BUSINESS ENVIRONMENT NOTES

MODULE I
Type of Environment-internal, external, micro and macro
environment:
WHAT IS BUSINESS

Business is an economic activity which is related with continuous production of good and
services for satisfying human wants.

1. Exchange of goods/services

2. Deals in numerous transactions.

3. Profit is main objective.

4. Risk and uncertainties.

5. Buyer and seller.

6. Marketing and distribution of goods/services.

7. To satisfy human wants.

8. Social obligation

Business does not function in isolation or in vacuum. It is affected by internal and external
factors. These internal and external factors collectively constitute business environment.
Internal environmental factors are within the control of business, whereas external factors
are beyond the control of business.

‘Environment’ refers to the system in which human beings live and they have to adjust
themselves according to it. So it is surroundings, external agents, influences or
circumstances under which something exists.

*Business Environment can be defined as the aggregate of all those forces, factors and
institutions which directly affect the working of a business organization.

Some of these constituents may be static, while others may be changing.

“Business Environment is the aggregate of all conditions, events and influences that
surround and affect the business.” Keith Davis
“Business Environment encompasses the climate or set of conditions-economic, social,
political or institutional in which business operations are conducted.” Prof. Weimer

“The term Business Environment of a company is defined as the pattern of all external
influences that affect its life and development.” Andrews

“The total of all things external to firms and industries that affect the function of the
organisation is called business environment.” Wheeler

*CHARACTERISTICS/NATURE OF BUSINESS ENVIRONMENT

Business Environment is very complicated, dynamic and multi-dimensional and affects

different business institutions in different ways. It exhibits many characteristics like:

1. Complex

Environment comprises of many factors. All these factors are related to each other.
Therefore, their individual effect on the business cannot be recognized. This is perhaps the
reason which makes it difficult for the business to face them.

2. Dynamic

As is clear that environment is a mixture of many factors and changes in some or the other
factors continue to take place. Therefore, it is said that business environment is dynamic.

3. Uncertain

Nothing can be said with any amount of certainty about the factors of the business
environment because they continue to change quickly. The professional people who
determine the business strategy take into consideration the likely changes beforehand.

4. *Multi-dimensional

Business environment is related to the local conditions and this is the reason as to why the
business environment happens to be different in different countries and different even in
the same country at different places.

6. Interdependent components

The different factors of business environment are co-related. For example, change in the
import-export policy with the coming of a new government.

In this case, the coming of new government to power and change in the import-export
policy are political and economic changes respectively. Thus, a change in one factor affects
the other factor.

*IMPORTANCE/SIGNIFICANCE OF BUSINESS ENVIRONMENT:

Business and its environment are closely inter-related and mutually interdependent.
Environment has its bearing on business and business has its bearing on environment. The
success of business lies in understanding the environmental changes and adapting its
business policies accordingly.

The surroundings of business enterprise which are constantly changing, carry with them
both opportunities and risks or uncertainties which can make or mar the future of business.
Significance of the study of environment in business sector may be explained as follows:

1. Early identification of opportunities helps a business organization to be the first to exploit

them.

2. A business organization should make its policies keeping in view the demands of
environment.

3. The study of business environment is important to ensure optimum utilization of

resources like, financial resources, human resource and physical resource etc.

4. Environment analysis helps the business organizations to identify strengths and

weaknesses.

5. Environment analysis helps the business organizations to identify threats and explore
opportunities available to business.

6. Environment analysis helps in adapting latest technological development which results in

improved efficiency.

7. Scanning the business environment helps to understand Political Situation and its effect
on business.

8. Scanning the business environment helps to understand economic policies of

Government and their impact on business.

9. Because of globalization, the impact of international events on business is increasing. To

understand global events and their impact on business, study of international environment
is must.

10. By environmental analysis, business organizations come to know about the strategies of
competitors to formulate counter plans.

11. Environment analysis helps in understanding the market conditions i.e. change in
demand/supply, change in fashion, taste, boom or depression etc.

SCANNING BUSINESS ENVIRONMENT

There is a close and continuous interaction between business and its environment. So it is
essential to understand and scan the environment to ensure effective utilization of
resources. SWOT analysis is an analysis undertaken by business firms to understand their
external and internal environment. The term

SWOT consists of four words:

S = Strengths

W = Weaknesses

O = Opportunities

T = Threats

SWOT analysis is applied to formulate effective organizational strategies. Through SWOT

analysis, the business firms can match Strengths and Weaknesses existing with an
organization with the Opportunities and Threats existing in the external environment.

COMPONENTS/TYPES/CONSTITUENTS/FACTORS OF BUSINESS ENVIRONMENT

Every business faces two types of environments simultaneously i.e. Internal Environment
and External Environment.

1. INTERNAL ENVIRONMENT

All those factors within an organization which impart strengths or cause weaknesses
constitute the internal environment. These factors can be controlled by business but they
are quite important in shaping the behaviour of people working in it. Hence, managers have
to take internal factors into account while taking actions.

2. EXTERNAL ENVIRONMENT

All those factors outside the organization which provide opportunities or pose a threat to
the organization make up the external environment. These factors are those over which the
business organization has no control.

According to William Glueck and Jauck

“In environment there are external factors, which constantly bring opportunities and threats
to the business firm. In includes Economic, Social, Technological and Political conditions.”

Examples of situations that may cause change in the external environment include:

(i) Improvement in production techniques

(ii) Fluctuations in the levels of demand

(iii) Fluctuations in interest rates

(iv) Changes in laws and regulations

(v) Changes in taxation

(vi) New social trends, fashions or life styles

(vii) International influences

TYPES OF EXTERNAL ENVIRONMENT

MICRO ENVIRONMENT

Micro environment consists of factors in the company’s immediate environment that affect
the performance of the company. These include the suppliers, marketing intermediaries,
competitors, customers and the public.

According to Philip Kotler

“The micro environment consists of factors in the company’s immediate environment which
affect the performance of the business unit. These include suppliers, marketing
intermediaries, competitors, customers and the public.”

According to Hill and Jones

“The micro environment of a company consists of elements that directly affect the company
such as competitors, customers and suppliers.”

MICRO ENVIRONMENT

1. Suppliers

Suppliers are important for any business unit. Suppliers are those who supply the inputs like
raw material and components to the company. Organizations should keep two things in
mind regarding suppliers:

Reliability

Multiple suppliers

2. Customers or clients

A business exists only because of its customers. Hence, a major task of a business is to
create and sustain customers. Monitoring the customer’s sensitivity is a pre-requisite for
business success.

A company may have different types of customers

(i) Individual and household customers

(ii) Government bodies

(iii) Foreign customers

(iv) Retail customers

(v) Wholesale customers

To succeed in capturing and sustaining customers, following points must be kept in mind:

(i) Buyer’s behaviour data can be used in constructing a customer profile.

(ii) Geographical factors should also be analyzed to know the opportunities and threats.

(iii) In the era of free trade, foreign customers can be attracted by making such products
which can compete with foreign products.

(iv) Single customer of a company is full of risks as it places the company in a poor
bargaining position.

(v) The business firm should make separate products for separate segments. Following can
be the basis of segmentation:

(a) Income level of customers

(b) Age of customers

(c) Personality and life style of customers

(d) Tastes and preferences of customers

(e) Quantity to be purchased by customers

(f) Education level of customers

3. Competitors

Competitor means other business units which are making similar products or a very close
substitute of our product. Competitors play a vital role in running the business enterprise.
Business has to adjust its various activities according to the behaviour of the competitors.

4. Market Intermediaries

Every business enterprise may be assisted by market intermediaries which include agents,
brokers who help the company find customers. It is a link between company and final
consumer. Market intermediaries help the company to promote, sell and distribute its
goods to final buyers.

Examples:
Wholesalers, retailers, advertising agencies, consultancy firms, banks, insurance companies,
warehouse, transport agencies etc.

5. Public

Public is any group that has actual or potential interest in the business. To achieve this
interest, it has its impact on the business. Public includes users and non-users of the product
like Environmentalists, NGOs,

Local Community, Media.

EXTERNAL ENVIRONMENT

A company and the forces operate in a larger Macro environment that shape opportunities
and pose threats to the company. These factors are generally more uncontrollable than the
micro forces.

According to Philip Kotler

“Macro environment includes forces that create opportunities and pose threat to the
business unit. It includes economic, demographic, natural, technological, political and
cultural environments.”

According to Hill and Jones

“The macro environment consists of the broader economic, social, political, legal,
demographic and technological setting within which the industry and the business units are
placed.”

1. ECONOMIC ENVIRONMENT

Economic environment consists of economic factors that influence the business in a

country. It is very complex and dynamic in nature that keeps on changing with the change in
policies or political situations.

Key components of economic environment are:

(A)Economic Conditions of Public

(B) Economic Policies

(C ) Economic System

2. POLITICAL-LEGAL ENVIRONMENT

Political environment affects different business units significantly. A stable and dynamic
political environment is essential for business growth. Whenever there is a change in the
Government in a democratic country, it is a sign of change in economic policies. The Political
environment of business depends on:

1. Ideology of the Government

2. Political Establishment

3. Political Stability in the country

4. Relations with other countries

5. Defense and Military Policy

6. Centre State Relationship

7. Approach of Opposition parties towards business

LEGAL ENVIRONMENT

Legal environment constitutes the laws framed by the Government and various legislations
passed in the parliament. The businessman cannot overlook the legislations because he has
to perform his business transactions within the framework of legal environment. Every
aspect for business is regulated by law in India. Government has also framed legislations
which regulate and control the business.

Some of the main legislations regulating the business are as follows:

1. Industrial Dispute Act, 1947

2. Factories Act, 1948

3. Consumer Protection Act, 1986

4. Companies Act, 1956

5. Foreign Exchange Management Act 1999

6. Securities and Exchange Board of India Guidelines, 2000

3. SOCIAL & CULTURAL ENVIRONMENT

Business is an integral part of society and both influence each other. Influence exercised by
social and cultural factors is known as socio-cultural environment. These factors include:
attitude of people, family system, caste system, religion, education, marriage, habits and
preferences, languages, urbanization, customs and traditions, ethics etc.

4. TECHNOLOGICAL ENVIRONMENT
A systematic application of scientific knowledge is known as technology. Everyday there are
vast changes in products, services, lifestyles and living conditions, these changes must be
analyzed by every business unit and should adapt these changes.

5. DEMOGRAPHIC ENVIRONMENT

Demographic environment refers to the study of the features of population i.e. size of
population, growth rate, gender ratio, age composition, income level, education level,
family size, family structure etc. All these factors affect size of demand, tastes, fashion,
liking, preferences of consumer etc.

6. NATURAL OR ECOLOGICAL ENVIRONMENT

It includes geographical and ecological factors such as natural resources, weather and
climatic conditions, port facilities, topographical factors such as soil, rivers, rainfall, pollution
etc. Every business unit must look for these factors before choosing the location for their
business.

7. INTERNATIONAL/ GLOBAL ENVIRONMENT

International environment is important for industries directly depending on import and

export. A recession in foreign market or protection policy by foreign nations may create
difficulties for industries depending on exports. Liberalization of import may help some
industries but may adversely affect other industries.

Following factors of International environment affect business:

1. Globalization

2. Liberalization

3. International agreements and declarations

4. International terrorism

5. Cultural exchange

Competitive and Industry Analysis:

Introduction

The environment in which the business operates has a greater influence on its performance.
The success or failure of any organisation’s strategies is based on the fundamental
understanding of its external environment. The external environment of an organisation
consists of both a general environment and competitive environment (Figure 1). The general
environment is often referred to as the macro-environment and includes factors such as
political, economic, social and technological. It should be noted that any change in the
general environment has the potential to influence the organisation’s competitive
environment and will also have an effect that transcend beyond the firms or specific
industries. For example, Hitkari Potteries, a popular bone-china crockery brand till 2000
slowly lost ground to competitors like La Opala and Corelle. This happened because the firm
failed to scan the general environment for signs of change i.e. the social change. The
societal change underway was the change in the lifestyle of potential consumers. With more
and more numbers of women joining the workforce, the ladies were facing shortage of time
for their household chores. Therefore, to strike a balance between their professional,
personal and family lives, these modern working women were looking for the crockery that
was convenient to use, unbreakable, chip resistant and microwave safe. Hitkari failed to
notice this social change in the general business environment and had to face stiff
competition from companies likes La Opala and Corelle that introduced ceramic crockery
that could meet the emergent needs of the consumers (Exhibit 1). Therefore, it is important
that the organisations scan the general environment and identify factors that have the
ability to influence or fundamentally change the industry within which they compete.

Competitive Environment

The competitive environment refers to the dynamic system in which an organisation

competes and operates. This system is generally referred to as an industry or a strategic
group. Where, an industry is defined as a group of firms producing the same product or
products that are close substitutes, while, strategic groups are the sub-groups (small group
of firms) within an industry that have similar characteristics and compete on similar basis.
The competition between firms within a strategic group is greater than the companies that
fall outside the said strategic group. For example, all the companies manufacturing the cell
phones collectively represent the mobile industry. Whereas, the companies that
manufacture smartphones (Android as operating system) are termed as strategic group as
they compete on similar technological platform when compared with the rest of the firms
that manufacture first generation cell phones (Symbian as operating system). These groups
have very little in common and therefore, pay little attention to each other when planning
for competitive moves. But the companies that manufacture smartphones (Windows, iOS as
operating system), however, have a great deal of commonality with the manufactures of
smartphones (Android as operating system). Consequently, the firms within this group are
strong rivals. However, there may be many different characteristics on to which the
strategic groups can be distinguished from each other, i.e. product quality, geographical
coverage, service levels etc. Hence, the concept of strategic groups is helpful for the
organisations to know more about their direct rivals and the basis on which the competitive
rivalry is likely to take place within the groups. Therefore, it becomes imperative for the
organisation to have an in-depth understanding of industry’s competitive character as a part
of external analysis and to help them shape their future strategies.
Porter’s Five Forces Framework

The five forces framework is developed by Michael Porter and is the most widely used
analytical tool for assessing the competitive environment. The five forces analysis is
undertaken from the perspective of both an incumbent (already operating in industry)
organisation and a new entrant organisation. The intensity of competition within the
industry is of utmost concern for any organisation. This framework helps the organisations
to determine this intensity of rivalry by examining the interaction of five competitive forces.
It is therefore, the combined strength of these five forces that helps the organisation to
determine the industry attractiveness and eventually the profit potential within a given
industry. The five forces are (1) threat of new entrant, (2) bargaining power of buyers, (3)
bargaining power of suppliers, (4) threat of substitute products or services, (5) intensity of
rivalry among firms in an industry. Onto the evaluation of the strength of these forces, a
high force can be looked upon as a threat as it reduces profitability whereas, a low force
would mean an opportunity that allows a firm to earn more profits. Figure depicts Porter’s
five forces model of industry rivalry. A description of each of these five forces is discussed in
details in the following section.

Threat of New Entrants

Any industry that has the potential for growth and is perceived to be profitable tends to
attract new entrants. These new entrants are the firms that are interested in investment to
avail the oppurtunities that lies ahead within the industry. If new firms are able to come into
an industry, the existing firms have to either share ceratin portion of the growing sales with
a large number of competing firms or have to part off with some of it own market share.
Either way, the existing firms have to face declining sales volumes and revenue, ultimately
leading to fall in incumbents’ profits.

The possibility that a firm enters from outside into an industry basically dependent on two
factors. The first being the barriers to entry and second, being the expected retaliation
(strong reaction) from the existing firms. A high entry barrier implies that there would be
lesser likelihood for new firms to make an entry into the industry at the first instance or will
be abstained from establishing themselves before they may pose competition to the
existing firms. Therefore, the higher entry barriers keeps the prospective entrants at a
distance from an industry. Some of the possible entry barriers are:

1. Brand benefits: Buyers are often attached to established brands and to break through
these well placed brands becomes a challenge for the new comers. The new entrants have
to struggle and redefine their strategies so as to bring in a change in the mindset of the
consumers. For example, Johnson & Johnson (J&J) has ruled the market for last 60 years in
the babycare segment. Companies like Marico, Dabur, Wipro, Himalaya have tried their
hand at babycare, but with little success. This is primarily because as far as baby is
concerned, the mothers do not want to risk experimenting with new brands in the market.
They want products which are completely trusted and safe. J&J products have thus
established itself as a most trusted brand over the generations
2. Access to Distribution Channel: Most existing companies in FMCG and automobile
industry are found to have a strong distribution channel which is very difficult for a new
entrant to penetrate.

For example, Lay’s potato chips by Pepsico India have a well established distribution channel
that has made its products available to the consumers at an arm’s length. This has not only
posed a challenge to product like Bingo by ITC (a conglomerate) but has also refrained the
local players from establishing themselves in the industry. In the same way, Suzuki-Maruti in
the automobile industry has established a vast network of dealers and services centre
across the length and breadth of the country making it the most affordable car in India. Such
deeply entrenched distribution network act as a barrier to entry for the new entrants.

3. Government Policy: Government policies may also act as an entry barrier. The showcase
that how the 5/20 rule by the government has restrained the Indian aviation companies
from flying in international skies and making the new companies lose to the opportunity
before the existing airlines in aviation industry.

4. Switching Costs: Switching costs are a particularly important consideration. Switching

costs are the expenses (financial or psychological) that a customer incurs when he/she
switches from one seller’s product to another. In an industry where the switching cost is
high, it becomes difficult for a new entrant to establish or survive because the customers
are not readily willing to switch. These costs may be because of advance technology
adopted by the existing firm and the level of convenience that a customer experiences in
owning a particular product, or may be the strong brand association.
5. Product Differentiation: Corporation like 3M (Exhibit 6) that is known as the global
innovation company had differentiated its products in the marketplace and created high
entry barriers through its high levels of innovation. The people at 3M capture the spark of
new ideas and transform them into thousands of ingenious products and practical
applications that help make people’s lives better. 3M’s office business is home to some of
the world’s best-known brands like Post-it, Scotch etc.

6. Economies of Scale: The firms that operate at a larger scale tend to get benefits of lower
production cost because of economies of scale. Over the years, an already established firm
in an industry might have attained that scale of production but a new entrant normally
would have to start its operation from a smaller scale. This in turn leads to relatively higher
cost of production for the new firm and adversely affects its competitive position in the
industry.

7. Capital Requirement: High capital requirements may prevent the new entrants from
making investments in an industry. For example, developing telecom infrastructure in rural
India requires high capital investment as it involves greater logistical risks and also extend
the time taken to roll out telecom services. The lack of trained personnel in the rural area to
operate and maintain the cellular infrastructure, especially passive infrastructure such as
towers, is also seen as a hurdle for extending telecom services to the under penetrated rural
areas.

Bargaining Power of Supplier

Sourcing in any industry is amongst one of the most essential activities of a business.
Organizations have a large dependence on the suppliers and latter has the ability to
influence their profitability. The supplier’s decisions on prices, quality of products &
services, payment and delivery terms are the various factors that influences buyer’s profit
potential and in turn determines the profit trends of an industry. Therefore, in the following
given situations, a supplier or supplier group is said to be powerful:

1. Importance of the Supplier’s Product to Buyer: When the supplier’s products are an
important and integrate part of buyer’s manufacturing process and its product quality, the
bargaining power of suppliers will be high. Taking an example of automobile industry in
India, Sona Koyo Steering Systems Limited (Exhibit 7) is the largest manufacturer of steering
systems for the passenger car and utility vehicle market. Its customers largely include all
major vehicle manufacturers in India such as Maruti Suzuki, Toyota, Hyundai, Tata Motors,
Mahindra & Mahindra, General Motors and Mahindra-Renault. Steering being a specialist
component for the automobile industry and Sona Koyo being the manufacturer of high
quality precision steering, enables Sona Koyo to hold a high command as a supplier in the
industry.
2. Greater Concentration among Supplier: A highly concentrated industry is one which is
largely dominated by few large firms. Such few firms hold greater control to influence the
industry as the larger share of industry’s output vest in their hands. This gives the supplier
or supplier group greater power over those who do business with them. Petroleum industry
is one such suitable example.

3. Importance of the Buyer to Supplier Group: In case the purchasing industry buys only a
small portions of the supplier group’s product than the importance of the buyer to supplier
group will be less (for example: the tyre industry, the sales of bicycle tyres is relatively more
important as compared to automobile tyres).

4. Threat of Forward Integration by Suppliers: A situation where the suppliers are capable
of moving up the value chain and may think of doing a business that their buyers are already
into; puts the buyers in a disadvantageous situation. A recent example may be of Ranbaxy
Laboratories which has decided to move from manufacturing of bulk drugs & formulations
to retailing of drugs through its own chain of retail stores and Fortis Hospital pharmacies.

5. High Switching Cost for Buyers: In this case the costs to the buyer of switching supplier is
high because of suppliers’ advantageous position or by the nature of supplies itself.

Bargaining Power of Buyer

The buyer in an industry, individually or collectively is supposed to have a stronger

bargaining power when they can force a reduction in the prices of the supply or demand a
higher quality of product/service or is being able to seek more value for their purchase in
any way. On the other hand, a low buyer bargaining power enables the supplier to pass the
price increase to the buyer or make the buyer to accept products and services of low quality
at a higher price. The bargaining power of buyer is increased in following circumstances.

1. Standard or Undifferentiated Products: When there is no differentiation in the supplies

of products & services, the buyers pressurize the suppliers on price rather than the features
of the products knowing that they can always find alternative suppliers.

2. Greater Concentration in Buyer’s Industry and Buying Volumes are High: Where the
number of buyers is few and the volume of purchase of any buyer is high, the buyer’s
business gains more importance to that of suppliers. For example, the cash & carry format
retailers that enjoy aggregate demand, exert massive pressure on its suppliers’ margin.

3. Threat of Backward Integration by Buyers: A situation opposite to forward integration

which the suppliers attempt to do so as to have command over the buyers. Here, the buyers
in order to hold their position stronger in the market may integrate their business
backwards i.e. close to the source of raw material. This will mean that the buyers undertake
the activities of manufacturing or distribution for which they have been dependent on
suppliers till now. For example, a textile company may go in for backward integration by
having its own tread production.

4. Accurate Information of Suppliers’ Cost Structure: A customer who is more informed

about the suppliers’ cost structure is capable of negotiating with suppliers. Whenever such
customers notice a decline in the suppliers cost they too would negotiate a proportionate
decrease in the price. For example, in present times when the fuel prices are deregulated or
market linked, the customer expects the prices of public transportation too to fall
proportionately with any decline in the prices of crude oil in international markets.

5. Customer’s Price Sensitivity: The utilitarian customers are the one who seek value and
are generally price sensitive. In an industry where the purchases are largely dominated by
such customers, the buyers tend to gain advantage in its bargaining power.

Threat of Substitute Products

A firm is not only exposed to competition from within but also from outside industry
products. These products may be close substitutes of each other that apparently are
different but satisfy the same set of customer needs. For example: as per a market research,
it is estimated that parents buy baby care products for their babies till the time they are
nine and a half months old. After which, they tend to use their personal care products on
the children and this cross-usage of non-baby brands (substitute product) has restricted the
potential growth of products in baby care category.

Quoting another example of recent happening where the bread makers were charged of
allegation about the presence of carcinogenic chemicals in their products. The firm offering
the substitute product i.e. home appliance for making baked breads at home left no stone
unturned to avail this opportunity. It posed a serious threat to the bread manufacturers. The
Company, Glen, advertised its product (Exhibit 8) in the local newspaper (HT City,
Chandigarh edition, 04 June 2016) to boost its sales. Through this advertisement the
company offered the benefits (Fresh, Hygienic & Convenient) of baking the bread at home
to the customers making it more attractive over the packed bread sold in the market.

Competitive Rivalry

When the firms in the industry exhibit a high level of rivalry, the profitability of the industry
may be affected. Such rivalry may take the form of incumbents competing aggressively on
the basis of product/service price. In response to which price cuts are commonly assumed
by the rivals and ultimately lowering the profits for all the firms in an industry. The following
are the factors that affect competitive rivalry in an industry.

1. Competitive Structure: Competitive Structure refers to the size, number and diversity of
the competitors in an industry. The different types of competitive structures have different
implications for both incumbent and new firms. Where there are few competitors and all
are of similar size, there is likely to be intense competition as each rival fights for
dominance. On the other hand, where there are few large companies or just one company,
the intensity of competition many range from state of neglect to fierce. Like in telecom, the
firms have collaborated with each other to share the burden of huge investment by having a
common tower infrastructure. In such cases, firms may also adopt a policy that is mutually
beneficial to the firms in the industry. While, in some other industries there might be
prevalence of cut throat competition by ways of pricing, delivery, advertising, after-sales
service etc.

2. Industry Growth: When the industry growth is sluggish and shows no symptoms of
recovery, in those situations the intensity of rivalry within the industry may increase.

3. Exit Barrier: Exit barriers refer to economic, strategic and emotional factors that limit the
firms to exit from its business or industry even in times of low or negative returns. Economic
factors could be high investments committed to plant and machinery that has no alternative
usage, deterioration of demand conditions resulting to excess capacity, high fixed exit cost.
Strategic factors could be value chain integrations or the linkages of different businesses of
a firm, such as, a firm may have been its own buyer or supplier or its different businesses
may have been sharing the common pool of resources. While the emotional factors could
be the sentiments of the management attached to a business or their commitment towards
the employees or other stakeholders like distributor, supplier etc

Porter’s five force framework helps to identify and analyze the five competitive forces that
outlines an industry and explains why different industries are able to sustain different levels
of profitability. The overall attractiveness of the industry does not imply that every firm in
the industry will enjoy the same profitability. With the help of this model, the firms are able
to determine their strengths and on the other side try to overcome their weaknesses to
achieve a profit above the industry average.

Strategic Management
Strategic management

‘Strategic management is not a box of tricks or a bundle of techniques. It is analytical

thinking and commitment of resources to action.’ – Peter Drucker

The primary task of management is to make decisions and take action upon that decision.
This task determines the excellence, survival and existence of an enterprise. Simply this
process is known as strategic management. The job of strategic management is to make the
best use to a firm’s resources in a changing environment. To a large extent, the success,
failure or stability of a firm depends in strategic management.
Today all types of organizations are running in continuous changing situations on the one
hand, while various internal pressure and environmental pressure have made it imperative
for a manager to think and act strategically. It is related with making long range decision
relating to an organization and its environment.

Globalization and privatization have also increased the importance of strategic management
which stress managing the organization’ relationship with its environment as a means to
achieve mission accomplishment. Examples of world famous multinational corporation like
IBM, General Motors, Zerox,

Mazda are before us who are continue not only in existence but also in a good competitive
position for last three decades due to the use of strategic management.

Meaning of strategic Management

In simple words, strategic management is a process of relating the organization with

environment through strategy formulation and implementation. This emphasis that there is
continuous interaction between and its environment and have open system approach.
Strategic management is concerned with making decision that relate the organization to its
environment, setting long-term goals, and allocating resources to achieve these goals. It is
always concerned with the long-term welfare of the organization and what is the
organization must adopt for changing needs. Anderson has explained three major
components of strategic management.

The first component involves analysis of the external environment. Modern managers are
highly concerned with rate of change in what is referred to as task environment or that
portion of the environment with which the managers should interact on a regular basis. The
second component is strategy. Strategy is the statement of objectives and plans for the
entire organization. Strategy determines the purpose of the organization and keeps
concerned with such issues as organizational strengths and weaknesses, competitors’
analysis, value of top managers, and what strategies the organization has applied in the
past. Organizational design, the third component of strategic management, matches the
strategic goals and purpose of the organization with the people who will do the work and
the way they are organized to do it.

Anderson opines that strategic management is usually considered the domain of top
management only, but the concept of strategic management are increasingly being applied
to lower management levels such as divisions, departments and even small work groups.

Strategic Management: Merits and Demerits

The strategic management has been getting wide acceptance in business world since 1980.
In the beginning, it has been accepted by executive of developed nations, but today most of
the multinationals and large corporations have adopted it. Now executives and managers
assume that strategic management is the only approach on which success or failure of a
corporation depends to a large extent. Globalization, liberalization and privatization have
made strategic management more popular and important. Some of the important benefits
of strategic management are as follows:

1. Strategic management allows a firm/s top executive to anticipate change and provides
direction and control for the enterprise.

2. It allows the firm to innovate in time to take advantage of new opportunities in the
environment and reduce the risk because the future is anticipated.

3. It helps ensure full exploitation of opportunities.

4. It provides clear objective and direction for employees.

5. This is conducive to greater harmony and goal congruence.

6. If focuses on problems of the whole enterprise, not just functional problems in marketing
or finance areas.

7. It enables management to improve the chances of making decisions which will stand the
test of time, and revising the strategy on the basic of monitoring the progress of various
functions.

8. It also helps in building strategic knowledge of management and develops the attitudes
necessary to be a successful generalist.

9. The conditions of most business are changing so fast. Besides, these changes have
increased dramatically in last three decades. Strategic management is only the way to
anticipate future problems and opportunities. In fact, growth, existence and survival of an
organization depend on strategic management to a large extent in fat changing situations. It
is only the way by which management may be able to make the best uses of a firm’s
resources in a changing environment.