AXIS INSTITUTE OF HIGHER EDUCATION

BUSINESS POLICY NOTES UNIT 2

STRATEGY ANALYSIS
• Strategic analysis refers to the process of conducting research on a company and its
operating environment to formulate a strategy.
• Strategic analysis helps to explore organizations growth options, addresses
challenges within industry, and makes better corporate decisions.

CONCEPT OF ENVIRONMENT
• Environment of an Organization is “The aggregate of all conditions, events and
influences that surround and affect it.”
CHARACTERISTICS OF BUSINESS ENVIRONMENT

1) Dynamic: The environment in which the business operates changes continuously

because there is a wide variety of factors that exist in the environment, causing the
business to change its shape and character. Example: A change in labour laws will
impact the production schedules of an organization.
2) Complex: There are many forces, events and conditions that constitute business
environment, arising from various sources. Example: All political, social, economic,
technological and legal matters affect the performance of an organisation
simultaneously.
3)Uncertain: Uncertainty is an inherent characteristic of the business environment
because no one can predict what is going to happen in future. Example: Covid and
demonetization were uncertain events that posed a challenge for all businesses and
public in general.
4) Multi-faceted: A single change in the business environment, can be viewed
differently by different observers because their perceptions vary. One company may
view an occurrence as an opportunity and another might view it as a threat.

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 Example: In case of rise in inflation rate, one company will be worried about increase
in cost of raw materials and other will take advantage and sell existing stock at low
prices to gain market share.
5) Far-reaching Impact: The survival, growth and profitability, of a business
enterprise, depends largely on the environment in which it exists. A small change in the
environment has a far-reaching impact on the organization in different ways.
Example: Climate change is one of the most pervasive and threatening issues of our
time, with far-reaching impacts. Organizations have to change the way they conduct
their business. Reducing factory pollution and proper disposal of industrial waste have
become crucial.
6) Relative: The notion of a business environment is relative since it varies from one
location to another. Example: companies operating in different sectors and different
countries have to operate in different environments.

OBJECTIVES OF BUSINESS ENVIRONMENT

1) Identify Business Opportunities - The business environment helps an organization to
find opportunities in the market. In light of changes in the market condition, customer
behaviour, technology, and other factors, business needs to find new opportunities.
2) Improving Performance - The company is a group of activities undertaken with the
possibility of a sales to make a profit. Higher profit means the performance is also
increasing. Example: Improvement in customer service and maximize upselling and
cross – selling.
3) Basis Of Decision Making - The business environment provides information about inside
and outside of an organization. The information related to change in culture, fashion,
trends and customer purchasing power becomes the basis of the decision making for any
organization.
4) Survival In the Market – Survival in the market is very difficult in the time of
competition. The business environment helps the business to find out information about
the internal and external environment. So that the business can make good decisions to
survive in the market.
5) Making Of Policies – The business makes policy according to the market conditions.
The market condition can be found out by analyzing the environment of the business. This
is how the business environment helps in the making policies of the organization.
Example: Equal Opportunity policy, Employee Face mask policy (during Covid-19).
6) Assistance In Planning – Planning is the fundamental management function, which
involves deciding beforehand, what is to be done, when is it to be done, how it is to be
done, and who is going to do it.

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 IMPORTANCE OF BUSINESS ENVIRONMENT
1)It Helps in Identifying Opportunities and Making First Mover Advantage - The
environment provides numerous opportunities, and it is necessary to identify the right ones to
improve the performance of a business.
2) It Helps the Firm Identify Threats and Early Warning Signals - Environmental
awareness can help managers identify various threats on time and serve as an early warning
signal.
3) It Helps in Planning and Policy Formulation - The business environment brings both
threats and opportunities to a business. Awareness of business environment helps in deciding
future planning or decision making.
4) It Helps in Tapping Useful Resources - Business and industry avail the resources (inputs)
from the environment and convert them into usable products (outputs) and provide them to
society.
5) It Helps in Coping with Rapid Changes - The business environment changes very rapidly,
and the industry gets affected by changing market conditions.
6) It Helps in Improving Performance - Environmental studies reveal that the success of any
enterprise is closely related to the changes in the environment.

COMPONENTS OF ENVIRONMENT

I)Internal Environment - The factors which exist within the organization, imparting strength
or causing weakness to the organization, comes under internal environment. It includes: Value
System, Vision and Mission, Goals and Objectives, Corporate Culture, Human Resources and
Labor Union. It consists of financial, physical, human and technological resources.
The internal environment consists of controllable factors that can be changed.

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II)External Environment consists of those factors which provide an opportunity or pose
threats to the business. These are uncontrollable factors and firms have to adapt. It is further
classified as:
a) Micro Environment: The immediate surrounding of the business that has a continuous and
direct impact on it is called Micro Environment. It includes suppliers, customers, competitors,
market intermediaries, public etc. which are specific to the business.
b) Macro Environment: It is the environment that influences the functioning and performance
of every business organization, in general. It comprises of the demographic, socio-cultural,
legal, political, technological, and global environment. This is largely uncontrollable and
therefore firms adjust their operations according to these factors.
(a)MICRO ENVIRONMENT
• COMPETITORS - It is essential to be aware of competitors’ products and services,
and try to understand their present and future direction. For example, a new product
coming from a competitor may warrant defensive action.
• CUSTOMERS - Customers remain central to the marketer’s view of the micro
environment. Company can have different types of customers like households,
producers, retailers, government and foreign buyers.
• SUPPLIERS – They supply inputs (money, raw material, fuel, power etc.) Marketers
must be aware of special factors amongst suppliers that may impact upon the marketing
plan.
• PUBLIC - This includes any group that can have an impact on the micro marketing
environment. Example - pressure groups, the government, shareholders, the media, and
local community.
• MARKET INTERMEDIARIES: they are the links that distribute goods to final
consumers. They are physical distribution firms (transport firms), service agencies
(media firms), financial intermediaries (banks, insurance companies) that help in
producing, marketing and insuring goods against loss.

(b)MACRO ENVIRONMENT
• POLITICAL ENVIRONMENT - The government interacts with businesses at Local,
State and Central level. Political factors include government regulation and legal issue
and both formal and informal rules under which business has to operate its work. Some
examples of political factors: Stable political environment, Tax and labor policy of
government, Government's economic policy etc.
• SOCIO-CULTURAL ENVIRONMENT - Socio-cultural environment represents the
values, beliefs, culture, norms and ethics of the society in which business operates. How
the society behaves and thinks about anything. Examples are – Lifestyle of people,
demographic characteristics, religious factors etc.

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 • TECHNOLOGICAL ENVIRONMENT - The technical environment is perhaps the
most dramatic force now shaping our destiny. Forces that create new technologies,
create new product and market opportunities, import technology or upgrade indigenous
and technological obsolescence.
• ECONOMIC ENVIRONMENT - The Economic environment consists of forces that
relate to factors affecting consumer purchasing power and spending patterns and thus
affect business decisions. Important criteria are: GDP, Unemployment, Inflation and
Per capita income.
• NATURAL ENVIRONMENT - It consists of resources used in production process.
It includes renewable and non- renewable resources. These factors have become
important because of increasing demand for raw materials, increasing pollution, amount
of waste generation and its disposal and climate change
• LEGAL / REGULATORY ENVIRONMENT - Legislature describes the laws that
are to be followed by businesses. Firms should promote economic growth and they
should know the legal system. Some of the important factors and influences operating
are: Policies related to licensing, monopolies, foreign investment and financing of
industries, Policies related to distribution and pricing and their control and Policies
related to imports and exports. Example - Air (prevention and control of pollution) act
1981
• INTERNATIONAL ENVIRONMENT - Global environment represents the
‘borderless world’. Global business environment is significantly influenced by world
trade organisation (WTO). The World Trade Organization (WTO) is the only global
international organization dealing with the rules of trade between nations. It has
impacted the following areas - Liberalization of imports, exports and foreign
investments.

ENVIRONMENT SCANNING
DEFINITION - It can be defined as the process by which organizations monitor their relevant
environment to identify opportunities and threats affecting their business for the purpose of
taking strategic decisions.”
FACTORS TO BE CONSIDERED FOR ENVIRONMENTAL SCANNING
1.Events – These are specific occurrences which take place in different environmental sectors
of a business. Organizations can observe and track them.
2.Trends – These are general courses of action or tendencies along which the events occur.
3.Issues – In wake of the events and trends, some concerns can arise. These are Issues.
Organizations try to identify emerging issues so that they can take corrective measures
4.Expectations – Some interested groups have demands based on their concern for issues.
These demands are Expectations.
EXAMPLE OF ENVIRONMANTAL SCANNING
Gas Leakage Accident in December 1984, at Union Carbide Factory at Bhopal.

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EVENT – This accident and the resulting disaster was an event. TREND – A general tendency
arose on part of the regulatory authorities and organisations to be conscious about safety from
hazardous exposure to chemicals. ISSUE – The issue is of a rising concern about
environmental pollution. EXPECTATION – The expectation of the general public from the
government is of legislating changes in rules and regulations pertaining to safety measures and
stricter enforcement through various mechanisms.

APPROACHES TO ENVIRONMENTAL SCANNING

1)Systematic Approach: Under this approach, information is collected systematically and
continuously to monitor changes.
2)Ad hoc Approach: Using this approach, an organization may conduct special surveys and
studies to deal with specific environmental issues.
3)Processed-form Approach: For adopting this approach, the organization uses information
in a processed form available from different sources both inside and outside the
organization. secondary sources of data and the information is available in processed form.

SOURCES OF INFORMATION FOR ENVIRONMENTAL SCANNING

1.Documentary or secondary sources– Different types of publications. These could be
newspapers, magazines, journals, books, trade and industry association newsletters,
government publications, annual reports of competitor companies, Trade directories etc.
2.Mass media - Internet, television, radio news etc.
3.External agencies - Suppliers, inspection agencies, marketing intermediaries, dealers,
advertisers, associations, unions, government agencies, etc.
4.Internal sources – Company files and internal documents, internal records, management
information system, company employees, sales staff, internal reports and memoranda,
drawings, charts, etc.
5.Formal studies - Market research reports, consultants, educational institutions, testing
laboratories etc.
6.Spying and surveillance – It is considered as a powerful way of extracting information from
other companies. Spying by ex-employees of competitors, industrial spy agencies, by planting
moles in rival companies.

IMPORTANCE OF ENVIRONMENTAL SCANNING

1) Helpful in Achieving objectives – If strategic planning is done without considering
environment, it is likely to be defective. Besides, the success of the implementation of the
strategy will result in successful attainment of objectives.

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2) Helpful in forecasting the Future – Changes in the environment are often frequent and all
of a sudden. Environmental scanning is a very useful tool for anticipating the future changes.

3)Provides time for adjustment – A business cannot change the business activities overnight.
Environmental scanning gives time to the company to get adjusted to the changed environment.
4)Serves as an early Warning system – It gives advance warning or danger signals of the
adverse changes in environment. It helps the company to design defence mechanism.
5)Identify threats and opportunities - A complete analysis of the environmental factors shall
enable the analyst to recognize the inherent risk involved and also enable him to take advantage
of the opportunities.

DRAWBACKS /ISSUES IN ENVIRONMENTAL SCANNING

1. Lack of Forewarning of Unforeseen Events - Business enterprises sometimes face events,
which are unexpected and environmental scanning should aim at minimizing the frequency and
extent of surprises that may attack a business organization.
2. No Assurance as to Organization Effectiveness - Sometimes, managers place absolute
faith in the data without thinking about the data’s verifiability or accuracy. In this case it may
lead to misleading outcome.
3. Not fully Reliable - Too much reliance on the information collected through environmental
scanning can lead to overloading of information and one is likely to get confused.
4. Absence of Strategic Approach - Success of any organization lies in strategic risk-taking.
Environmental analysis often makes an individual too cautious in his approach.

ANALYSIS OF EXTERNAL ENVIRONMENT / METHODS AND TECHNIQUES OF

ENVIRONMENTAL SCANNING ARE:
1.PORTER’S FIVE FORCES MODEL
2.ETOP ANALYSIS
3.PESTEL
4.PORTER’S DIAMOND MODEL

I.PORTER’S FIVE FORCES MODEL - Michael E. Porter created Porter's five forces
model as a framework that attempts to analyze the level of competition within an industry and
business strategy development.

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The intensity of competition in an industry depends on five forces.

1)Threat of entry by potential competitors: Potential competitors refer to the firms which
are not currently competing in the industry but have the potential to do so if given a choice.
Entry of new players increases the industry capacity, begins a competition for market share.
The threat of entry by potential competitors is partially a function of extent of barriers to entry.
The various barriers to entry are-

• Economies of scale
• Brand loyalty
• Government Regulation
• Customer Switching Costs
• Ease in distribution
• Strong Capital base

2)Rivalry among current competitors: Rivalry refers to the competitive struggle for market
share between firms in an industry. Extreme rivalry among established firms poses a strong
threat to profitability. The strength of rivalry among established firms within an industry is a
function of following factors:

• Extent of exit barriers

• Amount of fixed cost
• Competitive structure of industry
• Presence of global customers
• Absence of switching costs
• Growth Rate of industry
• Demand conditions

3)Bargaining Power of Buyers: Buyers refer to the customers who finally consume the
product. Bargaining power of buyers refer to the potential of buyers to increase the firms cost
in the industry by demanding better quality and service of product.

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• Strong buyers can extract profits out of an industry by lowering the prices and increasing
the costs. They have full information about the product and the market. They emphasize
upon quality products. In this way, they are regarded as a threat.

4)Bargaining Power of Suppliers: Suppliers refer to the firms that provide inputs to the
industry. Bargaining power of the suppliers refer to the potential of the suppliers to increase
the prices of inputs (labour, raw materials, services, etc) or the costs of industry in other ways.

• Supplier’s products have a few substitutes. Strong suppliers’ products are unique. They
have high switching cost. Their product is an important input to buyer’s product. In this
way, they are regarded as a threat.

5)Threat of Substitute products: Substitute products refer to the products having ability of
satisfying customer’s needs effectively. Lesser the number of close substitutes a product has,
greater is the opportunity for the firms in industry to raise their product prices and earn greater
profits (other things being equal).

II.ETOP ANALYSIS

ETOP (ENVIRONMENTAL THREAT AND OPPORTUNITY PROFILE) - It is the process

by which organizations monitor their relevant environment to identify opportunities and threats
affecting their business for taking strategic decisions.

External Threats – These are anything in the outside environment that can adversely affect
goals. Examples are new competitors, new technologies, unstable political and legal system.
External Opportunities – These are anything in the outside environment that provide
competitive advantage and a means to improve performance.

Objectives of ETOP –
1.Helps organisation to identify threats and opportunities.
2.Organization knows where it stands with respect to its environment.
3.Helps in formulating appropriate strategies.
4. Helps to consolidate and strengthen organization’s position.

Steps in ETOP Analysis -

1.Identify major environmental factors such as: economic, social, political, technological etc.
2.Environmental factors are sub-divided into sub-sectors of each factor.
3.These factors are analysed to determine major weaknesses and strengths in each sub-sector.

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4.The impact of each factor is assessed as favourable, unfavourable or neutral.

Example ETOP profile for a bicycle company

The strategic managers should focus on the following dimensions: Issue selection, accuracy of
data, impact studies and flexibility in operations.

III.PESTEL ANALYSIS
A PESTEL analysis is a strategic framework commonly used to evaluate the business
environment in which a firm operates. The framework is used by management teams in their
strategic planning processes and enterprise risk management planning.

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1.Political Factors – The political environment consists of factors related to management of
public affairs and their impact on the business of an organisation.
• It relates to how the government intervenes in the economy. Specifically, political factors
have areas including tax policy, labour law, environmental law, trade restrictions, tariffs,
and political stability.
• Governments have a high impact on the health, education, and infrastructure of a nation.
2.Economic Factors – This includes those factors that are related to goods, services and
money.
• It includes economic growth, exchange rates, inflation rate, taxes and interest rates. These
factors can drastically affect how a business operates. For example, interest rates affect a
firm's cost of capital and therefore to what extent a business grows and expands.
3. Socio-cultural Factors – This includes those factors that are related to human relationships
within society.
• It includes the cultural aspects and health consciousness, population growth rate, age
distribution, career attitudes, family structure and educational levels.
• For example, the ageing population may imply a smaller and less-willing workforce (thus
increasing the cost of labour).
4.Technological Factors– This affect how an organisation operates, sells its products, interacts
with, and gathers intelligence on customers, suppliers, and competitors.
• It includes technological aspects like R&D activity, automation, technology incentives and
the rate of technological change.
• These can determine barriers to entry, minimum efficient production level and influence
the outsourcing decisions. Technological shifts would affect costs, quality, and lead to
innovation
5. Environmental factors – This includes ecological and environmental aspects such as
weather, climate, and climate change, which may affect industries such as tourism, farming,
and insurance. Furthermore, growing awareness of the potential impacts of climate change is
affecting how companies operate and the products they offer, both creating new markets and
diminishing or destroying existing ones.
6. Legal Factors - The legal or regulatory environment consists of factors relating to planning,
promotion and regulation of activities by the government.
• It includes discrimination law, consumer law, employment law, and health and safety law.
These factors can affect how a company operates, its costs, and the demand for its products.

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IV.PORTER’S DIAMOND MODEL
Michael Porter’s Diamond Model (also known as the Theory of National Competitive
Advantage of Industries) is a diamond-shaped framework that focuses on explaining why
certain industries within a particular nation are competitive internationally, whereas others
might not. The Porter Diamond model offers an effective way for analysing the national
competitiveness.
The Porter Diamond model bases its assessment on six elements:

1.Firm strategy, structure and rivalry - The conditions in a country that determine how
companies are established, are organized and managed, and the characteristics of domestic
competition. Domestic rivalry is instrumental to international competitiveness, since it forces
companies to develop unique and sustainable strengths and capabilities.

2.Factor conditions - They refer to different types of resources that may or may not be present
in the home country: human resources, physical resources, knowledge resources, capital
resources and infrastructure. Example very rich in natural resources such as oil for example
(Saudi Arabia). This explains why Saudi Arabia is one of the largest exporters of oil worldwide.

3.Demand conditions - Demand conditions, involve such factors as early home demand,
market size, market growth and sophistication. These characteristics can help companies create
competitive advantage. Example - when sophisticated home market buyers pressure firms to
innovate faster and to create more advanced products than those of foreign competitors.

4.Related and supporting industries - Related and supporting industries can produce inputs
that are critical for innovation. These industries provide cost-effective inputs, and also
participate in the upgrading process, thus stimulating other companies in the chain to innovate.

5.Chance - Chance refers to random events that are beyond the control of the company. For
the international competitiveness, they may be very important: the discontinuities created by
chance may lead to advantages for some and disadvantages for other companies. Example –
Covid as a chance event impacted organisations all over the globe, proving to be advantageous
for some and disadvantageous for others.

6.Government - The government can have strong influence on the international

competitiveness of a firm. The government of a country can either promote or hinder export. It
can influence the supply conditions of key production factors.

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