Legislative and Business Studies Lecture 5 External Business Environment

1
Legislative and Business StudiesLecture
5External Business Environment
2
Learning Objectives

• By the end of the lecture you should be able to
• Demonstrate the range and complexity of the
  external influences on business activity
• Analyse the general environment using PESTEL
  model
• Investigate the competitive environment using
  Porter's five forces analysis
• Examine both internal and external environment by
  applying SWOT analysis

3
The Firm in Its Environment
4
Environmental Influences
5
Two Levels of Environment
6
The General Environment

• Known as the contextual environment or
  macro-environment
• The general environment usually influence all
  aspects of organisations
• PESTEL analysis
• Identifies the most important factors of the
  organisation
• Provides a check list of possible environmental
  influences

7
PESTEL Analysis
8
Political and Economic

• Political
• Governments shape what business can do
• e.g. taxation, pollution, regulation
• Economic
• Wealth and stage of development
• e.g. wage levels, interest rates, consumer
  confidence

9
Social and Technological

• Social
• Demographic trends, consumer fashions, family
  structures, attitudes
• e.g. opinions on heavy drinking in UK
• Technological
• Physical infrastructure, transportation,
  communications technologies
• e.g. convergence of data, intranet

10
Environmental and Legal

• Environmental (natural)
• Natural resources, pollution and the effects of
  climate change on business (threats and
  opportunities)
• e.g. CO2 emissions
• Legal
• The framework within which companies operate
  employment, financial or governance regulations
• e.g. customer right, privacy

11
Using PESTEL

• Subjective interpretation as well as objective
  realities
• Forces in the general environment affect public
  organisations as much as private
• The value is not a long list of factors, but
  agreement on critical ones that stakeholders may
  use to stimulate internal change

12
Change and Complexity
13
The Competitive Environment

• Known as the immediate Environment, operational
  Environment or micro-environment
• The general environment usually influence
  performance of an organisation
• Porters five forces
• The state of competition in an industry is
  determined by these forces
• The collective strength of the five forces
  determine industry profitability

14
Porters Five Forces
15
Threat of New Entrants

• Fewer new entrants more profit
• Affected by entry barriers such as
• High costs of equipment and facilities
• Lack of distribution facilities
• Customers loyalty to established brands
• Small companies lack of economies
• Subsidies/regulations favour existing firms

16
Bargaining Power of Buyers

• Greater power of buyers less profit to seller
• Power of buyer increases if
• Buyer takes high percentage of suppliers sales
• Many alternative products or suppliers available
• Product a high percentage of buyers costs,
  creating incentive to seek alternatives
• Cost of switching to other suppliers is low

17
Bargaining Power of Suppliers

• High power of supplier less profit to buyer
• Power of supplier is high if
• Buyer takes small percentage of sales
• Few alternative products or suppliers
  (distinctive product keeps buyers loyal)
  available
• Product a low percentage of buyers costs, little
  incentive to seek alternatives
• Cost of switching suppliers high

18
Substitutes

• Easy to substitute less profit to supplier
• Substitution becomes easier if
• Buyers willing to change buying habits
• Technological developments enable new products
  and services
• Transport costs fall
• New suppliers enter the market

19
Intensity of Rivalry Amongst Competitors

• Greater rivalry lesser profit
• Rivalry increases when
• Many firms, but none dominant
• Market growing slowly, so firms fight for share
• High fixed costs encourage overproduction
• High exit cost or specialised assets
• Loyalties (family businesses or political
  support)prolong overcapacity

20
Managing the Five Forces

• Subjective interpretation as well as objective
  realities
• Forces contradict/balance each other
• Managers can consciously try to shape them as
  part of their strategy
• Competitive forces affected by those in the
  general environment

21
Stakeholders

• People or groups with expectations of the
  organisation
• Customers, communities, government, etc.
• How to manage these conflicting interests?
• Balance all stakeholders
• Satisfy shareholders
• Satisfy powerful stakeholders

22
Stakeholder Mapping
23
SWOT Analysis

• Finding a fit between external environment and
  internal capabilities
• Summarise the key internal and external issues in
  an industry
• Strengths
• Weaknesses
• Opportunities
• Threats

24
Summary

• Assumptions about their environment affect how
  managers work
• PESTEL, five forces, stakeholders, and SWOT
  models help analyse managers contexts

25
Reference and Further Reading

• Boddy, D., Management An Introduction, Prentice
  Hall, 2008 (Chapter 3)
• Worthington, I., and Britton, C., The Business
  Environment, Financial Times Press , 2006