Chapter 2

Business Environment
Definition of Environment:
The environment can be described as everything which is beyond the organizational boundary.

Elements of Environment:

 Though environmental factors are not in control of management but these need to
be managed strategically as they are influential to all areas of the business.
 Therefore, it’s important to understand different elements of the environment in order
to run the organization effectively.
 Generally, environment includes Political /legal, economic, social/cultural and
technological factors of the country organization operates in. Here is a detailed
diagram depicting elements.
Models:

There are three models which can be used to assess the environment for an organization:

1. PESTEL Analysis
2. This is usually related to macro-economic factors
1. The Value Chain Analysis
2. Porter’s Five Forces

PESTEL Analysis:
Political:
 Government policy has an impact on the legal system, the structure of the economy,
and some operational concerns.
 Political instability is a risk as long-term objectives for firms cannot be realized.
 Different approaches to the political climate are used in various nations.
 Extra layer of international law and regulations is applicable to international trade.
The Economic Impact of Government:

The economic structure of a business can be directly influenced by the government in several
ways, according to Porter. They are explained below:

 Capacity:
Government policies may encourage businesses to expand. (e.g., using taxation or interest
rates) Therefore there are various incentives for locating capacity in a specific area.

 Demand:
 The government is a significant consumer, and it has the power to influence demand
through laws, tax breaks, and subsidies.
 Emerging Industries:
 Government can either foster it or harm it.
 Government policy can deter businesses from joining a market by restricting
investment or competition or by making it more difficult for foreign businesses to
compete in the domestic market using quotas and tariffs
 Competition:
 The government's purchase decisions will have a significant impact on the
competitive power of one firm (such as weaponry) compared to another.
 Industry regulations and restrictions, such as minimum product quality standards,
will have an impact on industry growth and profitability.
 Because it provides infrastructure (e.g., highways), the government is also able to
affect industrial competition.
 Governments and supranational organizations like the EU may enact regulations to
maintain an industry's fragmentation and prevent the concentration of a sizable
portion of the market in the hands of one or two companies.
Regulations

Some industries are regulated by government for the adoption of new products like
pharmaceutical:

National and supranational (e.g.WTO) bodies also affect the operating activities of some
organizations, for example:

 Anti-discrimination legislation
 Health and safety legislation
 Products safety and standardization
 Workers’ rights (e.g., unfair dismissal)
 Training and education policies
Social and Demographic Factors

Population and Labor Market: Population affects an organization’s supply of labor and hence
its policies towards recruiting and managing human resources.

 Population growth boosts employment

 Increasing birth rates imply more young individuals.
 Falling mortality rates mean more senior people—some of whom will work.
 Workforce ageing:
  Fewer young individuals may increase their cost. Since the late 1970s, 16-year-
olds joining the workforce have declined.
 Women participate more for four reasons.
 More part-time jobs
 Rising male unemployment since many male-dominated businesses have fallen
 The service sector's expansion
 Women having children later
 How corporations can handle demographic and educational trends
 Determine the organization's labor market (young, part-time). "Who should we hire?"
 Find the company's catchment areas (possible recruits).
 Determine catchment area labor force supply side trends (e.g., how many school
leavers? What is the local population growth/decline?).
 Examine local education trends.
 Determine whether other businesses want your skills (e.g., if there are several
electronics companies in the area, they'll want someone with similar skills).
 Determine if other suppliers can meet some of your need.
 To meet labor demand, organizations need proper resourcing methods.
 Family lifecycle
 Marketing uses family life cycle (FLC) demography.
 Demographic summary: It combines age, marital status, professional status
(income), and kid status to identify household phases. It's obvious that certain items
and services can be marketed to certain life stages.
Social Class:

Society can be divided into broad groups, whose members share common features, such as
occupation, income level and education background. These groups are known as social classes

Demographics and Class Structure can Influence and Inhibit Conduct.

 Behavioral determinants boost purchases: They include personality, culture,

socioeconomic class, and the purchase's relevance (e.g., food or water or a luxury).
 Inhibitors (such poor income) make people less likely to buy.

Impact of Technology on Organizations and

Accountant
Information systems and technology shaped modern business. Modern communications
technology allows dispersed organizations to empower workers or outsource decision-making.

Smaller, agile firms are trending. Flexibility and quickness are becoming competitive
advantages. IT has sped up complex operations and provided instant feedback.

Span of Control

It is the number of subordinates under a supervisor.

Automation, rationalization, and better management information systems often reduce staffing.
Many companies have eliminated middle management known as 'Delayering'. Middle managers'
choices have been delegated to lower-level managers. Thus, IT has flattened organizational
structures and expanded control.

There is not universally 'correct' size for the span of control. The appropriate span of control will
depend on:

 The ability of the manager. A good organizer and communicator will be able to
control a larger number. The manager's workload is also relevant.
 The ability of subordinates. The more experienced, able, trustworthy and well-trained
subordinates are, the easier it is to control larger numbers.
 The nature of the task. It is easier for a supervisor to control a large number of
people if they are all doing routine, repetitive or similar tasks.
 The geographical dispersal of subordinates. A manager may be able to manage a
larger group (wider span of control) more easily if subordinates are located together,
for example in the same building as the manager.
 The availability of good quality information. Relevant, timely information reduces
uncertainty and
Tall and Flat Organizations

An information system, such as an intranet, can help provide organization unity and coherency
in flat, decentralized organizations.

The trend towards flatter structures is evidenced by talk of an 'e-lance economy', characterized
by shifting coalitions of small firms collaborating on projects.

Organization Structure and Information Systems

The structure of an organization and the way in which the organization’s information system is
arranged are related issues.

 Centralized systems mean holding and processing data in a central place, such as
a computer center at head office. Data will be collected at 'remote' (i.e.,
geographically separate) offices and other locations and sent into the central
location.
 Decentralized systems have the data/information processing carried out at several
different locations, away from the 'center' or 'head office'.
Effects of technological advances on the role of the accountant and on organizations

 Routine processing (bigger volumes, greater speed, greater accuracy)

 Digital information and record keeping.
 New skills required and new ways of working.
 Reliance on IT
 New methods of communication and of providing customer service
 Interoperability (encourages collaboration across organization boundaries) and open
systems
 The view of information as a valuable resource
 The view of information as a commodity which can be bought, sold or exchanged
('information market')
IT and Employment

 Information technology has changed employer-employee interactions.

 Reduced hierarchy
 Information overload; job; close business contacts regardless of location
 Workplace flexibility
 More monitoring and control
 Delayering has coincided with mass layoffs of management and workers.
 Homework and supervision
 Communications technology has made some tasks less dependent on office
presence. Computer tasks especially.
 The worker can enter data at home.
 Head office can get keyed-in data via telecommunications.
 When needed, some organizations use a pool of freelancers. Publishing and
journalism use this method.
If it includes IT, this is called telecommuting or homeworking. The practice isn't new, but office
management is.

Outsourcing

Outsourcing is hiring a third party to perform certain tasks. Various outsourcing alternatives
allow for 'in-house' control. Outsourcing has pros and cons.
There are four broad classifications of outsourcing

1. Ad hoc The organization has a short-term requirement for increased IS/IT skills
2. Project management the development and installation of a particular IS/IT project is
outsourced
3. Partial Some IT/IS services are outsourced.
4. Total An external supplier provides most an organization’s IS/IT services.
Outsourcing Benefits

 Long-term outsourcing contracts with fixed prices can eliminate cost unpredictability.
FM companies pay for inefficient computing services. This encourages the third
party to deliver quality service.
 Ten-year contracts encourage planning.
 Outsourcing offers economies of scale. FM companies may study innovative
technologies that benefit several clients.
 Specialized organizations retain skills and expertise. Many companies lack a well-
developed IT department to give IT personnel job advancement. Talented
employees left for other jobs.
 You learn new things. An expert company can share workers with multiple clients.
This allows the outsourcing company to capitalize on new advancements without
hiring or retraining personnel.
 Flexibility (contract-allowing). Demand can scale resources. For instance, IT staff
may double during a significant system changeover. An outsourcing company can
organize its work by project, and some personnel will expect to be relocated
between projects.
Outsourcing Drawbacks

 Information and its provision are integral to business and management. IT services
may not be outsourced like office cleaning or catering. Information drives
management.
 Outsiders handling a company's confidential information may be harmful
commercially and legally.
 Internal management does not need to stay current or provide new ideas if a third
company handles IS/IT services. Thus, competitive advantage may be neglected.
Third-party innovations may be offered to competitors.
 An unsatisfactory contract may bind an organization. The choice may be irreversible.
If the service provider provides poor service, the business may have to rebuild its
computing function or switch providers, which could be costly.
 An outside organization does not raise awareness of IS/IT expenses and
advantages within the organization. Managers who can't manage in-house IS/IT
resources may struggle to manage outsourced resources.

The Value Chain

This model was provided to us by Porter in 1985 grouping out organization’s various activities
into a value chain.

 Margin: This is the amount which the customer is ready to pay over and above the
business costs. Thus, value activities and linkage management create value.
Note

This is the amount which the customer is ready to pay over and above the business costs.
Thus, value activities and linkage management create value.
Linkages connect the activities of the value chain.

1. Activities in the value chain affect one another. For example, more costly product
design or better-quality production might reduce the need for after-sales service.
2. Linkages require co-ordination. For example, Just in Time requires smooth
functioning of operations, outbound logistics and service activities such as
installation.

Value Network

Value-added activities and links extend outside the organization. The cook chooses the
ingredients, but the farmer determines their quality. The chef's skills and the grower's success in
raising high-quality fruit are equally crucial to consumer happiness.

A value network connects an organization's value chain to its suppliers, distributors, and
customers, according to Johnson et al. (2005).
Value networks create value through transactions between organizations. Exchanges might
involve items and information like collaborative design.

Competitive Advantage – Porter’s Five

Forces Model
Porter (1980) categorizes competition elements.

 Some circumstances make one industry (e.g., the chemicals industry compared to
the apparel retail industry) possibly more profitable (i.e., a higher return on
investment).
 Industry factors influence enterprises' competitive strategies.
Five competing forces define the industry's profit potential (long-term return on capital).
The Threat of New Entrants (and barriers to entry to keep them out)

Newcomers increase capacity and competition. This hazard will vary by industry and relies on
two factors.

 Strength of entry barriers. Barriers deter newcomers.

 Existing competitors' reaction to the newcomer.
The Threat from Substitute Products

A substitute product is one from another industry that meets customer needs.

The Bargaining Power of Customers

Customers desire cheaper, higher-quality goods and services. This desire may reduce industrial
suppliers' profits. Customers' strength depends on several factors:

 The customer's purchase volume and product importance to their firm

 Switching supplier costs
 Whether the products are standard (easily replicated) or specialized.
 A low-profit customer will demand cheap prices from suppliers.
 Customers' ability to replace suppliers
 Buying staff skills or consumer price awareness
 Customers that value product quality are less price-sensitive, making the industry
more profitable.
The Bargaining Power of Suppliers
Suppliers might raise pricing. Suppliers might raise prices for several reasons.

 Whether there are one or two industry leaders who can charge monopoly or
oligopoly prices.
 The supplier's industry's vulnerability to newcomers or substitutes
 Whether the suppliers have non-industry customers and do not rely on the industry
for most of their sales.
 The supplier's product's importance to the customer's business, whether it offers a
differentiated offering buyers need, and whether customers' switching costs would
be considerable.
The Rivalry amongst Current Competitors in the Industry

Industry profitability depends on competitive rivalry. Price competition, advertising wars, sales
promotion campaigns, new product launches, improved after-sales service, and guarantees or
warranties are examples of competitive actions. Competition can increase demand and grow
the market, or it can maintain demand and lower profits unless competitors drop costs.

SWOT Analysis
A method of environmental analysis which looks at an organization’s internal strengths and
weaknesses as well as external opportunities and threats is known as SWOT analysis.

Internal Appraisal

An internal appraisal will identify:

The strengths and weaknesses analysis are meant to shape the organization’s approach to the
external world.

External Appraisal
The external appraisal identifies opportunities that can be exploited by the organization’s
strengths and to anticipate environmental threats against which the company must protect
itself.

Using a SWOT Analysis

The SWOT analysis can be used in one of two ways.

 The organization can develop resource-based strategies which enable the

organization to extend the use of its strengths. This is common in retailing, for
example, as supermarket chains extend their own brands from food to other areas.
 The business can develop positioning-based strategies. In other words, identifying
what opportunities are available and what the firm must do exploit them.