UNIT II
I. Formulating a Strategy
It involves the following components or steps:
1. External environment analysis
2. Internal Environment analysis (Organizational appraisal)
3. Formulating Corporate-level strategy
4. Formulating Business-level strategy
5. Strategic Analysis
6. Strategic choice or decision making
7. Preparing Strategic Plan
What is Environment?
The totality of all surroundings in which an organization operates is called its business environment. All
events, issues, situations or entities together form the business environment.
All organizations operate in an environment that has a direct or indirect impact on their operations and
performance. The factors that constitute this environment may be within the organization’s control or
beyond. However, if it impacts the organization in any manner, then it is a part of its environment.
Characteristics of environment
1. Totality: Business environment is the sum totals of all those factors/forces which are
available outside the business and over which the business has no control. It is the group
of many such forces that is why, its nature is of totality.
2. Complex and inter-related: The different factors of business environment are co-related.
For example, let us suppose that there is a 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.
3. Specific forces and general forces: The forces present outside the business can be divided
into two parts – specific and general.
(i) Specific: These forces affect the firms of an industry separately, e.g.,
customers, suppliers, competitive firms, investors, etc.
(ii) General:
These forces affect all the firms of an industry equally, e.g., social, political,
legal and technical situations.
4. 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.
5. Multi-faceted relativity: 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. Far-reaching impact: The impact of any changes in the environment can be seen like a
ripple or wave that impacts the entire value chain of the organization. The impacts can be
long term in terms of time period that may be required to overcome a challenge, as well
as broad in nature, which implies that more than one business units can be impacted.
7. Uncertainty: 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.
Importance of business environment
There is a close and continuous interaction between a business and its environment. This interaction helps in
strengthening the business firm and using its resources more effectively. The 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:
Identifying Firms’ Strengths and weaknesses: Business environment helps in identifying the individual
strengths and weaknesses in view of the technological and global developments.
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 in meeting the
challenges successfully.
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.
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.
Image Building: Environmental understanding helps the business organisations 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.
Meeting Competition: It helps the firms to analyse the competitors’ strategies and formulate their own
strategies accordingly.
GENERAL ENVIRONMENT (Macro env) and RELEVANT ENVIRONMENT (Micro env)
Some factors of the environment are common to all organizations and impact their operations alike. Some
others impact only a selective group of industries or organizations.
Some factors may have a strong and long-lasting impact on the organizations while some may only have a
small impact.
All these factors together constitute the general environment of the organization. However, there is a subset
of this general environment that has a major impact on the organization. These factors are more important,
per se, to the organization than others. These particular set of factors in the nearby environment constitute its
relevant environment.
Therefore, relevant environment is that part of the general environment which has a greater impact on the
organization, compared to other factors, and should be the main focus of strategy management.
Relevant environment can also be called Micro environment.
, Micro environment is the environment which is close to business and affects its capacity to work. It consists
of Suppliers, Customers, Market Intermediaries, Competitors and Public.
The environment that affects an organization can be also classified into
I. External environment: The sum total of all individuals, institutions and other forces that are outside
the control of a business enterprise but the business still depends upon them as they affect the overall
performance and sustainability of the business. They help in determining the opportunities and
threats for the organization.
II. Internal Environment: An organization's internal environment is composed of the elements within
the organization, including current employees, management, and especially corporate culture, which
defines employee behaviour. These are considered to determine the strengths and weaknesses of the
firm.
Thus, anything within the control of an organization that impacts its performance is a part of its internal
environment, and anything that impacts the organization but is not completely under its circle of control is
called external environment.
A study of both the environments together gives a complete picture of where and how an organization needs
to concentrate in order to survive and grow in their particular industry.
This is done by identifying the Strengths & Weaknesses from the internal environment and Opportunities &
Threats from the external environment. It is generally referred to as SWOT Analysis.
SWOT Analysis
The SWOT analysis is an extremely useful tool for understanding and decision-making for all sorts of
situations in business and organizations. SWOT is an acronym for Strengths, Weaknesses, Opportunities,
Threats.
A SWOT analysis is a subjective assessment of data which is organized by the SWOT format into a logical
order that helps understanding, presentation, discussion, and decision-making. The four dimensions are a
useful extension of a basic two heading list of pro's and con's
A SWOT analysis can be used for all sorts of decision-making, and the SWOT template enables proactive
thinking, rather than relying on habitual or instinctive reactions.
I. Formulating a Strategy
It involves the following components or steps:
1. External environment analysis
2. Internal Environment analysis (Organizational appraisal)
3. Formulating Corporate-level strategy
4. Formulating Business-level strategy
5. Strategic Analysis
6. Strategic choice or decision making
7. Preparing Strategic Plan
What is Environment?
The totality of all surroundings in which an organization operates is called its business environment. All
events, issues, situations or entities together form the business environment.
All organizations operate in an environment that has a direct or indirect impact on their operations and
performance. The factors that constitute this environment may be within the organization’s control or
beyond. However, if it impacts the organization in any manner, then it is a part of its environment.
Characteristics of environment
1. Totality: Business environment is the sum totals of all those factors/forces which are
available outside the business and over which the business has no control. It is the group
of many such forces that is why, its nature is of totality.
2. Complex and inter-related: The different factors of business environment are co-related.
For example, let us suppose that there is a 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.
3. Specific forces and general forces: The forces present outside the business can be divided
into two parts – specific and general.
(i) Specific: These forces affect the firms of an industry separately, e.g.,
customers, suppliers, competitive firms, investors, etc.
(ii) General:
These forces affect all the firms of an industry equally, e.g., social, political,
legal and technical situations.
4. 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.
5. Multi-faceted relativity: 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. Far-reaching impact: The impact of any changes in the environment can be seen like a
ripple or wave that impacts the entire value chain of the organization. The impacts can be
long term in terms of time period that may be required to overcome a challenge, as well
as broad in nature, which implies that more than one business units can be impacted.
7. Uncertainty: 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.
Importance of business environment
There is a close and continuous interaction between a business and its environment. This interaction helps in
strengthening the business firm and using its resources more effectively. The 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:
Identifying Firms’ Strengths and weaknesses: Business environment helps in identifying the individual
strengths and weaknesses in view of the technological and global developments.
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 in meeting the
challenges successfully.
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.
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.
Image Building: Environmental understanding helps the business organisations 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.
Meeting Competition: It helps the firms to analyse the competitors’ strategies and formulate their own
strategies accordingly.
GENERAL ENVIRONMENT (Macro env) and RELEVANT ENVIRONMENT (Micro env)
Some factors of the environment are common to all organizations and impact their operations alike. Some
others impact only a selective group of industries or organizations.
Some factors may have a strong and long-lasting impact on the organizations while some may only have a
small impact.
All these factors together constitute the general environment of the organization. However, there is a subset
of this general environment that has a major impact on the organization. These factors are more important,
per se, to the organization than others. These particular set of factors in the nearby environment constitute its
relevant environment.
Therefore, relevant environment is that part of the general environment which has a greater impact on the
organization, compared to other factors, and should be the main focus of strategy management.
Relevant environment can also be called Micro environment.
, Micro environment is the environment which is close to business and affects its capacity to work. It consists
of Suppliers, Customers, Market Intermediaries, Competitors and Public.
The environment that affects an organization can be also classified into
I. External environment: The sum total of all individuals, institutions and other forces that are outside
the control of a business enterprise but the business still depends upon them as they affect the overall
performance and sustainability of the business. They help in determining the opportunities and
threats for the organization.
II. Internal Environment: An organization's internal environment is composed of the elements within
the organization, including current employees, management, and especially corporate culture, which
defines employee behaviour. These are considered to determine the strengths and weaknesses of the
firm.
Thus, anything within the control of an organization that impacts its performance is a part of its internal
environment, and anything that impacts the organization but is not completely under its circle of control is
called external environment.
A study of both the environments together gives a complete picture of where and how an organization needs
to concentrate in order to survive and grow in their particular industry.
This is done by identifying the Strengths & Weaknesses from the internal environment and Opportunities &
Threats from the external environment. It is generally referred to as SWOT Analysis.
SWOT Analysis
The SWOT analysis is an extremely useful tool for understanding and decision-making for all sorts of
situations in business and organizations. SWOT is an acronym for Strengths, Weaknesses, Opportunities,
Threats.
A SWOT analysis is a subjective assessment of data which is organized by the SWOT format into a logical
order that helps understanding, presentation, discussion, and decision-making. The four dimensions are a
useful extension of a basic two heading list of pro's and con's
A SWOT analysis can be used for all sorts of decision-making, and the SWOT template enables proactive
thinking, rather than relying on habitual or instinctive reactions.
