Transcript The External Environment

The External Environment
Lecture Outline
• Analysis of Macro Environment
– PESTEL
• Industry analysis
– 5 Forces Model
• Life-Cycle Model
Understanding the EnvironmentIssues
• Diversity
– Many different influences
• Complexity
– Interconnected influences– eg Information Technology changes the nature
of work- changes lifestyles- alters consumer
behaviour
• Speed of change
– Particularly ICT –means more and faster change
Layers of the business environment
Environment
• “Environment are largely if not totally external, and beyond the control
of individual industrial enterprises and their management. These are
essentially the givers within which firms and their managements must
operate in a specific country and they vary, from country to country”.
• Business Environment – 2 External Factors:
– business opportunities and threats to business.
• Organizational Environment – 2 Internal Factors:
– strengths and weaknesses of the organization.
• A SWOT analysis is thus the first step in strategy
formulation
Internal Environment
Business Decision
External Environment
BUSINESS ENVIRONMENT
Macro Environment
Micro Environment
Internal Environment
Financiers
Suppliers
Customers
Competitors
Public
Mktg Intermediaries
Mission / Objectives
Management Structure
Internal Power Relationship
Physical Assets & facilities
Business
Decision
Company image
Human resources
Financial Capabilities
Technological Capabilities
Marketing Capabilities
Economic
Technological
Global
Demographic
Socio-Cultural
Political
Internal Environment
• Any business has certain vision, mission and
objectives and a strategy to achieve them.
Formulation of strategy is defined as establishing
a proper firm-environment fit. Indeed the
objectives should be based on an assessment of
the external environment and the organizational
factors (internal environment).
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Vision
Mission
Objectives
Management Structure
Human Resources
Financial Factors
Company Image and Brand Equity
Micro Environment
The Micro environment consists of different
types of stakeholders - customers, employees,
suppliers, marketing intermediaries, competitors.
•Task Environment and Operating Environment
• direct bearing on the operations of the firm.
•Changes in the micro environment will directly
affect and impinge on the firm's activities.
Macro-environment – PESTEL (1)
Macroenvironment – PESTEL (2)
Political
• Government stability
• Taxation policy
• Foreign trade
regulations
• Social welfare
policies
Economic
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Business cycles
GNP trends
Interest rates
Money supply
Inflation
Unemployment
Disposable income
Macroenvironment – PESTEL (3)
Sociocultural
Technological
• Population
demographics
• Income distribution
• Social mobility
• Lifestyle changes
• Attitudes to work and
leisure
• Consumerism
• Levels of education
• Government spending on
research
• Government and industry
focus on technological
effort
• New discoveries
/developments
• Speed of technology
transfer
• Rates of obsolescence
Macroenvironment – PESTEL (4)
Environmental
• Environmental
protection laws
• Waste disposal
• Energy consumption
Legal
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Competition law
Employment law
Health and safety
Product safety
Key Aspects of PESTEL Analysis
• Not just a list of influences
• Need to understand key drivers of change
• Focus is on future impact of environmental
factors
• Combined effect of some of the factors likely
to be most important
External Environmental Analysis
Environmental Analysis has three goals:
 Provides an understanding of current and potential
changes taking place
 Environmental Analysis should provide input for
strategic decision making.
 Facilitate and lead to strategic decisions within an
organization.
Environmental Analysis and diagnosis give strategists
time to anticipate opportunities and to plan to take
optional responses to these opportunities. It also
helps strategists to develop an early warning system
to prevent threats or to develop strategies which can
turn a threat to a firm’s advantage”. Firms which
systematically analyse and diagnose the environment
are more effective than those which do not.
Process of Environmental
Analysis
The analysis consists of four steps:
 Scanning : Detect early signals of possible environmental
change and detect environmental change already
underway.
 Monitoring : Purpose of monitoring is to assemble
sufficient data to discern whether certain trends are
emerging, identification of the trends and identification of
areas for further scanning.
 Forecasting : It is concerned with developing projections
of the direction, scope and intensity of environmental
change.
 Assessment : To determine implications for the
organisation’s current and potential strategy.
Environmental Analysis and Strategic Management
Defining Business Mission and Objectives
SWOT Analysis
Environmental Analysis + Self Appraisal
Strategic Alternatives and Choice of Strategy
Implementation of Strategy
Evaluation and Control of Strategy
Likely Future Trends
• Portable Information Devices
• Alternative Energy Sources– Geothermal, hydroelectric
• GM foods and farming
• Growth of Woofies
• Environmental Awareness
External Environment
Issues Priority Matrix
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Identify likely trends:
– Societal and task environments
• Strategic environmental issues
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Assess probability of trends occurring
– Low to High
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Ascertain likely impact of trends on the
corporation
– Low to High
Issues Priority Matrix
Probable Impact on Corporation
Medium
Low
High
Priority
High
Priority
Medium
Priority
High
Priority
Medium
Priority
Low
Priority
Medium
Priority
Low
Priority
Low
Priority
Probability of Occurrence
High
Porter’s Diamond
• PESTEL factors differ from country to
country –their competitive impact will
differ from country to country
• Porter’s (1990) suggests reasons why
some countries are more competitive
than others
Porter’s Diamond
The Determinants of National Advantage
Source: M. Porter, Competitive Advantage of Nations, Macmillan, 1990.
Porter’s Diamond
• Factor conditions
– Education, infrastructure, cash, eg, Taiwan
• Demand Conditions, eg, Japanese
demand for quality.
• Firm Strategy, Structure & Rivalry. Eg,
Taiwan’s SME sector
• Supporting Industries, eg Italy, leather,
Silicon Valley computer related industry
Scenario Analysis
• How the business environment might develop
in the future based on key environment
changes around which there is a high degree
of uncertainty.
• Newspaper Industry
– Influence of electronic media
• Energy Industry
– Environmental issues
– Middle East Situation
Industry Analysis
Industry
A group of firms producing a similar
product or service, such as soft drinks
or financial services.
Industry Analysis
Industry Analysis (1)
Threat of New Entrants -Barriers to entry:
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Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Size
Government Policy
Industry Analysis (2)
Rivalry Among Existing Firms -Intense rivalry related to:
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Number of competitors
Rate of Industry Growth
Produce or Service Characteristics
Amount of Fixed Costs
Capacity
Height of Exit Barriers
Diversity of Rivals
Industry Analysis (3)
Threat of Substitute Products/Services
Substitute Products:
Those products that appear to be
different but can satisfy the same need as
another product. To the extent that
switching costs are low, substitutes can
have a strong effect on an industry.
Industry Analysis
Bargaining Power of Buyers -Buyer is powerful when:
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Buyer purchases large proportion of seller’s products
Buyer has the potential to integrate backward
Alternative suppliers are plentiful
Changing suppliers costs very little
Purchased product represents a high percentage of a buyer’s
costs
• Buyer earns low profits
• Purchased product is unimportant to the final quality or price
of a buyer’s products
Industry Analysis
Bargaining Power of Suppliers -Supplier is powerful when:
• Supplier industry is dominated by a few companies but sells
to many
• Its product is unique and/or has high switching costs
• Substitutes are not readily available
• Suppliers are able to integrate forward and compete directly
with present customers
• Purchasing industry buys only a small portion of the
supplier’s goods.
Industry Analysis
• The collective strength of these forces
determines the ultimate profit potential
of an industry.
• The stronger each of these forces the
more limited industries are in their ability
to raise prices and increase profits
The Life Cycle Model
Develop- Growth
ment
Shakeout
Maturity
Users/
buyers
Few:
Early
adopters
Growing
adopters:
Trial of
product
Growing
Saturation
selectivity of Repeat
purchase
purchase
reliance
Drop-off in
usage
Competitive
conditions
Few
competi tors
Competitor
entry
Fight for
share
Undifferentiated
Many:
Pricecutting
Shakeout of
weakest
Exit of
some
competitor
s
Fight to
maintain
share
Emphasis on
low cost
Decline
SWOT Analysis
SWOT stands for Strengths, Weaknesses,
Opportunities and Threats
Identification of the threats and opportunities in
the external environment and strengths and
weaknesses in the internal environment of the firms
are the cornerstone of business policy formulation.
It is the SWOT analysis which determines the
course of action to ensure the growth / survival of
the firm.
Strengths
Strengths—internal to the unit; are a
unit’s resources and capabilities that
can be used as a basis for developing a
competitive advantage; strength should
be realistic and not modest.
Strengths
Your list of strengths should be able to answer:
• What are the unit’s advantages?
• What does the unit do well?
• What relevant resources do you have access
to?
• What do other people see as your strengths?
• What would you want to boast about to
someone who knows nothing about this
organization and its work?
Strengths
• Examples: good reputation among
customers, resources, assets, people, :
experience, knowledge, data, capabilities
• Think in terms of: capabilities; competitive
advantages; resources, assets, people
• (experience, knowledge); marketing; quality;
location; accreditations
• qualifications, certifications;
processes/systems
Weaknesses
•Weaknesses—internal force that could
serve as a barrier to maintain or achieve a
competitive advantage; a limitation, fault or
defect of the unit;
•It should be truthful so that they may be
overcome as quickly as possible
Weaknesses
Your list of weaknesses should be able to answer:
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What can be improved?
What is done poorly?
What should be avoided?
What are you doing as an organization that you feel could be done
more effectively/efficiently?
– What is this organization NOT doing that you feel it should be doing?
– If you could change one thing that would help this department
function more effectively, what would you change?
– Examples: gaps in capabilities, financial, deadlines, morale
– lack of competitive
Opportunities
•Opportunities—any favorable situation present now
or in the
future in the external environment.
Examples: unfulfilled customer need, arrival of new
technologies, loosening of regulations, global
influences, economic boom, demographic shift
•Where are the good opportunities facing you?
•What are the interesting trends you are aware of?
•Think of: market developments; competitor;
vulnerabilities; industry/ lifestyle trends;;
geographical; partnerships
Threats
•External force that could inhibit the
maintenance or attainment of a
competitive advantage; any unfavorable
situation in the external environment that
is potentially damaging now or in the
future.
Threats
• Examples: shifts in consumer tastes, new regulations, political or
legislative effects, environmental effects, new technology, loss of key
staff, economic downturn, demographic shifts, competitor intent; market
demands; sustaining internal capability; insurmountable weaknesses;
financial backing
Your list of threats should be able to answer:
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What obstacles do you face?
What is your competition doing?
Are the required specifications for your job/services changing?
Is changing technology threatening your position?
Do you have financial problems?
Could any of your weaknesses seriously threaten your unit?
POSITIVE/
HELPFUL
to achieving the
goal
INTERNAL Origin
facts/ factors of the
organization
EXTERNAL Origin
facts/ factors of the
environment in
which the
organization
operates
Strengths
Things that are
good now,
maintain them,
build on them
and use as
leverage
NEGATIVE/
HARMFUL
to achieving the
goal
Weaknesses
Things that are bad
now, remedy,
change or stop
them.
Opportunities
Things that are
Threats
good for the
Things that are bad
future, prioritize
for the future,
them, capture
put in plans to
them, build on
manage them or
counter them
them and
optimize
SWOT Analysis of Indian Economy
Weaknesses
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Strengths
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Huge pool of labor force
High percentage of cultivable land
Diversified nature of the economy
Availability of skilled manpower
Extensive higher education system
High growth rate of economy
Rapid growth of IT / ITes Sector
Abundance of natural resources
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Opportunities
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Scope for entry of private firms in various
sectors of business
Inflow of FDI
Huge foreign exchange prospects in IT / ITeS
Investment in R & D
Area of infrastructure
Huge domestic market : Opportunity for MNCs
Huge agricultural resources
High percentage of workforce involved
in agriculture
Approx a quarter of population below
the poverty line
High unemployment rate
Inequality in prevailing socio economic
conditions, rural – urban divide
Low productivity
Huge population leading to scarcity of
resources
Low level of mechanization
Red tapism, Bureaucracy
Low literacy rates
Threats
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High fiscal deficit
Threat of government intervention in
some states
Growing import bill
Population explosion, rate of growth of
population
Agriculture excessively dependent on
monsoon
AN ORGANIZATION’S ENVIRONMENT
Industry Sector
Competitors,
Raw Materials
Sector
Industry size and
Suppliers,
Characteristics, Related Manufacturers,
Industries
Real Estate
Socio-Cultural sector
Age, Values, Beliefs, Education,
Religion, Work Ethic, Urban vs.
Rural, Birth Rate
DOMAIN
Government Sector
Task Environment
Human
Resources
Sector
Labor Market, Employment
Agencies, Universities, Training
Schools, Employees in Other
Companies, Unionization
Financial Resources Sector
Stock Markets, Banks,
City, State, Federal Laws and
ORGANIZATION
Regulations, Taxes, Services,
Savings and Loans,
Market
Court System, Political
Sector
Private Investors
Economic
Processes
Conditions Sector Technology
Sector
Customers, Clients,
Potential Users of
Techniques of
Recession, Unemployment
Rate, Inflation rate, Rate of
Production, Science, Products and Services
Investment,
Economics,
Macro
Research Centers,
Growth
Environment
Automation, New
Materials