Unit-1

• Introduction to Micro Environment – Meaning of Business

& Business Environment,
• Types of Business Organizations,
• SWOT analysis,
• Types of Environment-Internal to the Enterprise (Value
System, Management Structure and Nature, Human
Resource, Company Image and Brand Value, Physical
Assets, Facilities, Research & Development, Intangibles,
Competitive Advantage),
• External to the Enterprise, Micro- Suppliers, Customers,
Market Intermediaries; Macro- Demography, Natural, Legal
& Political, Technological,)
• Michael Porter’s Five Forces Analysis,
• Competitive Strategies
 Business
• The business may be defined as an activity
concerned with the production and exchange of
goods and services with the objective of earning
profit.

• The word business means employment, trade,

profession or occupation.

• The term business encompasses all those economic

activities related to production and exchange of
goods or services for money or an economic return.
 Characteristics and Features of Business:

• Business has the following characteristics.

1. Exchange of goods or services for income:
Business involves the exchange of goods or services for
income, mostly by money payments. Business involves
exchange of goods or services for consumer satisfaction.
2. Continuous Transaction:
The activities of a business enterprise are normally returning in
nature and it operates more or less continuously.
3. Profit Motive:
Profit motive is another general characteristic of business
enterprises.
4. Risks & Uncertainty:
Business involves several risks; indeed one of the economic
theories of profit regards profit as a reward for risk bearing.
Common risks in business pertain to changes in technology,
consumer tastes and preferences, supply conditions, competitive
situations, demand condition.

5. Entrepreneur:
There must be someone who takes the initiative for establishing
a business. The person who recognized the need for a product
or service is known as entrepreneur.
6. Economic Activities:
All those activities relating to the production and
distribution of goods and services are called economic
activities.

7. Creation of Utility:
The goods are provided to the consumer as per their linking
and requirements.

8. Organization:
Every enterprise needs an organization for the successful
working. Various business activities are divided into
departments, section, and jobs.
9. Financing:
Business enterprises cannot move a step without finance.
The finance are required for providing fixed and working
capital. The availability of other factors and production also
depends upon availability of finance.

10. Consumer Satisfaction:

The ultimate aim of business is to supply goods to the
consumers. If the consumers are satisfied then they will
purchase the same thing again and again, otherwise they will
go for an alternative commodity.
 Objective of Business

• Economic Objective
• Human Objective
• Social Objective

1. Economic Objectives:
The following are the economic objectives of the business
a. Profit earning
b. Production of goods
c. Creating markets
d. Technological improvements
2. Human Objective:
a. Welfare of the employee
b. Satisfy the psychological and social need
c. Training and development of the employee

3. Social Objective
a. Cater the social need by supply the necessary goods and
services
 Environment
• Environment refers to all internal and external factors or
forces which directly or indirectly impact on the
performance of a firm and its decision making process.

Environment
Environment

Internal Environment External Environment

Micro Environment Macro Environment

 Characteristics of Environment:

• Environment is complex
• Environment is dynamic
• Environment is multi-faceted
• Environment has a far-reaching impact
 Need and Importance of Business
Environment:
• Identify Opportunities: Early identification of
opportunities helps an enterprise to be the first to use the
opportunities.
• Identify Threats: Early identification of threat provides the
opportunities to the firms to take corrective actions against
these threats.
• Coping with Rapid Changes: Analysis of environment
helps in coping the various rapid environmental changes.
• Improving Performance: By analysis of the environment
organizations can improve their performances.
• Basis of Strategy: Analysis of the environment provides
the basis of strategy formulation.
 The Dynamism of Business Environment

• Business environment of a country is never constant or

static. It is always in a dynamic state and affected by a
number of factors. Understanding a changing business
environment and predicting it at least in near future is not an
easy task.
• Factors producing changes in Business Environment
1. Changes in Government policies
2. Changes in market structure and competition
3. Changes in consumers attitude, tastes and preferences
 Types of Industrial Organization:
• Industrial organization structure is the type of business
structure that firms employ to organize their operations.

• The main types of industrial organization are:

• Partnership Organization: Formed by two or more people

who work together for profit making or profit sharing.

• Sole Proprietorship: Owned and controlled only by one

person and not incorporated and organized under civil law
and not subject to company law or other legal entity law.
• Corporate Organization: Formed by a group of
individuals who combine their financial resources to buy
a company with the goal of profit maximization.

• First two have similar responsibilities while a corporation

has greater legal protection and can receive funding from
outside sources.
 SWOT Analysis:
• SWOT analysis (or SWOT matrix) is a strategic planning
and strategic management technique used to help a person or
organization identify Strengths, Weaknesses,
Opportunities, and Threats related to business competition
or project planning.

• It is sometimes called situational assessment or situational

analysis.

• Strengths: characteristics of the business or project that give

it an advantage over others
• Weaknesses: Characteristics that place the business or
project at a disadvantage relative to others

• Opportunities: Elements in the environment that the

business or project could exploit to its advantage

• Threats: Elements in the environment that could cause

trouble for the business or project
 Internal Environment
• Internal Environment: Company Image and Brand Value,
Physical Assets, Facilities, Research & Development,
Intangibles, Competitive Advantage),

• The internal environment refers to all the factors which

are inside the organizations and provide strength and
weakness.

• The internal factors are generally controllable factors.

• Strength is an inherent capacity which an organization
can use to gain strategic advantage.
• Example of strength are: good reputation among customers,
resources, assets, people, experience, knowledge, data and
capabilities.

• Weakness is an inherent limitation or constraint which

creates strategic disadvantages.
• Examples of weakness are: gaps in capabilities, financial
deadlines, low morale and overdependence on a single
product line.
• The important internal factors are:
• Value system, vision, mission, objectives of the organization,
management structure and nature, internal power relations, human
resource etc. are the important internal factors.

• Value System: A business value system is a set of beliefs and

principles that guide the way a company conducts its operations
and interacts with stakeholders. These values can influence a wide
range of business decisions, including product development,
marketing strategies, employee management, and corporate social
responsibility.
• The value system of the organization influences the internal
environment of the company.

• Vision, Mission, and Objectives: The internal environment of an

organization is guided by the vision, mission and objectives of the
company.
• Management Structure and Nature: The organizational
structure, the composition of board of directors, etc. are
important factors which influence internal environment.

• Human Resources: The characteristics of the human

resources like skill, quality, morale, commitment, attitude
etc. could contribute to the strength and weakness of an
organization.

• Miscellaneous Factors: Physical assets and facilities like

production capacity, technology and efficiency of machines,
distribution logistic, research and development, marketing
resources are among the factors which influence the
competitiveness and internal environment of a firm.
 External Environment
• External Environment: Suppliers, Macro- Demography,
Michael Porter’s Five Forces Analysis, Competitive
Strategies

• The external environment includes all the factors which

are outside the organization and provide opportunities
and threats to the organization.

• The external factors are beyond the control of a company.

The external environment consists of a micro and macro
environment.
• Opportunity is a favorable condition in the organization’s
environment which enables it to consolidate and strengthen
its position.
• Examples of opportunity are: economic boom, arrival new
technologies, loosening of regulations, favorable global
influences and unfulfilled customer needs.

• Threat is an unfavorable condition in the organization’s

environment which crates a risk for , or causes damage to,
the organization.
• Examples of threat are: economic downturn, demographic
shifts, new competitors, unexpected shift in consumer
tastes, demanding new regulations, unfavorable political or
legislation, new technology and loss of key staff.
 The external factors such as:

• Economic factors, socio-cultural factors, government and

legal factors, demographic factors etc. therefore generally
regarded as uncontrollable factors.

Opportunity & Threats External Environment Uncontrollable

Micro Environment Macro Environment

(Suppliers, marketing (The demographic, economic,

intermediaries, competitors, technical, political and cultural
customers and the publics) forces or factor)
 Micro Environment

• Micro Environment:
• Suppliers, marketing intermediaries, competitors, customers
and the publics create a micro environment and they impact
on performance of a firm. The micro environment is
immediate environment that affects the performance of
the company.

• Customers: The major task of business is to create and

sustain customers. Customers are one of the important factors
in creating the positive external environment for the
organization.
• Competitors: Healthy competition creates the positive
environment. Competition creates an opportunity to improve
the strength of organization in exploiting the opportunity.

• Marketing Intermediaries: Marketing intermediaries are

important links between the company and final consumers and
help in creating the positive external environment.

• Financiers: Another important micro environmental factor is

the financiers of the company.

• Publics: A company may encounter certain publics in its

environment. “A public is any group that has an interest in an
organization’s. Media publics, citizens’ action publics and
legal publics are some examples.
 Macro Environment

• Macro Environment:
• The demographic, economic, technical, political and
cultural forces or factors etc. create a micro environment
and they impact on micro environment of a firm. The
macro environment consist larger societal forces that
affect all the factors in the company’s micro
environment.

• Economic Environment: The economic stage, economic

structure, economic policies, economic planning etc. creates
an economical environment.
• International Environment:- Globalization process, global
economic forces, global trade, global financial system etc.
create an international environment.

• Political Environment: The political system, political

structure, Political process like operation of the party system,
elections, etc. create a political environment.

• Regulatory Environment: The constitutional framework,

directive principles, fundamental rights, Policies related to
licensing, monopolies, policies related to import and exports
etc. create a regulatory environment
• Socio-Cultural Environment:
Demographic characteristics, such as
 Population,
 Age composition,
 Income distribution,
 Environmental pollutions,
 Consumerism,
 Corruption,
 Family structure and changes in it etc.

• Create a socio-cultural environment.

 Industry Analysis: (Michael Porter’s
Five Forces Analysis):

• An industry is defined as a group companies offering products

or services that are close substitutes of each other.

• Michael E Porter made immense contribution to the

development of the ideas of industry and competitor analysis,
and their relevance to the formulation of competitive
strategies.

• He advocates that a structural analysis of industries be made

so that a firm is in a better position to identify its strength and
weakness.
• A model consisting of five competitive forces has been
proposed:

1. Threat of new entrants

2. Rivalry among competitors

3. Bargaining power of suppliers

4. Bargaining power of buyers

5. Threat of substitute products

 1. Threat of New Entrants:

• Any industry that is perceived as being profitable tends to

attract new entrants. These new entrants are firms that are
interested in investing in the industry to share the growth
prospects.
• The chance that new entrants will enter into an industry
depends on two factors:
1. The entry barriers to an industry
2. Expected retaliations from existing firms

• The concept of entry barriers implies that there are

substantial costs involved in entering into a new industry.
• The higher the entry barriers in an industry, the less likely
are the new entrants to enter that industry.

• So higher entry barriers serve to keep out potential entrants

into an industry.

• The entry barriers may arise as a consequence of several

factors such as:

• Capital requirement being very high may prevent new

entrants from making investment.
• Switching costs from the existing products or services to a
new one may discourage customers from making new
commitments owing to the costs incurred in buying new
ancillary equipment, retraining employees or establishing a
new network of relationship.

• Product differentiation by existing firms based on perceived

distinctiveness by the customers based on effective
advertising, reputation as a service provider, brand loyalty
of customers towards existing firms or some such other
factor.
• Besides the entry barriers, the expected retaliations to the
new entrants from the existing firms may be a potential
threat to entry.

• For example, an existing firm with a large stake in the

industry may lower its price to create difficult situations
for the new entrants.
 2. Rivalry Among Competitors:
• Firms with an industry are mutually dependent. The
situation in an industry keeps changing with the action
and reaction of the constituent firms.

• The desire to be the market leader or to corner a large

market share leads to rivalry among competitors.

• The extent of rivalry among competitors in an industry

affects the competition within that industry.

• When the rivalry is weak, there is likely to be the lesser

competition; when such rivalry is high, the level of
competition is higher
• The dimensions of such rivalry among competitors are
several. Some of the major ones are described below:

• Competitive structure refers to the number of

competitors, their size, and their diversity.

• Different types of competitive structures have different

implications for the existing firms and for new entrants.
Structures vary from being fragmented to consolidated.

• A fragmented structures means that there are a large

number of small or medium sized companies, none of
them in a position to dominate the industry.
• This structure is characterized by low entry barriers and
less or no differentiation, leading to products becoming
commodities.

• Competition is intense and industry faces booms and

busts leading to frequent changes in the industry.

• A consolidated structure consists of a few large

companies (an Oligopolistic market) or just one large firm
(Monopoly).
 3. Bargaining Power of Buyers
• The bargaining power of buyers constitutes the ability of
the buyer individually or collectively, to force a reduction
in prices of products or services, demand a higher quality
or better services or to seek more value for their purchase
in any way.

• A higher buyer bargaining power constitutes a negative

feature for existing or new entrants.
 4. Bargaining Power of Suppliers
• The bargaining power of suppliers constituent their ability,
individually or collectively to force an increase in the price
of products or services or make the buyer accept a lower
quality of product or level of service.

• The bargaining power of suppliers is high under these

conditions:
• When the suppliers are few and the buyers are many.
• When the services or products are unique and are not
commonly available.
• When the substitutes of the products and services supplied
are not freely available.

• When the switching costs of a supplier from one buyer to

the other is low.
 5. Threat of Substitute Products:
• Substitute products or services are those that apparently
are different, but satisfy the same set of customers’ needs.

• We refer to the example of tea and coffee. Other example

of substitute product or services could be alternative
transport modes, postal, fax and courier services and
electric gadgets like bulbs and tube lights.
 Competitive Strategies:
• A competitive strategy is a set of policies and procedures
that a business uses to gain a competitive advantage in the
market.

• It's the process of identifying and executing actions that

allow a business to improve its competitive position.

• Businesses may use various competitive strategies to raise

the value of their products and services for consumers,
investors and employees.
• Here are four types of competitive strategy and an
example for each:
 1. Cost Leadership Strategy:
• A cost leadership strategy keeps prices for products and
services lower than competitors to encourage customers to
purchase the lower-priced products to save money.
Businesses use a cost leadership strategy in industries with
high price elasticity, such as energy and transportation.

• This strategy is most effective for companies that can

produce a large volume of products for low costs.

• These businesses often have large-scale production

methods, high-capacity utilization and various distribution
channels with which to work.
 2. Differentiation Leadership Strategy
• Businesses may use the differentiation leadership strategy to
differentiate their products from competitors by
emphasizing specific features of their products.
• This strategy might involve the design or function of a
product. A company that's been in operation for a while may
use this strategy to show that an original offering is better
than newer products.
• Alternatively, a newer company may use this strategy to
show that a new invention is more beneficial than existing
offerings.
• The goal is to appeal to more customers through unique
features and quality while keeping competitors from
obtaining a larger market share for products.
 3. Cost Focus Strategy
• The cost focus strategy is similar to the cost leadership
strategy, but the cost focus strategy involves catering to a
specific market.

• This strategy still involves trying to offer the lowest price,

but it attempts to target a unique market segment with
specific preferences and needs.

• When a company implements a cost focus strategy, it can

establish brand awareness more easily within a specific
geographic market.
 4. Differentiation Focus Strategy
• The differentiation focus strategy is similar to the
differentiation leadership strategy in that both attempt to
highlight unique product attributes and features.

• The difference between them is that while the differentiation

leadership strategy may involve appealing to a broader
market, the differentiation focus strategy involves appealing
to a specific market segment.

• This strategy typically doesn't prioritize the price of a

company's offerings, as it attempts to highlight how a
company's offerings are unique compared to those of its
competitors.