The External Environment

1. The External Environment

2. Lecture Outline • Analysis of Macro Environment • PESTEL • Industry analysis • 5 Forces Model • Life-Cycle Model

3. Understanding the Environment- Issues • 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

4. Layers of the business environment

5. Macro-environment – PESTEL (1)

6. 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

7. Macroenvironment – PESTEL (3) • Sociocultural • Population demographics • Income distribution • Social mobility • Lifestyle changes • Attitudes to work and leisure • Consumerism • Levels of education • Technological • Government spending on research • Government and industry focus on technological effort • New discoveries /developments • Speed of technology transfer • Rates of obsolescence

8. Macroenvironment – PESTEL (4) • Environmental • Environmental protection laws • Waste disposal • Energy consumption • Legal • Competition law • Employment law • Health and safety • Product safety

10. 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

11. Likely Future Trends • Portable Information Devices • Alternative Energy Sources- • Geothermal, hydroelectric • GM foods and farming • Growth of Woofies • Environmental Awareness

12. 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

13. Probable Impact on Corporation Low High Medium High High Medium Priority Priority Priority High High Medium Low Priority Priority Priority Medium Probability of Occurrence Medium Low Low Priority Priority Priority Low Issues Priority Matrix

14. 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

15. Porter’s Diamond The Determinants of National Advantage Source: M. Porter, Competitive Advantage of Nations, Macmillan, 1990.

16. 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

17. 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

18. Industry Analysis Industry A group of firms producing a similar product or service, such as soft drinks or financial services.

19. Industry Analysis

20. 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

21. 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

22. 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.

23. 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

24. 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.

25. 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

26. The Life Cycle Model