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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). • • • • • • • 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 • • • • • • • 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 • • • • 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 • Identify likely trends: – Societal and task environments • Strategic environmental issues • Assess probability of trends occurring – Low to High • 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: • • • • • • • 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: • • • • • • • 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: • • • • • 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: – – – – 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: • • • • • • 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 • Strengths • • • • • • • • 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 • • • • • • • • Opportunities • • • • • • • 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 • • • • • 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