Types and Characteristics of Business Environment

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By: Site Engineer, Staff

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Types of Environment

The remote environment consists of forces that are not in the company’s direct operating environment. Normally, the remote environment is not affected by the operating environmental forces of a single company.

A multinational company has its headquarters in the USA does not get affected by the competition faced by its subsidiary company in Nigeria. However, a change in the legislature that affects the industry as a whole in which the said company operates for example ban on certain raw material may substantially affect its business.

Characteristics of the Environment

The business environment has several characteristics and each of these characteristics is to be clearly understood by strategy managers.

1. The Environment is Not Static

Around the business world, changes are either fast or slow. The changes occur continuously. In the present business scenario, these are more frequent and rapid changes. Changes may occur in any scope of the environment and consequently affect other factors. The dynamism of the environment brings in many threats as well as opportunities for an organization. Hence, organizations should be more alert to changes and be more adaptable. This is necessary for their survival.

2. Environment Affects Business Strategies

Since the environment has a direct effect on companies organizations have to formulate their objectives keeping the environment in focus. Hence, the formulation of policies should essentially be in true with these objectives. A strategy that is adopted by a company may fail miserably if environmental factors are not correctly perceived and addressed while formulating the strategies.

3. The Environment is Only Partially Controllable

The environment within a company can be controlled to some extent whereas the environment outside an organization is not under our control and hence has to be assessed. The environment can only be partially influenced by one company since there are other companies in an environment. These companies have varying interests that may clash with the interest of the company attempting to influence the environment.

4. Environment is Complex

The environment has many dimensions for a particular business. The events, conditions, and influences arise from various sources that are present in the environment. All these factors interact with each other to produce changes in the business environment. An example is the leakage of poisonous gases from the crude oil-producing state in Nigeria, which caused a long legal battle affecting the business of the company and led to the closing down of some plants.

It is quite difficult to understand the interactions of all the factors present environment. However, strategy managers try to comprehend the various factors and their influences.

5. Environment Has Multi-dimensions

When a change is triggered off in a business environment, it may influence some factors and may not influence others. Change in the environment is perceived by different people in different ways. For some companies, amendment of law may be useful while for others it may prove to be fatal.

Opportunities present in an environment may be a threat to some companies. The dimensions available to define an environment are multitudinous and often strategy managers find it difficult to identify all the factors.

Influence of the Environment

The environment affects current strategies as well as the decisions on the future course of strategies. The various influences of the environment may be summarized as follows.

1. Strength

Certain companies have inherent strengths that they build over the year’s viz research and development based information, trained manpower, distribution network, widespread infrastructure, etc which enable them to be highly competitive and to create a niche for the company in a highly competitive environment due to these core competencies.

2. Weakness

Some companies have inherent weaknesses, limitation or constraints which prove to be strategically disadvantageous. Some companies may depend solely on a single source for raw materials or they may be doing only seasonal business and if a season is not favorable; their profits run into rough weather.

3. Opportunity

An event in the environment that may be favorable to a company may be suitably exploited by it for the overall benefit of the organization. A business opportunity may arrive due to changes in tax structure, natural or climatic changes, changes in the competitor’s product designs, change in some regulation, etc.

4. Threat

Some events in an environment may create situations where the profit company may be reduced or its very existence may be threatened. The emergence of stiff competition, obsolescence due to new products and design brain drain of technical experts due to lucrative offers from competitors, etc are some of the examples of threats

Checklist for Strengths and Weaknesses

Marketing

  • Market expansion potential
  • Distribution channels
  • An effective mechanism for the organization for marketing
  • An effective mechanism for obtaining customer feedback, imaginative, effective and result-oriented sales promotion and advertising
  • Effective pricing strategy
  • After-sales service
  • Follow up of product performance
  • Product differentiation
  • Customer goodwill
  • Brand loyalty
  • Product features
  • Range of products
  • Timely delivery
  • Quality
  • Reliability
  • Life cycle cost of the product
  • Ability to gather information about markets
  • Market share
  • Product mix

Finance and Accounting

  • The high cost of entry
  • Financial leverage
  • Follow of financial strategies
  • Budget control
  • Working capital management
  • Effective cost control
  • Cost reduction progress
  • Size of financial operations
  • Effective accounting systems
  • Profit planning
  • Cost-effective systems
  • Cost structures
  • Flexibility in financial operations
  • Ability to raise short-term capital
  • Ability to raise long-term capital
  • Shared resources at the corporate level
  • Lower cost of capital
  • Tax benefits
  • Financial relations with investors stockholders etc.
  • Barriers to entry

Technical

  • Location facilities
  • Improved material handling
  • Layouts
  • Effective make or buy decisions
  • High-value addition
  • Degree of vertical integration
  • Cost/benefit ratios analysis
  • Patents
  • Effective scheduling purchasing, etc.
  • Cost of quality
  • Waste management
  • Clearly defined business processes
  • Use of computers in manufacturing, processing design, etc.
  • Easy availability of raw materials
  • Cost-effective designs
  • Lower weights
  • Better quality at lower costs
  • Innovation
  • Latest cost-effective technology
  • Lower inventory costs

Personnel and General Management

Components of Environment

Several economic factors present in the environment affect the demand-supply, services price availability, etc of products. The economic state of a company can be affected by various factors of the environment and these factors also drive the companies to change their strategies.

While studying the environment a company would like to have information on certain specific aspects of the environment relevant to the company.

Some of these factors can be summarized as follows.

  • Structure of industry
  • Economic plans such as five-year plan annual plans etc.
  • Economic policies viz monetary, industrial fiscal policies etc.
  • Economic indices viz. growth of GNP, per capita income, rate of interest balance of payments, etc.
  • Policies of financial institutions, World Bank, local banks, national banks private banks, etc.
  • Modes of transport and communication, electricity tariffs, energy sources. Inflationary or deflationary situations etc.
  • The economic condition existing in a country or state, relevant to the company
  • Stage of the business cycle.
  • Economic system adopted viz capitalistic socialistic mixed economy, etc.

Each of the above factors can be either helpful or may create hindrances in accomplishing their company’s objectives depending on the situation such as the use of the intonation to study the behavior of markets and frame their strategies accordingly. Some well-known conclusions are also used to frame policies and strategies.

Some factors like recession which lead to retrenchments resulting in poor sales, lowered interest rates leading to lowered fund requirements for investments and similar other axioms of business are deployed for framing strategies.

Market Environment

The marketplace environment where the product is sold to the consumer has a great impact on a company. In a market, some competitors offer better services to gain an edge. The competition may even turn out to be unhealthy when customers are carried away by untrue stories about a product or the company.

Relevant Factors that Influence the Business

  • The market is usually charged with competition in the present day. New competitors may be entering the market every day. There may be major competitors and smaller ones too. The nature of competition in some of the products may be very fierce whereas in others it may be mild. Various competitors may have different strategies to maintain a competitive edge. All these factors affect market situations and must be studied the business managers formulating suitable strategies that will not only enable the company to withstand the onslaught of competition but will also help them to achieve coveted positions in the business.
  • It is very rare for products to reach consumers directly from manufactures. There is usually a chain of dealers, sub-dealers, local dealers, middlemen, etc before a product reaches a consumer. Further logistics, costs, delivery systems, packaging transporting, displaying, etc are involved which are also to be considered since all these finally go into selling of a product.
  • Customers have needs, demands, choices, preferences, attitudes, values, habits, buying behavior, etc with these traits a customer goes to the market to satisfy his needs. The satisfaction level about the quality of performance and appearance of a product may become a driving force for business. Some customers may be price-conscious whereas others may bother more about status services offered brand name etc.
  • Products available in the market have a certain pattern of demand. Product image, its features, life cycle cost-utility finish, ergonomics, design, functions that it performs, etc are some of the important aspects that a customer expects from products. The functions, whether secondary or primary satisfy some needs of the customer. This drives him to buy a product and thus a business exists. How well the needs are satisfied decides how strongly a business is being driven. As a product is launched in the market, competitors come up with even better features at lower costs. They may also offer additional functions at a lower price or may offer an improved version of service or product. Customers evaluate features and then decide to buy or not.

In the case of the manufacture of control panels, generators, transformers, switch gears, etc., competition may not be as severe as in the case of consumer products. Here, the market environment may be governed by a service lifecycle cost, image, etc. Some sectors may be protected by the government viz petrol, cooking gas power equipment, electricity water, etc although in recent years these fields are also being opened up for competition.

Rapidly changing business environment both at the national and international levels caused the different markets to react accordingly.

Companies have also geared up themselves and have brought in new systems, strategies, policies, etc to meet new challenges. Today, companies spend a sizeable amount of money to understand the market environment which directly or indirectly affects them.

Executives of companies visit markets to get firsthand information about their products and products of competitors. In earlier times, the edible oil companies rarely cared about their consumers but today, companies making different brands of oil conduct surveys to get data consumer satisfaction. The same is the case with the automobile industry wherein companies having unsold stocks resort to various methods of sales promotion. Even in the case of personal computers, companies are trying to reach out to homes of people to dramatically expand their markets.

It has now become a practice for companies to study the competitor’s profile and benchmark their operations for improvements.

Factors Involved in a Situational Study of the Competitors Profile

It is not an easy task to gather all the required data. However, executives make continued efforts to get more accurate details relating to these factors. A company ranks these factors to give more weight to the more important factors.

The customer profile also has to be worked out in a similar way of gathering all the vital information. The profile for the most prospective customers would necessitate knowing their complete details viz geographic, demographic, and psychographic aspects and their buying behavior.

Now let us discuss each of these dimensions of the customer profile.

1. Geographic Location: Strategic managers need to know their customers’ geographic locations. Since each location has its own culture, environment, and background. It becomes easy to assess the customer’s preferences.

For example, a person longing in Africa has a different pattern of preferences compared to China. The food habits, festivals living styles dressing hobbies, etc vary from region to region and companies operating in different states must be able to match their products and services to their customer’s delight.

Political leaders make themselves more acceptable to the masses belonging to a particular state by wearing local outfits and using the local language. Similarly, companies make use or festival seasons to persuade their customers with hoardings of new arrivals and discount sales.

2. Demographic Characteristics: The demographic information refers to information on age, sex, marital status, income, etc which is comparatively easier for collection and processing. This information helps to create customer groups and segments for which separate strategies may be worked out by business managers. The product designs, their features, and prices vary according to the buying capacity of the customers. This is the reason why a single company offers different varieties of detergents, cars, magazines, etc with different features and prices.

3. Psychographic Aspect: The personality, lifestyle, tastes, and social movements of customers are some of the factors which influence their selection and preference of products. Certain classes of clothing, vehicles, toys, furnishings, etc are owned only by a definite class of people.

4. Buyer Behavior: There exists a definite buying behavior that is based on several indices viz usage rate, benefits desired, preference for price-quality, service, life, life cycle cost, ownership cost, etc. Today, buyers have more awareness about their rights and demand very good product performance. This poses a challenge for manufacturers. Buyers have also joined hands and have legal forums where their grievances regarding products are being heard. Strategy managers have to consider these factors while making their strategies.

 

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