Business Environment: Nature and Significances of Business Environment
Business Environment: Nature and Significances of Business Environment
Business Environment: Nature and Significances of Business Environment
Environment
The nature of Business Environment is simply and better explained by the following
approaches:
i) System Approach:
In original, business is a system by which it produces goods and services for the satisfaction
of wants, by using several inputs, such as, raw material, capital, labour etc. from the
environment.
(iii) Creative Approach:
As per this approach, business gives shape to the environment by facing the challenges and
availing the opportunities in time. The business brings about changes in the society by giving
attention to the needs of the people.
In a globalised economy, the business environment plays an important role in almost all
business enterprises. The significance of business environment is explained with the help of
the following points:
Snapshot
What is GATS?
Service trade expansion has big prospects though countries are in general
reluctant to liberalise it. According to the WTO, “while services currently
account for over 60 percent of global production and employment, they
represent no more than 20 per cent of total trade (BOP basis).”
The GATS is basically a primary step towards service trade that was
reached at the Uruguay Round. Service trade liberalization under it is at the
entry level stage. As a Multilateral rule making and trade liberalization
regime, the GATS has to be expanded by making further discussions.
Environmental Scanning
In any business organization, there is an internal and external environment. They
comprise all the factors that can affect the business of a company in any way. And
they also present opportunities for the business to grow and threats that may harm
the business. So these environments need constant monitoring. This is where
environmental scanning comes into the picture.
Now that we know the environmental scanning meaning, let us see the purpose. The
purpose of this process of environmental scanning is to provide the entrepreneur
with a roadmap to the changes likely to happen in the future. So this way they can
adapt the business to overcome the threats and capitalize on the opportunities
coming their way.
Weakness: Study of the internal environment also point out the weaknesses
of the company. For the growth and stability of the company, these identified
weaknesses must be corrected without delay.
Opportunity: Analysis of the external environment helps with the
identification of possible opportunities. The entrepreneur can prepare to
capitalize on these.
Environmental scanning will help us avoid any wastages and allow for the most
effective and economical use of these resources.
It is a very competitive world and for any business to survive and thrive it is a
difficult task. But if the business employs all the techniques of environmental
scanning it can gain a significant advantage.
It will allow the firm to prepare for future threats and opportunities while at the
same time eliminating their weaknesses and improving on their strengths.
A business must have a plan for both short term and long term. The planning of
long-term objectives can only occur after proper analysis and environmental
scanning meaning. This will help the entrepreneur plan the necessary business
strategy.
5] Helps in Decision Making
Environmental scanning allows the firm to make the best decision keeping in mind
the success and growth of the business. They point out all the threats and
Example of Environmental
Scanning
Microsoft has been able to work crucially to use its research and
development to adapt to the changing trends in the software and mobile
devices development. Initially, the software giant has a deep root in
making software for desktops and mobile PCS until they started making
mobile devices like phones and pads to compete well globally and expand
their reach.
To achieve their goal of breaking into the leaders of firms making mobile
devices, they have partnered with other suppliers of materials. They are
continuing their research to leverage their strength, which lies in their
ability to create software that will come in handy in their new venture.
Not many software firms have the foresight to diversify and move to more
important things happening in their environment.
Components of Environmental
Scanning
The environment of a business organization can be split into two types,
which are the external environment and the internal environment. There
are different dimensions to both the internal and external environments.
1. Internal Environmental
Internal environmental components are the ones that lie within the
organization, and changes in these components affect the general
performance of the organization. There are different internal
environmental like human resources, capital resources, technological
resources, and a lot more like objectives, Organizational structure, Value
system, corporate structure, and labor union, etc.
2* Threat of substitutesEdit
A substitute product uses a different technology to try to solve the same economic need.
Examples of substitutes are meat, poultry, and fish; landlines and cellular telephones; airlines,
automobiles, trains, and ships; beer and wine; and so on. For example, tap water is a
substitute for Coke, but Pepsi is a product that uses the same technology (albeit different
ingredients) to compete head-to-head with Coke, so it is not a substitute. Increased marketing
for drinking tap water might "shrink the pie" for both Coke and Pepsi, whereas increased
Pepsi advertising would likely "grow the pie" (increase consumption of all soft drinks), while
giving Pepsi a larger market share at Coke's expense.
Potential factors:
Buyer propensity to substitute. This aspect incorporated both tangible and intangible factors.
Brand loyalty can be very important as in the Coke and Pepsi example above; however contractual
and legal barriers are also effective.
Relative price performance of substitute
Buyer's switching costs. This factor is well illustrated by the mobility industry. Uber and its
many competitors took advantage of the incumbent taxi industry's dependence on legal barriers to
entry and when those fell away, it was trivial for customers to switch. There were no costs as every
transaction was atomic, with no incentive for customers not to try another product.
Perceived level of product differentiation which is classic Michael Porter in the sense that
there are only two basic mechanisms for competition - lowest price or differentiation. Developing
multiple products for niche markets is one way to mitigate this factor.
Number of substitute products available in the market
Ease of substitution
Availability of close substitute
5* Competitive rivalryEdit
For most industries the intensity of competitive rivalry is the major determinant of the
competitiveness of the industry. Having an understanding of industry rivals is vital to
successfully marketing a product. Positioning pertains to how the public perceives a product
and distinguishes it from competitors‘. An organization must be aware of its competitors'
marketing strategies and pricing and also be reactive to any changes made.
Potential factors:
Sustainable competitive advantage through innovation
Competition between online and offline organizations
Level of advertising expense
Powerful competitive strategy which could potentially be realized by adhering to Porter‘s
work on low cost versus differentiation.
SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position
of the business and its environment. Its key purpose is to identify the strategies that will create a
firm specific business model that will best align an organization’s resources and capabilities to
the requirements of the environment in which the firm operates.
In other words, it is the foundation for evaluating the internal potential and limitations and the
probable/likely opportunities and threats from the external environment. It views all positive and
negative factors inside and outside the firm that affect the success. A consistent study of the
environment in which the firm operates helps in forecasting/predicting the changing trends and
also helps in including them in the decision-making process of the organization.
An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given
below-
1. Strengths - Strengths are the qualities that enable us to accomplish the organization’s
mission. These are the basis on which continued success can be made and
continued/sustained.
Strengths can be either tangible or intangible. These are what you are well-versed in or
what you have expertise in, the traits and qualities your employees possess (individually
and as a team) and the distinct features that give your organization its consistency.
2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our
mission and achieving our full potential. These weaknesses deteriorate influences on the
organizational success and growth. Weaknesses are the factors which do not meet the
standards we feel they should meet.
Organization should be careful and recognize the opportunities and grasp them
whenever they arise. Selecting the targets that will best serve the clients while getting
desired results is a difficult task. Opportunities may arise from market, competition,
industry/government and technology. Increasing demand for telecommunications
accompanied by deregulation is a great opportunity for new firms to enter telecom
sector and compete with existing firms for revenue.
SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it
involves a great subjective element. It is best when used as a guide, and not as a prescription.
Successful businesses build on their strengths, correct their weakness and protect against
internal weaknesses and external threats. They also keep a watch on their overall business
environment and recognize and exploit new opportunities faster than its competitors.
SWOT Analysis provide information that helps in synchronizing the firm’s resources and
capabilities with the competitive environment in which the firm operates.
SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances
as very simple because of which the organizations might overlook certain key strategic contact
which may occur. Moreover, categorizing aspects as strengths, weaknesses, opportunities and
threats might be very subjective as there is great degree of uncertainty in market. SWOT Analysis
does stress upon the significance of these four aspects, but it does not tell how an organization
can identify these aspects for itself.
There are certain limitations of SWOT Analysis which are not in control of management. These
include-
a. Price increase;
b. Inputs/raw materials;
c. Government legislation;
d. Economic environment;
e. Searching a new market for the product which is not having overseas market due to
import restrictions; etc.