Environmental Factors - Study Notes

19.01 Meaning and definition of business environment

• Business environment is the sum total of all factors, internal and external, which have an impact on the functioning of a business.
• Bayard O Wheeler: "the total of all things external to firms and industries which affect their organisation and operations".
• The environment is dynamic, so strategic decisions are taken only after scanning it through a SWOT analysis. The controllable internal environment gives strengths and weaknesses; the uncontrollable external environment relates to opportunities and threats.

Significance

1. Formulating strategy and future planning: environment data are used to devise strategies and plan development.
2. Identifying opportunities: in the 80's Dr. Reddy saw the need for quality healthcare and started Apollo Hospitals, a pioneer in corporate hospital care.
3. Environment scanning: helps firms identify threats and take measures to overcome them.
4. Business aids: systematic monitoring helps a business cope with rapid change.
5. Public image: responding quickly to people's needs, for example home delivery by Aditya Birla's "More" stores.

Fuji Films, with a global presence for over 50 years, was affected by the advent of digital cameras.

19.02 Types of business environment

19.02.01 Internal environment factors

1. Value system: values of the founder percolate through the organisation; suppliers and distributors value strong ethical culture.
2. Vision and objectives: guide operations and strategic decisions, e.g. "Amul the taste of India" of GCMMF.
3. Management structure and nature: the board is the highest decision making authority; its composition and professionalism are critical.
4. Internal power relations: relations among board members, with the CEO, and support from employees and shareholders.
5. Human resources: quality, skill, attitude and commitment of manpower.
6. Company image: helps in launching products, choosing dealers, forging alliances, entering markets and raising finance.
7. Other factors: R&D, financial position and capital structure, marketing network, physical resources.

TATA Steel and WIPRO have been named among the world's most ethical companies.

19.02.02 External environment

Subdivided into the micro or task environment and the macro or general environment.

19.02.03 Micro environment

19.02.04 Macro environment (uncontrollable)

1. Economic: stage of development (developed: USA, Japan, Germany, Canada, Australia; developing: India, China, Brazil, Mexico; under developed), economic system (capitalistic, socialistic, mixed), economic policies (monetary, fiscal, export-import, industrial, trade, foreign exchange), indices (GDP, GNP, national income, per capita income, balance of payments), financial markets and economic structure.
2. Socio-cultural: social institutions, family structure, marriage, caste system, customs and beliefs, demographic factors, lifestyle and tastes.
3. Political and legal: legislative, executive and judiciary; political stability (election system, law and order, President's rule, civil war), political organisation, image of the leader, legal framework, constitution, foreign policy on tariffs and free trade.
4. Geo-physical: natural resources, weather and climate, terrain, ecological factors (plastic bag ban by the Ooty corporation), location (cotton textiles in Coimbatore), natural harbours and ports.
5. Technological: IT and telecom created a global market; level of technology, rate of change, technology of competitors, obsolescence.
6. Global: differences in language and culture, currencies, norms, tastes, import-export tax structure and adoption of technology.

19.03 VUCA

Volatility, uncertainty, complexity and ambiguity; developed in the late 80's by the U.S. military. Firms must plan, anticipate change and stay adaptable.

19.04 Corporate governance

• A set of rules and policies which governs a company; the board of directors plays a key role.
• Committees: Kumara Mangalam Birla 2000, Narayana Murthy 2003, Adi Godrej 2008, presently Uday Kotak. Norms are in the Companies Act 2013 and SEBI listing regulations.
• Listed companies: at least one third independent directors, at least one independent woman director, disclosure of related party deals and managerial pay, CEO and CFO sign-off on compliance.

19.05 GST

• Indirect, comprehensive, multi-stage, destination-based tax on every value addition.
• CGST: Central Government, intra-state sale. SGST: State Government, intra-state sale. IGST: Central Government, inter-state sale.
• The GST Council is a constitutional body chaired by the Union Finance Minister; it recommends taxes to be subsumed, exemptions, model laws, threshold limits, rates and special provisions (article 269A).

Case studies

Tata's five core values: Integrity, Excellence, Unity, Responsibility, Pioneering. Dr. Verghese Kurien: pioneer of the White revolution (Amul). Apollo's vision: "Touch a Billion Lives". TVS group: began as a rural transport service in 1911 in Tamil Nadu.