.

4. To Formulate Appropriate Strategy: After identifying all the present strengths

and weaknesses, or opportunities and threats, by proper environment scanning,

appropriate future plans and strategies are formulated. These plans and strategies

are formulated with the objective to minimise the threat by using present strength or

try to overcome weaknesses by capitalising the opportunities.

5. To Identify the International Events and their Impact on Business: Due to

globalisation, the impact of international events on a business firm has increased. In

this situation, environment analysis helps to identify and understand the global

events and their influence on business.

6.3. Process of Environment Analysis:

Environment analysis is a continuous and expensive process which includes the following

sequential steps:

Scanning,

Monitoring,

Forecasting, and

Assessment.

Figure 4: Process of Environment Analysis

Scanning- It is the first step of environment analysis. Under this step, the analyst

identifies all the environment variables or forces which can influence the profitability and

functioning of the business. We figure out only relevant environment factors so that

vague, ambiguous and irrelevant data can be avoided. Generally, it includes government

policies, competitor‟s strategy, market conditions, etc., that can influence the business

firm.

Monitoring- The next step of this process is to analyze the effect of all the identified

relevant factors on the different aspects of business. After analyzing these factors,

following outcomes emerge:

A specific description for all the relevant factors,

Identification of areas for further and detailed studies, and

Identification of trend and pattern of the industry.

Forecasting- Forecasting is important for the identification of future threats and

opportunities, and formulation of plans and strategies accordingly. Under this step,

environment analyst predicts the future events and their impact, on the basis of data

related to past and present. Forecasting covers all the aspects of business environment

i.e. economic, political, and technological, etc.

Assessment- In the last step, all the factors, identified in previous steps, are assessed

in terms of their impact on organisation‟s performance and profitability. The degree of

impact varies from factor to factor. Some factors provide opportunity while other pose

threat to the organisation.

6.4. Limitations of Environment Analysis:

Environment analysis process has following limitations:

1. Unexpected and Unanticipated Events: The future events and factors which may

affect an organisation are unpredictable and uncertain. These events and factors

cannot be predicted and quantified accurately.

2. Part of Strategy Formulation Process: The environment analysis is only a part of

strategic formulation process which is based on various inputs. Hence, it does not

guarantee the effectiveness of the organisation.

3. Inaccurate Data: The process of environment analysis is based on the data which is

collected for the same purpose. But it may be possible that the data used for

forecasting or predicting future event is inaccurate.

4. Involves Money and Cost: The process of environment analysis involves time and

money. It is a lengthy process that includes following steps:

a. Scanning

b. Monitoring

c. Forecasting, and

d. Assessment

5. Based on Assumptions: The whole process of forecasting is based on certain

assumptions which may or may not be true. There is basic assumption of forecasting

that there is a pattern of happening of an event. This assumption may not be held

true in all cases.

INTERACTIVE 5

7. Competitive Forces of an Industry:

Presently, the modern business units are run with the objective to gain economies of

scale and diversify their operations. In order to achieve these objectives, business firm

has to explore and enter the new potential markets. Therefore, it becomes important to

understand the competitive structure of the industry in which firm is going to enter.

Competitive structure of an industry is a combination of all the forces that decide the

level of competition, within the industry. Ultimately, these environmental forces

determine the potential profits of the industry. Michael E. Porter has developed a model

which explains the factors that decide the competitive structure of an industry. A

manager who wants to gain competitive advantage over its rival firms can understand

competitive business environment in a better way with the help of this model. According

to this model, competitive structure of an industry depends on the following five forces:

1. Threats of new entrants,

2. Bargaining power of suppliers,

3. Bargaining power of buyers,

4. Threats of substitute products, and

5. Rivalry among existing firms.

Figure 5: Porter's Five Forces Model

1. Threats of New Entrants:

Entry of the new firms increases the level of competition in the market. The new

entrants capture the market share of existing firms by bringing new products,

technology and capacity. As a result, profits of existing firm are adversely affected by

the entry of new firms in the industry. If the entry and exit is free and there are no

significant barriers to entry in the industry, then the level of competition will be so high

and vice-versa.

The following characteristics of existing firm and industry act as a barrier for new

entrants:

a. Economies of Scale: Economies of scale, enjoyed by the existing firms, provide cost

advantage over new entrants. Existing firms‟ low cost of production discourages the

new firms to participate and compete in the market. Economies of scale restrict the

entry of new firms in the industry.

b. Capital Requirement: The huge funds requirement for setting up new production

facility also acts as an entry barrier for new and small firms. For example, airplanes

manufacturing requires huge capital which restrict the entry of new competitors for

Boeing and Airbus.

c. Government Policy: Government also restricts the entry to a particular industry

through licensing, quota and other rules and regulations. For example, RBI issues

license to companies for establishment of banks in India.

d. Product Differentiation: The brand image and customer loyalty, build by the

existing firms, also act as an obstacle in the way of a new firm. To overcome this

problem, new firms have to spend heavily on advertising and promotion.

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2. Bargaining Power of Suppliers:

Bargaining power of suppliers mean how strong is their position in the market. If the

bargaining power of supplier is high, they can easily control the price and supply of the

raw material. In such case, a supplier can influence the competitive position of a firm by

affecting its output and cost of production. Bargaining power of suppliers will be high

when:

a. The numbers of suppliers in the industry is limited and there is no close substitute for

supply. For example, there are two main manufacturers of computer processor e.g.

Intel and AMD, who supply the most important part of a computer system to all

manufactures of the industry such as HP, Dell, Acer, Lenovo, Toshiba, Compaq and

Sony.

b. If the switching cost is very high then supplier will have more bargaining power in

the industry as it is very difficult for buyer to shift from one product to another. The

cost of shifting from one product to another is called switching cost. For example, in

case of ` services the cost of switching from one service provider to another is very

high which includes cost of installation, dish and set up box.

c. In case, where the supplier has capacity to integrate forward then they have higher

bargaining powers. The forward integration is a strategy under which a supplier gains

ownership and increases control over the buyers. For example, a supplier of a

particular can integrate forward by opening its own retail outlets in the market.

3. Bargaining Power of Buyer:

Position of buyer also affects the firm‟s competency in the industry. According to Porter,

Suppliers have high bargaining power in following cases:

a. The buyer purchase bulk quantity from the firm and the number of buyers are limited

in the industry. In case of industrial goods, buyers hold more bargaining power as

they purchased in bulk quantities and they remain limited in numbers.

b. Buyer has more bargaining power if the he has capability to integrate backward. In

case of large buyer, if a firm fails to provide the desired quality and quantity then

buyer can set up his own unit to produce raw material for its unit.

c. If there is low switching cost then the buyer can easily shift from one brand to

another without incurring any extra cost. For example, there is intense competition in

FMCG industry because there is no switching cost for the buyer to shift from one

product to another.

4. Threat of Substitute Product:

The fourth force of Porter‟s model is threat of substitute product in the market. The

substitute products satisfy identical consumer needs. If the number of substitutes,

available in the market, will be more, the competition remains high. For example, there

are too many soft drinks products available in the market, such as, cold coffee, cold

drinks, fruit juices, etc. If price of one product rises, the consumers will switch over to its

substitute immediately.

5. Rivalry among Existing Firms:

It is the last force of Porter‟s five competitive forces which depends on all the other four

forces. It indicates the level of competition among the existing firms of an industry. If

competition is low, the participants will have great opportunity to earn more profit by

increasing the price level and control the supply of goods.

8. Role of Environment Analysis: Strategic management is a process of formulating, implementing, reviewing and

controlling organisation plans and policies in order to achieve organisational objectives.

Organisational plans and policies are framed and implemented on the basis of

information collected through the process of environmental analysis. Environment

analysis helps in understanding the relevant environment forces and their impact on firm

so that proper strategies can be adopted. We can say that environment analysis is

supplement to strategic management as it provides-

Figure 6: Strategic Management Process

1. Define Mission and Objectives: The process of strategic management starts with

setting up mission and vision for the organisation. Mission is the fundamental

purpose for which organisation is set up. It explains the purpose and scope of

business activities in term of products and markets. Environment analysis helps in

setting up mission and objectives for an organisation. It provides information related

to environment changes and threats and opportunities on the basis of which

organisational objectives are redefined.

2. SWOT Analysis: Identification of the threats and opportunities is the main part of

plan and strategy formulation process. In the strategic management process, it is

tried to avail environmental opportunities and meet the threats with internal

strength. If the company finds it difficult to face environmental threats or overcome

internal weaknesses then it shifts its focus from core business to some other areas.

3. Strategic Decision Making: After the identification of opportunities or threats,

existing in the external environment of a firm, different strategic alternatives are

generated. There may be different strategic alternatives available to a firm, such as,

starting a new range of product, enter the new markets, etc. In the light of internal

strength and weaknesses, the best suited alternative is selected and it becomes the

firm‟s strategy.

4. Implementation of Strategy: Only the selection of best strategy does not confirm

the achievement of business objectives. To execute the strategy, a *detailed action

plan is prepared. Under this step, overall organisational objectives are divided into

functional level objectives.

5. Evaluation and Control of Strategy: In the last stage of strategic management

process, managers evaluate the strategy on the basis of past and expected

performance. The internal and external environmental changes are also taken into

consideration to modify the current strategy accordingly.

Value Addition 3: Do You Know? SWOT analysis of Samsung Electronics Co. Ltd.

Samsung electronics is a South Korean company that serves more than 100 consumer

electronic products worldwide. It is the largest mobile phone maker and television

manufacturer and second largest semiconductor chip producer.

SWOT Analysis:

Strengths

Strongest patent portfolio among the rivals.

largest share in mobile phone market

high brand value

Weaknesses

patent infringement

Focus on too many products

low profit margins

More content at same price point as competition

Opportunities

growing demand in developing countries

obtain the patents through acquisitions

Threats

rapid technological change in industry

declining margins on hardware products

saturated market in developed countries

Source: http://www.strategicmanagementinsight.com/swot-analyses/samsung-swot-

analysis.html

9. Fiscal Policy & Monetary Policy:

The central bank of India, known as Reserve Bank of India, sets the monetary policy by

adjusting the different key rates such as CRR, SLR, Bank Rates, etc. The RBI implements

monetary policy through the wide network of commercial banks and other financial

institutions. The monetary policy changes affect the both long term and short term

interest rates and money supply in the economy. The RBI periodically announces

different monetary policy as per the prevailing economic condition in the country. The

main objectives of implementing the monetary policy are:

Price Stability: The main objective of monetary policy is to stabilize price level

in the economy.

Control of Credit: Ensure the adequate flow of credit among different productive

sectors of the economy.

Control of Inflation: RBI announces monetary policy, time to time, in order to

control inflation by adjusting the money supply in the economy.

Similarly, government announces fiscal policy by setting up taxation policies and decides

the pattern of government expenditure. The fiscal policy involves- tax policy,

expenditure policy, investment policy and disinvestment policy. The changes in fiscal and

monetary policies affect a business directly and indirectly. Therefore, it becomes

necessary for a manager to understand the impact of monetary and fiscal policies on

business carefully.

Fiscal Policy Impact:

Generally, fiscal policy involves change in taxation policy and government‟s expenditure.

An increase in the indirect taxes changes the pattern of demand for goods and services.

Sometimes, government changes taxation policy in order to control the demand of

product.

Monetary Policy Impact:

The Changes in monetary policy influence short term as well as long term interest rates

in the economy. These changes affect the investment as well as capital decision of the

business firms. The change in money supply also affects the aggregate demand and the

general price level in the economy.

Value Addition 4: Time Line

Monetary Policies in India The different economic policies are announced in India from time to time are:

1. Controlled Expansion (from 1951 to 1972): The main objective of RBI during

this period was to fulfil the financial needs of trade and industry by curbing the

use of credit facilities for unproductive and speculative purposes.

2. Tight Monetary Policy (from 1972 to 1991): Inflationary conditions worsened

during the 1972-1974. The RBI tightened the monetary policy by increasing the

key rates to check inflation. In India, monetary policy is formed in response of

fiscal policy. During this period, the fiscal deficit was too high and it caused high

inflation in the economy. Therefore, RBI announced tight monetary policy to

neutralize the inflationary impact of fiscal policy.

3. Monetary Policy during Reforms (from 1991 onwards): In 1991,

Government announced the new economic policy to liberalization and

globalisation of Indian economy. Under the reforms, government decided to

reduce fiscal deficit and accelerate growth by creating an investment friendly

environment in the economy. In this direction, necessary changes in monetary

policies were made. Till 1995, the main focus of monetary policy was on inflation

control and price stability. After 1995, the policy was focussed to accelerate the

economic growth.

Source: Essentials of Business Environment (1st edition) by C.B. Gupta, Sultan Chand &

Sons, Delhi

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Summary: Environment is a sum total of all factors, conditions and other things which influence

everything that exists within it.

The environment and business both are interrelated. Business takes inputs from

environment, process them and provide these goods to the environment in return.

The modern business environment is globalised, highly competitive and diversified.

A number of changes have taken place in customer taste and preference, distribution

channel and size of business.

The environmental analysis is a process of identifying and predicting environment

changes. It helps in identifying strengths, weaknesses, threat and opportunities. It

also provides input for decision making.

Environment analysis is continuous process which includes these sequential steps:

scanning, monitoring, forecasting and assessment.

The competitive structure analysis of an industry is very crucial for the strategic

decision making process. According to Porter‟s model, the competitive structure of an

industry depends on following five forces: threat of new entrant, bargaining power of

buyer and seller, availability of substitute product, and rivalry among existing firms.

Strategic management is a process of formulating, implementing and evaluating

organisational plan and policies. Environment plays a significant role in strategic

management process by providing relevant information for the same.

The fiscal and monetary policies are used by Government and central bank of a

country respectively in order to achieve various objectives. These policies affect a

business in both positive and negative way. So it becomes important for a strategic

manager to consider these policies at the time of formulating business strategies.

Glossary: Strategy: The strategy refers to action plan designed to achieve competitive

advantage in order to achieve organisational goals.

CRR: Cash Reserve Ratio is the proportion of cash deposits that banks have to keep

with RBI.

SLR: Statutory Liquidity Ratio is the proportion of total deposits that a bank has to

invest in government securities.

Substitute Product: The product which can be used on the place of one another for

the same purpose.

Customer Loyalty: When a customer repeatedly buys company products because of

his past experience.

Companies Acts: Legislation that governs the creation and operation of limited

liability companies in the country.

Channel of Distribution: A „route to market‟ for a company and a means of getting

its goods and services to the final consumer.

Diversification: An organization enters new markets and/or launches new products

that are not closely related to its current activities.

Economies of Scale: Cost advantage achieved through the mass production. As per

EOS, cost per unit falls as output rises.

GDP: Gross Domestic Product is the aggregate amount of goods and services

produced within a country during a particular financial year.

Inflation: A rise in the general level of prices of goods and services.

Globalisation: It is the interaction of world economies with the objective to facilitate

free transfer of the factors of production and final products.

Exercise:

A. Short Answer Type Questions:

1. What is Environment Analysis? Explain the importance of Environment Analysis.

2. Discuss the role of environment analysis in strategic management.

3. Explain the characteristics of present modern business environment.

4. Explain different approaches of environment analysis.

5. Explain briefly the current demographic environment of India.

B. Long Answer Type Questions:

1. Explain the competitive structure of the industry with suitable example.

2. Explain the process of environment analysis.

3. Explain the current Indian business environment.

4. Describe the monetary and fiscal policy of government with their impact on business.

5. Discuss the limitations of environment analysis process.

C. Objective Type Questions:

I. Choose the Correct Answer:

1. Which of the following does not act as a barrier for new entrants?

a. Economies of scale

b. Capital Requirement

c. Government‟s restrictive policy

d. Availability of substitute products

2. Which is a correct sequence of environment analysis?

a. Scanning - Monitoring – Forecasting – Assessment

b. Monitoring – Forecasting – Scanning – Assessment

c. Scanning – Monitoring – Assessment – Forecasting

d. Monitoring – Scanning – Forecasting – Assessment

3. Which of the following is not the factor of Porter‟s 5 forces model?

a. Bargaining power of buyers

b. Rivalry among existing firms

c. Threat of substitute product

d. Demand and factor condition

4. Bargaining power of the supplier will be high if:

a. Switching cost is low

b. No substitute for the supply

c. Supplier has no capacity to integrate forward

d. There are large number of suppliers

5. Which is the last step of strategic management process?

a. Evaluation and control

b. Strategy implementation

c. Strategic decision making

d. SWOT analysis

6. Which is not a limitation of environment analysis?

a. Certain assumptions

b. Uncertainty

c. Time and money

d. Inputs for decision making

7. Which is not the main objective of monetary policy?

a. Credit control

b. Inflation control

c. Employment generation

d. Price stability

8. What is the approach of environment analysis?

a. Systematic approach

b. Ad hoc approach

c. Both (a) and (b)

d. None of the above

9. „SWOT‟ stands for:

a. Strategy – work- opportunity – timing

b. Strength – weakness – opportunity – threat

c. Strategy – work – opportunity – threat

d. Strength – weakness – offer – timing

10. Which is not a characteristic of a modern business organisation?

a. Bulk Production

b. Globalisation

c. Low competition

d. All of the above

II. Fill in the Blanks:

1. The bargaining power of suppliers will be high when the number of suppliers in the

market is__________.

2. The process of breaking the business environment into smaller parts in order to gain a

better understanding of it is known as ______________.

3. The strategic management process starts with setting up ______and ______for the

business organisation.

4. _______is the last force of Porter‟s five competitive forces which depends on all the

other four forces.

5. The environment analysis helps in identifying ______and __________from internal

business environment.

Answers to Objective Type Questions:

I. Choose the Correct Answer:

1. Availability of substitute products;

2. Scanning – Monitoring – Assessment – Forecasting;

3. Demand and factor condition;

4. No substitute for the supply; 5. Evaluation and control;

6. Inputs for decision making;

7. Employment generation;

8. Both (a) and (b);

9. Strength – weakness – opportunity – threat;

10. Low competition.

II. Fill in the Blanks:

1. Limited; 2.Environment Analysis; 3.Vision and Mission;

4. Rivalry amongst existing firms; 5.Strengths and Weaknesses.

References:

1. Work Cited and Suggested Readings:

a. Gupta, C.B. (2014). Essentials of Business Environment (1st Ed.). New Delhi: Sultan

Chand and Sons.

b. Cherunilam, F. (2013). Business Environment: Text and cases. New Delhi: Himalaya

Publishing House Pvt. Ltd.

c. Sloman, J. & Sutcliffe, M. (2004). Economics for Business (3rd Ed.). New Delhi:

Pearson Education.

d. Dhingra, I. C. & Dhingra, N. (2014). Concise Business Environment (1st Ed.). New

Delhi: Book Age Publications.

e. Fernando, A. C. (2011). Business Environment. New Delhi: Pearson Education.

f. Ramachandaran, K.C. (2007). Economic Environment of India. New Delhi: Northern

Book Centre.

g. Jain, T.R., Trehan, M. &Trehan, R. (2009). Indian Business Environment (1st Ed.).

New Delhi: V.K. (India) Enterprises.

2. Web Links:

1. http://commerce.nic.in/trade/international_ta.asp?id=2&trade=i

2. http://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=498

3. http://aric.adb.org/india

4. http://www.citylab.com/tech/2011/10/worlds-leading-nations-innovation-and-

technology/224/

5. http://www.indexmundi.com/india/languages.html

6. http://infochangeindia.org/environment/backgrounder/india-s-culture-of-

conservation.html

7. http://knowledge.allianz.com/demography/population/?1656/key-facts-and-figures-

about-indias-population

8. http://www.factmonster.com/ipka/A0775267.html

9. http://www.managementstudyguide.com/changing-face-of-business-

environment.htm

10. http://smallbusiness.chron.com/environmental-business-analysis-43238.html

3. Video Links:

1. http://www.youtube.com/watch?v=PeN1pvahsSA

2. http://www.youtube.com/watch?v=ntxMOKXHlfo

3. http://www.youtube.com/watch?v=nfaJORbpOH4

4. http://www.ndtv.com/video/player/ndtv-special-ndtv-profit/experts-take-on-

business-environment-in-india/176024

5. http://education-portal.com/academy/lesson/the-strategic-management-

process.html#lesson

6. http://education-portal.com/academy/lesson/what-is-business-environment-

definition-factors-quiz.html#lesson