BBA 302; BANKING AND BUSINESS ENVIRONMENT

UNIT:1
Introduction
Understanding the environment within which the business has to operate is very
important for running a business unit successfully at any place. Because, the
environmental factors influence almost every aspect of business, be it its nature, its
location, the prices of products, the distribution system, or the personnel policies.
Hence it is important to learn about the various components of the business
environment, which consists of the economic aspect, the socio-cultural aspects, the
political framework, the legal aspects and the technological aspects etc.
The concept of business environment as per the business dictionary it is defined as
“The combination of internal and external factors that influence a company’s
operating situation. The business environment can include factors such as: clients and
suppliers; its competition and owners; improvement in technology; laws and
government activities; and market, social and economic trends.”
The success of every business depends on adapting itself to the environment within
which it operates. For example, when there is a change in the government policies,
the business has to make the necessary changes to adapt it to the new policies.
Similarly, a change in the technology may render the existing products obsolete, as we
have seen that the introduction of computer has replaced the typewriters; the color
television has made the black and white television out of fashion. Again, a change in
the fashion or customers’ taste may shift the demand in the market for a particular
product, e.g., the demand for jeans reduced the sale of other traditional wear. All
these aspects are external factors that are beyond the control of the business. So, the
business units must have to adapt themselves to these changes in order to survive and
succeed in business. Hence, it is very necessary to have a clear understanding of the
concept of business environment and the nature of its various components.
The success of a business lies in its alertness to adapt changes occurring in the
environment.
Some definitions of Business Environment
According to M. Weimer, “Business Environment encompasses the climate or set of
conditions, economic, social, political or institutional in which business operations are
conducted.”
According to Bayard O. Wheeler, “Business Environment is the total of all things
external to business firms and industries which affect their organization and
operations.”
In the words of Paire and Anderson, “Business environment is the sum of those inputs
to an organization which are under the control of other organizations or interest
groups or are influenced by the interaction of several groups, such as the economy.”
Nature of Business Environment
 Environment is complex- Business environment consist of a number of factors,
events and influences arising from different sources. All these factors no way
exist in isolation but continuously interact with each other to create entirely
new sets of influence. It is very difficult to comprehend at once that what all
factors constitute a given environment. Overall, there is a general conclusion
that environment is a complex phenomenon relatively easier to understand in
parts but difficult to grasp in its totality.
 Dynamic- Business environment is constantly changing in nature. Due to many
influences, there is dynamism in environment, causing it to change its shape
and character continuously. The changes in business environment are
unpredictable. It is very difficult to predict the exact nature of future happenings
and the changes in economic and social environment.
 Environment is multi-faceted- Shape and character of every environment
depends upon the perception of the observer. A particular change in the
environment, or a new development going to be viewed differently by different
observers. This is seen frequently when the same development seen as
opportunity by one company and threat by another company.
 Far reaching impact- Environment has very far-reaching impact on business
environment. Growth, success and profitability of every organization depend
upon the environment in which it exists. A minor environmental change may
impact organization in several different ways.
 Environment is wider- Environment is very much wider in nature. It covers all
factors and forces like customers, competitors, suppliers, government, and the
social, cultural, political, technological and legal conditions.
 Influenced by place- Business Environment differs from place to place, region
to region and country to country. Such as political conditions in India differ from
those in Pakistan or taste and values cherished by people in India and China vary
considerably.
Importance of Business Environment
There is a close and continuous interaction between the business and its environment.
This interaction helps in strengthening the business firm and using its resources more
effectively. Business environment is multifaceted, complex, and dynamic in nature and
has a far-reaching impact on the survival and growth of the business. To be more
specific, proper understanding of the social, political, legal and economic environment
helps the business in the following ways:
(a) Determining Opportunities and Threats: The interaction between the business
and its environment would identify opportunities for and threats to the business. It
helps the business enterprises for meeting the challenges successfully. Analyzing of
the environment over the period of the time help multinational companies to gain
over the coming opportunities and get prepare to face threats
(b) Giving Direction for Growth: The interaction with the environment leads to
opening up new frontiers of growth for the business firms. It enables the business to
identify the areas for growth and expansion of their activities.
(c) Continuous Learning: Environmental analysis makes the task of managers easier
in dealing with business challenges. The managers are motivated to continuously
update their knowledge, understanding and skills to meet the predicted changes in
realm of business.
(d) Image Building: Environmental understanding helps the business organizations in
improving their image by showing their sensitivity to the environment within which
they are working. For example, in view of the shortage of power, many companies
have set up Captive Power Plants (CPP) in their factories to meet their own
requirement of power.
(e) Meeting Competition: It helps the firms to analyses the competitors’ strategies
and formulate their own strategies accordingly.
(f) Identifying Firm’s Strength and Weakness: Business environment helps to identify
the individual strengths and weaknesses in view of the technological and global
developments.
Elements of Environment

There are two set of factors – Internal and external that influences business. Internal
environment refers to internal factors that outline the strength and weaknesses of an
organization in relation to its external environment. It includes all the factors over
which organization has a considerable degree of control such as human resources,
organization culture, organization structure, location, company’s image etc.
Internal environment represents the world inside of an organization. Internal factors
are controllable factors and organization can alter, modify, introduce or phase out
such factors as per requirement of the environment.
The following components comprise the internal environment of the business firm.
 Organization culture: Organization culture is widely acknowledged component
of the internal environment of the business. The culture of an organization
refers to values, style and learned ways that shape the collective behavior of
humans within an organization. Employees performing work in business
enterprises hold some value system that influences their working languages,
ethical standards, working style and mutual interaction. A healthy culture
shared by all within organization promotes mutual cooperation and provides
satisfaction among all employees acts as a great internal strength of the
business firm.
 Vision, mission, and objectives: Vision, mission and objectives of a company
provide a roadmap that guides its philosophies, priorities, policies.
For instance, Wal-Mart stores Vision is “To become the worldwide leader in
retailing” and Mission is “To help people save money so they can live better”.
 Top management structure: Top management supports the growth of the
organization. The composition of the board of directors and the extent of
professionalism of management greatly affects the success and failure of an
organization for achieving its vision, mission, and objectives. The quality,
attitude and behavior of highest decision-making authority is a critical factor for
the development of the company. Shareholding pattern split among promoter,
promoter group and public could have important implication for business.
 Experienced top management facilitates quick decision making that acts as
internal strength of an organization.
 Human resources: Workforce is an entitled as greatest asset of an organization
as it plays an important role in both strategy implementation and management
system. A committed and talented workforce with leadership skills ensures the
success of the business. Business leaders need to attract, develop and retain the
best people necessary to seize elusive opportunities, for reducing cost and
optimize performance.
 Company’s image: Company’s image is more than its colorful logos, artistic
designs, and creative website etc. The image perceives by the mind of
customers conveys lot that influences its sales and profitability. Launching new
products, attracting potential customers, restraining competitive attacks,
raising finance, forming joint ventures greatly depends on upon company’s
image. Brand equity can prove the greatest strength of the company in the form
of brand loyalty or repeated sales.
 Miscellaneous factors: Miscellaneous factors that highly affect decision-making
capabilities of business include-
i) Natural resources: Adequate access to natural resources such as water,
wood, iron, coal, mineral deposits etc. considered valuable available for
commercial disposal.
ii) Financial resources: Money available in the form of cash and securities
held by an organization is a prominent criterion to determine its real
internal strength. Financial resources determine company’s size and
capacity to expand its operations as against competitors.
iii) Physical resources: Physical resources include production facilities
mainly machinery, IT equipment, vehicles and distribution networks,
physical infrastructure etc. available to an organization needed for
smooth running of business.
iv) Research & development capabilities: Investment in research &
development activities ensures company’s ability to innovate new
products for meeting diverse customer expectations.
Others factors such as the location of business, patents & trade secrets,
operational capabilities &structure forms part of the business internal
environment that influence the functioning of business.
External environment
External environment connotes that fall outside the organization boundaries and
beyond the control of the business enterprise. The external environment forces are
an extensive and multidimensional phenomenon. It represents the world outside the
business which has a direct bearing on the functioning of business. External factors
are uncontrollable factors that can offer opportunities as well as pose threats to the
business.
“The environment of business consists of all those external things to which it is exposed
and by which it may be influenced directly or indirectly.”
- Reinche and schoell
“In environment, there are external factors, which constantly bring opportunities and
threats to the business firm. It includes social, economic, technological and political
conditions.”
- William Glueck and Jauck

Firms are expected to monitor changes in the external environment which are
uncertain needed for well-being of business concern. All factors comprise external
environment may not relevant for particular business. Firms need to focus on such
forces that affect its decision-making capabilities. The external business environment
is classified into the micro and macro environment.
Micro Environment
“The micro environment consists of factors in the company’s immediate environment
which affects the performance of business unit. These include suppliers, marketing
intermediaries, competitors, customers and the public.”
- Philip Kotler
“The micro environment of a company consists of elements that directly affect the
company such as competitors, customers and suppliers.”
- Hill and Jones
Micro Environment of business discussed as follows-
 Customers: The survival of business solely depends on the satisfied customers.
In today competitive environment attracting and retaining customer has
become more challenging. In order to satisfy the different needs, tastes and
likings of customers business spend heavily on consumer research, product
designing & advertising and after sales services. For a business depending upon
a single customer can prove risky. Different categories of customers include
  Individuals & households
 Industries & other commercial establishments
 Government & other institutions.
Choice of the customer should be done by considering relative profitability,
dependability, the stability of demand, growth prospects, the extent of
competition etc. In the present scenario, with the concept of market
segmentation business houses delivering products to customers for satisfying
their needs. The segmentation of consumer market can be done on the basis of
 Income level of customer
 Demographic factors mainly age, gender, occupation etc.
 Geographical area
 Personality, lifestyle and attitude of the customer.
In a competitive market, where choices to customers are abundant and have
more power to control market big MNCs are also striving for retaining foreign
customers.
 Suppliers: Suppliers are those who supply inputs and components in the form
of raw material, labor and capital to the company for the production process.
Suppliers provide the resources needed by the company such as labor, material,
storage and credit facility. For smooth functioning of the business
source/sources of supply should be reliable. A reliable source of supply ensures
quality input material, less ordering and carrying cost, minimum buffer stock
that further reduce its cost of carriage and insurance charges. Depend on a
single source of supply can prove risky for a business during the strike and
lockout situation. The wrong choice of supplier can cause the company to lose
cost advantage benefit as well as loss of trust among customer as it happened
in ‘Toyota’.
During 2009-11, Toyota had to recall nearly 10 million vehicles all around
Europe as the accelerators were not working properly. It was because the
suppliers had supplied faulty mechanical accelerators. Due to faulty
accelerators, there were many accidents out of which nearly 89 were fatal and
ended in death. Out of 10 million cars nearly 7 million were Toyota Camry and
Corolla. Toyota repaired all these cars and sent them back to their owners, but
they lost the trust of the customers. Business houses need to choose best
suppliers that should supply quality inputs with the reliable delivery system at
low cost. Ultimately supply of quality inputs determines the finished product
quality.
 Competitors: Business gets affected by action and reaction of competitors.
Healthy competition between rival firms drives innovation that expands its
 product range in order to build a better relationship with customers. The rivalry
among firms such as coke vs. Pepsi is for capturing maximum market share
which is producing and delivering similar products. In today’s globalized world
domestic firms are also facing cut- throat competition from big MNCs serving
the customers with wide variety of products. Most popular type of competition
is ‘brand competition’ where national and international brands are striving for
winning same customer base. For buying Android phones the brand Nokia,
Samsung, Micromax, HTC, Gionee, Lava, Sony, Nexus, Apple, ZTE, Huawei, TCL,
Lenovo etc. is available for customer choice. Competitors’ analysis is crucial for
business in order to –
 Identifying its own weaknesses as against competitors
 Identifying weaknesses of its competitors
 Formulating strategies to combat competition.
The competitive environment ensures availability of desired products to the
consumer at affordable prices.
 Market intermediaries: For a business it is difficult to make products available
to each and every segment of customer. An intermediate agency that connects
the company and final consumer are crucial for promotion, selling and
distribution of goods. Market intermediaries include agent, brokers,
wholesalers, retailers and distribution companies that help the business house
to make products available to existing customers as well as finding new
customers. The reliable channel of distribution provides timely feedback of
customer about products which is essential for strategic policy formulation.
Apart from the promotion of company’s products, market intermediaries also
provide feedback regarding unfulfilled demands of customers and untapped
market by a business unit which can become the source of innovation and new
product developments.
 Public: In the words of Philip Kotler, “a public is any group that has an actual or
potential interest in or impact on a company’s ability to achieve its objectives”.
The environmentalists, consumer protection groups, media, local people,
student unions, religious groups etc. can affect the working of the business. The
firm has a primary duty to satisfy the general public at large along with
customers. Creating positive image among the public has a long-term impact on
the company well-being. Survival and overall success of business depend on
how society perceived their activities. Good public relation helps to get a
favorable response related to a company whereas adverse situation can pose a
threat to the business. For instance, an advertisement for a skin whitening
product in Thailand has drawn criticism on social media claiming in ad “you need
 to be white to win” runs with the tagline. Suggesting people with dark skin are
losers is definitely racist. Yulihan Group (Thai Co.) apologized for this
controversy.

Macro Environment
It is also known as General / Remote environment.
“Macro environment includes forces that create opportunities and pose threats
to the business units. It includes economic, demographic, natural, technological,
political and cultural environments.”
- Philip Kotler
“The macro environment consists of the broader economic, social, political,
legal, demographic and technological setting with in which the industry and the
business units are placed.”
- Hill and Jones

Important macro environment factors include economic environment, political and

regulatory environment, social/cultural environment, demographic environment,
technological environment. These factors are discussed as follows:
 Economic environment - The survival and success of each and every business
enterprise depend fully on its economic environment. It refers to all factors
related to the areas of production, distribution, income and wealth have a
bearing on the function of business. The main factors that affect the economic
environment are:
(a) Economic Conditions: The economic conditions of a nation refer to a set of
economic factors that have great influence on business organizations and their
operations.
Aspects of economic conditions
GDP, GNP, Balance of Trade, Balance of Payment, Inflation, Poverty, Savings &
Investment, International Debt, Per Capita Income, Foreign exchange reserve,
foreign trade, Capital market etc.
(b) Economic Policies: All business activities and operations are directly influenced by
the economic policies framed by the government from time to time.
Aspects of economic policies
Industrial policy, Fiscal policy, Monetary policy, foreign investment policy, Export –
Import policy (Exim policy).
The government keeps on changing these policies from time to time in view of the
developments taking place in the economic scenario, political expediency, and the
changing requirement. Every business firm has to function strictly within the policy
framework and respond to the changes therein.
(c) Economic System: The world economy is primarily governed by three types of
economic systems, viz.,
(i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy.
India has adopted the mixed economy system which implies co-existence of public
sector and private sector. Economic environment may put constraints and may offer
opportunities to business. For instance, with the easing of investment caps and
controls, India’s high-value industrial sectors – defense, construction, and railways –
are now open to global participation.
 Social and cultural environment- Social environment consists of customs and
traditions of a society in which business exists. Culture refers to knowledge,
beliefs, art, morale, law, customs, habits and capabilities of individuals acquired
from society. The social-cultural environment of a nation determines the value
system of the society which, in turns affects the functioning of business.
Strategies of business should be appropriate in the social- cultural
environment. For e.g., Nestle brews a very large variety of instant coffee to
satisfy different nation’s tastes. As far as culture is concerned, beef
consumption is regarded as forbidden in countries like India, China, and
 Thailand etc. Perception about color also varies from country to country like
Green favorite in the Muslim world but represents illness in Malaysia.
Aspects of social and cultural environment
Social Customs & traditions, Values & Beliefs, Ethical standards, Work Ethics,
Language, Conflict & cohesiveness, Quality of life, Birth & Death, Education/
literacy level, Consumption habits, Family structure, Human relationship etc.
 Political environment- It constitutes all the factors related to government
affairs such as the type of government in power, the attitude of government
towards different groups of societies, policy changes etc. It has an immediate
and great impact on business transactions so businessmen must scan their
environment very carefully so as to make changes accordingly.
The political environment has a close relationship with the economic system.
Important economic policies such as industrial policy, policy toward foreign
capital & technology, fiscal policy, and foreign trade policy are often political
decisions. For e.g., India improved its position from last year’s 134 to 130 in the
World Bank Doing Business 2016 ranking. The rise in the 2016 ranking was
primarily on account of improvement in two areas - ease of starting a business
and securing an electricity connection. World Bank official lauds efforts of Modi
Government as it took four months in 2005 to start a business in India, but it
takes only 29 days in 2015.
Aspects of political environment
Present political system, Constitution of country, Government interventions in
business, Profile of political leaders, foreign policy of government, Ideology of
political parties etc.

 Legal environment- It constitutes laws and regulations passed by parliament

which can never be overlooked by businessmen as he has to perform business
transactions within the framework of the legal environment. The important
legislations that concern the business enterprises include:
(i) Companies Act, 2013
(ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948
(iv) Industrial Disputes Act, 1972
(v) Payment of Gratuity Act, 1972
(vi) Industries (Development and Regulation) Act, 1951
(vii) Prevention of Food Adulteration Act, 1954
(viii) Trade Marks Act, 1999
(ix) Consumer Protection Act, 1986
 (x) Environment Protection Act 1986
(xi) Competition Act, 2002
They provide opportunities to businessmen along with putting on some
constraints. For e.g., Companies Act, 2013 has replaced the old Companies Act,
1956 and partially made effective w.e.f. 12th September 2013 that contain
comprehensive provisions to govern all listed and unlisted companies in the
country. GST will put in place a state-of-the-art indirect tax system by 1st April
2016. This will create a unified and common domestic market by replacing a
confusing array of taxes and preventing their cascading effects.
 Demographic environment- It refers to environmental factors related to
density, location, age, gender, race, and occupation etc. of the population.
Basically, it’s a study of the human population living in an area. Its study
provides the base for decision making and policy formulation. Major
demographic changes include a change in family structures and labor force
diversity such as women participation, ethnic diversity etc.
Aspects of demographic environment
Population size, Density, Location, Age, Sex, Jobs, Income level. Life style,
Education, Heredity etc.
 Technological environment- Technology is a most important element of the
macro environment. It refers to changes taking place in the methods of
production, use of new equipment and machinery to improve the quality of the
product. A businessman must closely monitor the technological changes taking
place in the industry so as to implement them in a competitive environment.
For instance, bulky computers with CPU, keyboards and mouse have changed
into portable laptops and netbook which help in accessing the internet
immediately.
Aspects of technological environment
Innovation and improvements, Scientific improvements, Development in IT
sector, Import & export of technology, Technological advancements in
computers etc.
Internet and telecom system changed the whole world. The phenomenal growth of
the internet and associated World Wide Web (WWW) has made e-commerce possible
allowing businesses to communicate and collaborate beyond borders. Via Instagram
and Twitter, businesses can stay in touch with customers and provide them help to
solve problems. Mobile devices like smartphones and tablets, combining with the
power of internet have revolutionized the way we work. The Internet has simplified
business processes with the help of video conferencing, cloud computing Aspects of
technological environment Innovation and improvements, Scientific improvements,
Development in IT sector, Import & export of technology, Technological
advancements in computers etc. Aspects of demographic environment Population
size, Density, Location, Age, Sex, Jobs, Income level. Life style, Education, Heredity etc.
and instant messaging. The result is greater productivity and efficiency. This calls for
substantial investment in Research and Development in order to remain competitive
in the business world.

Environmental Analysis
Environmental Scanning and Monitoring
Environmental analysis is a strategic process that helps to identify all external and
internal elements/factors that may have an effect on an organization’s performance.
The purpose of environmental analysis is to find out existing and prospective strengths
and threats, weaknesses and opportunities of a business. Such a process helps an
organization to formulate appropriate strategies to tackle such issues in the future.
Managers usually perform environmental analyses to help them understand the
internal and external environmental factors and the interplay between them. This, in
turn increases the probability of appropriateness of the organizational strategies. In
order to perform an environmental analysis efficiently and effectively, a manager must
thoroughly understand the structuring of the various forces in an organizational
environment. For purposes of environmental analysis, the environment of an
organization is generally divided into 3 distinct levels:
 General Environment (external environment)
 Operating Environment (micro environment)
 Internal Environment
STAGES OF ENVIRONMENTAL ANALYSIS
The process of environmental analysis may be divided into the following stages:
Scanning: Scanning is the process of analyzing the factors that may have an implication
on the business. This process involves identification of precursors or indicators of
prospective environmental changes. This stage is therefore aimed at ‘signaling’ the
organization to potentially significant impingement, before it has fully occurred and
crystallized. The overall focus here is to detect the warning signals for a business.
Monitoring: This step involves in-depth monitoring and analysis of specific
environmental trends that have been identified in the first step. The purpose here is
to assemble data to discern trends and emerging patterns in the environment. The
outputs of monitoring include specific description of environmental factors;
identification of specific environmental patterns and trends for further monitoring and
assessment.
Forecasting: “Forecasting is concerned with development of plausible directions,
scope, speed, and intensity of environmental changes, to lay the evolutionary path of
anticipatory change”.
Assessment: the focus here is to assess the impact of the identified factors on the
business. Herein, “the frame of reference moves from understanding the
environment-focus of scanning, monitoring, forecasting - to identifying what that
understanding of environment means for the organization.

APPROACHES TO ENVIRONMENTAL ANALYSIS

Broadly, there are two approaches to environmental analysis:
o Outside-in Approach: Also known as the ‘macro’ approach, this takes into
consideration a long-term perspective of the business. It involves identifying
changes in the macro environment, and making necessary changes in the
organization’s internal environment in the light of these.
o Inside-out Approach: Also known as the ‘micro’ approach, this involves an analysis
of the changes in the internal environment of the business. Re-building strengths
and removal of weaknesses are the objectives of this approach.
Various methodological approaches to environment analysis are as follows:
 SWOT Analysis: SWOT is an acronym for Strengths, Weaknesses, Opportunities
and Threats. The strengths and weaknesses represent the internal
characterization of the business; whereas the opportunities and threats arise
from the external environments’ interplays. The degree to which the internal
environment of the firm matches with the external environment is termed as
strategic fit. SWOT analysis enables organizations to identify both internal and
external influences. SWOT's primary objective is to help organizations develop
full awareness of all the factors that may affect strategic planning and decision making.
Subsequently, the TOWS matrix framework (presented below) can be applied to
determine various strategic alternatives for an organization.
Components of SWOT Analysis
Component Environment Description
Strengths Internal Characteristics of a business that
give it
an advantage over others.
Weaknesses Internal Characteristics that place the
business at
a disadvantage relative to others.
Opportunities External Opportunities that a business can
use to
exploit its potential
Threats External Elements in the external
environment
that could cause trouble for the
business.
SWOT Matrix
 TOWS Matrix

 PESTLE ANALYSIS: PESTLE is an acronym for the Political, Economic, Social,

Technological, Legal and Environmental factors that affect the business
environment. These factors have been explained below:
Political Factors: The political factors include the present political situation of a
country. It may also include international political conditions that may have a bearing
on the business. Some important political factors include the following:
o Fiscal Policies
o Monetary Policies
o EXIM Policies
o Tax Laws
o Proximity to elections etc.
Economic factors: These factors include all the determinants of the economy and its
state, and direction. Various such factors are:
o The rate of inflation
o Bank Rate
o Lending Rate
 o Credit accessibility
o Unemployment rates
o The foreign exchange rate etc.
Social factors: This set of factors includes the social, behavioral or attitudinal
characteristics of a business’s current or prospective clients. These are:
o Socio-economic status

o The gender and connected demographics

o Lifestyle

o The domestic structures

o Level of Education

o Income Level

Technological factors: The advancements in technology are greatly influencing

businesses. Performing environmental analysis on these factors shall help business in
staying up to date with the changes. Various technological factors that may be
important for a firm are:
o Rate of technological obsolescence
o Rate of technological advances
o Innovative technological platforms
o Research and Developmental advancements
Legal factors: The legal factors include the legislative forces which may have a direct
or indirect bearing on the business. Various important legal factors are:
o Employment regulations
o Competitive regulations
o Patent infringements
o Health and safety regulations
o Product regulations etc.
Environmental factors: Every business unit used environmental resources. It
therefore owes an environmental responsibility. Assessment of environmental factors
is equally important for the success of an organization. Various such factors that need
attention are:
o Geographical location
o The climate and weather
o Waste disposal laws
o Energy consumption regulation
Pros of PESTLE Analysis
o Simple and easy to use framework.
o Involves cross-functional skills and expertise.
o Helps to reduce the impact and effects of potential threats.
o Aids strategic thinking and decision making.
o Helps in identification and exploitation of environmental
opportunities.
Cons of PESTLE Analysis
o Oversimplification of information
o Needs to be monitored on timely basis.
o Chances of 'paralysis by analysis'
o Time consuming and costly
o Users' access to quality external information is often restricted
because of the cost and time needed to collate it.
Often, managers choose to learn about political, economic, social and technological
factors only. In that case, they conduct the PEST analysis. PEST is also an
environmental analysis. It is a shorter version of PESTLE analysis. STEP, STEEP,
STEEPLE, STEEPLED, STEPJE and LEPEST: All of these are
acronyms for the same set of factors. Some of them gauge additional factors like
ethical and demographical factors.
  Michael Porter’s Five Force Model: According to this model, the state of
competition in an industry depends on five basic competitive forces. An
assessment of these forces is important for a firm to appropriately position
itself in the market. The five basic competitive forces are:
o Rivalry among Existing Firms: Firms in an industry are “mutually
dependent”, competitive moves of one firm have a bearing on the
others. The intensity of rivalry may however be subject to several
factors. These include the following:
Factor Explanation
Number of Competitors The rivalry is higher in an industry with many current
and
potential competitors
Market Size and GrowthHigher rivalry exists in stagnating markets
Prospects
Customer Loyalty Higher customer loyalty results in less competition.
Product Differentiation Lower is the degree of production differentiation;
greater is the
intensity of price rivalry.
Availability ofAvailability of substitutes increases rivalry among
Substitutes existing firms.
Exit Barriers Fewer exit barriers force rivalry
Cost Structure When fixed costs are high in percentage, profits
depend on the sales volume. This, in turn, forces
rivalry for greater market
share.

o Threat of New Entrants: In a growing industry, the threat of new entrants is high.
Potential competition tends to be higher in such an industry due to its profitability.
Barriers to entry in such cases are also low. Higher are the entry barriers, lesser is the
threat of new entrants. These barriers have been explained below.
Factor Explanation
Investment Cost High investment costs deter new entries in the industry
Capital Requirements High capital requirements deter new entries in the
industry
Existing economies of Existing economies of scale make it difficult for new firms
Scale to break into the market and offer products at such costs.
Product Differentiation Product differentiation characterized by brand image,
USPs etc. reduce the threat of new entrants
Monopoly Proprietary products, technology monopolization,
control over suppliers etc. limit new entries

o Threat of Substitutes: A substitute is a product that can be used in place of

the existing one. While substitutes offer a definite threat, the extent of it
depends on the extent to which the price and performance of the substitute
can match the industry's product, the willingness of customers to switch, their
loyalty and switching costs.
Lesser price, better performance, lack of customers’ trust and low switching costs
individually and collectively result in higher threat of substitutes.
o Bargaining Power of Suppliers: Such power of the suppliers is high in the
following cases:
o When there are only a limited number of large suppliers.
o When the resources supplied by them are scarce.
o When the switching costs are high.
o When the customers are loyal.
o When the supplier can integrate vertically.
o When the customer is small and unimportant
o When there are few or no available substitutes.
o Bargaining Power of Buyers: Powerful customers are able to exert pressure
to drive down prices, or increase the required quality for the same price, and
therefore reduce profits in an industry. A great example in the UK currently is
 the dominant grocery supermarkets which exert great power over supplier
firms. The bargaining power of the customers is high in the following cases:
o When the customers are small in number

o When the size of the order is very larger

o When several alternative suppliers are available

o When the customers can integrate backwards

o When the customers are well informed

o When the switching costs are very low

Michael Porter’s Five Force Model

 TECHNIQUES FOR ENVIRONMENTAL ANALYSIS
The techniques for environmental analysis are the tools for gathering the information
for appraising the environment. William Glueck mentions four techniques for
environmental analysis. These are:
 Verbal and Written Information: Written information included the documented
information that is published or unpublished. There may be various sources of
written information depending upon the context of information required. Common
sources are the websites, reports, records, books etc. In cases when the
documented information may have changed, contacting the concerned persons
may provide the latest information. Verbal information is, therefore, also
important. Sources of verbal information include electronic media, conferences,
seminars, workshops etc.
 Search and Scanning: Even if the information exists, it may not be readily available,
the processes of searching and scanning, then, come in picture. They help in
identifying sources of information to collect the required information in a timely
manner.
 Spying: Spying, albeit unethical is not uncommon in business. This has been used to
collect secret information in order to get a competitive advantage.
 Forecasting: Forecasting is a formal procedure that involves estimation of the
intensity, nature, and timing of the external forces that may affect the performance
of a firm, disrupt its plans, or force a change in its strategies.
ADVANTAGES AND LIMITATIONS OF ENVIRONMENTAL ANALYSIS
Advantages
o The very idea of environmental analysis makes one aware of the environment-
organization linkage
o It helps an organization to identify the present and future threats and
opportunities
o It helps a firm to understand the transformation of the industry environment

o It helps in adequate strategy formulation and implementation

o It helps in making suitable modifications in the strategies

o It keeps the managers more informed and alert.

o It provides a necessary and useful factors of the influential factors for a business.
Limitations
Environmental analysis has several limitations. These include the following:
o Unexpected and Unanticipated Events: Such elements cannot be foretold.
Many times, the business has to face unexpected happenings. The benefit of
environmental analysis fails in this case.
o Uncritical Faith: Sometime data may be incorrect. So, decisions on basis of this
analysis may be risky for business.
o Paralysis by Analysis: Analysis paralysis or paralysis by analysis is an anti-
pattern, the state of over-analyzing (or over-thinking) a situation so that a
decision or action is never taken, in effect paralyzing the outcome.