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

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
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

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

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 High Medium Low

Probability of Occurrence

Medium

High

High Priority

High Priority

Medium Priority

High Priority

Medium Priority

Low Priority

Low

Medium Priority

Low Priority

Low Priority

Porters Diamond
PESTEL factors differ from country to country their competitive impact will differ from country to country Porters (1990) suggests reasons why some countries are more competitive than others

Porters Diamond
The Determinants of National Advantage

Source: M. Porter, Competitive Advantage of Nations, Macmillan, 1990.

Porters Diamond
Factor conditions
Education, infrastructure, cash, eg, Taiwan

Demand Conditions, eg, Japanese demand for quality. Firm Strategy, Structure & Rivalry. Eg, Taiwans 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 sellers 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 buyers costs Buyer earns low profits Purchased product is unimportant to the final quality or price of a buyers 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 suppliers 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 Decline

Users/ buyers

Few: Early adopters

Growing Growing Saturation adopters: selectivity of Repeat Trial of product purchase purchase reliance Competitor entry Fight for share Undifferentiated Many: Price-cutting Shakeout of weakest

Drop-off in usage

Competitive Few conditions competi tors

Fight to Exit of maintain share some Emphasis on competitors low cost