2. The Strategic Environment
International Business Strategy
LON301BUS
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Unit: 3 Knowledgecast: 2

3. Module Learning Outcomes
Communicate an in-depth understanding of the complexity of the environment and its applications on decision-making process
Assess current developments in the organisational environment and alternative responses related to strategy
Demonstrate the ability to construct and present quantitative and qualitative data effectively by the application of IT skills and methodological techniques
This Knowledgecast focuses on defining the external environment and critically examining some of the tools/methods commonly used to analyse this environment.

4. The External Business Environment
Layers of the business environment
The organisation
Competitors (or market)
Industry (or sector)
The macro environment
The micro environment
Organisation greyed out as INTERNAL (See Unit 3 Knowledgecast 1)

5. (far, remote, mediate, general)
Macroenvironment
“Consists of the forces at work in the general business environment which will shape the industries and markets in which the organisation competes”... “Is the part of the environment over which the business can rarely exert any direct influence but to which it must respond ” (Stonehouse, Hamill, Campbell and Purdie, 2000: pp 73 and 104).
(far, remote, mediate, general)
Strategic Management

6. (near, immediate, competitive, operating)
Microenvironment
“Is the competitive environment facing a business and it consists of the industries and markets in which the organisation conducts its business” (Stonehouse, Hamill, Campbell and Purdie, 2000: 73).
(near, immediate, competitive, operating)
Strategic Management

7. The Business Environment
Company
Internal
Substitute
Technological
Buyer
Political
New Entrants
Supplier
Competitors
Pick an organisation to illustrate SWOT making notes on the projection.
Socio-cultural
Image Copyright
Economic
Microenvironment
Macroenvironment

8. M84 Strategic Management
Industry Life Cycle
M84 Strategic Management
Gerry Johnson & Kevan Scholes: Exploring Corporate Strategy, Sixth Edition, © Pearson Education Ltd 2002

9. PEST Analysis Political Economic Socio-cultural Technological
Strategic Management

10. PEST Analysis - Political
Government stability
Taxation, employment and safety law
Social welfare policies
Foreign trade regulations
Relations between government and the organisation
Government ownership of industry and attitude to monopolies and competition policy
‘Green’ issues that affect the environment
Level and type of energy consumed – renewable energy?
Rubbish, waste and its disposal
Strategic Management

11. PEST Analysis - Economic
Total GDP and GDP per head growth rates (trends)
Inflation
Consumer expenditure and disposable income
Interest rates
Currency fluctuations and exchange rates
Investment, by the state, private enterprise and foreign companies
Business cycles
Unemployment
Energy costs, transport costs, communications costs, raw materials costs
Strategic Management

12. PEST Analysis - Socio-cultural
Shifts in values and culture
Change in lifestyle
Consumerism
Attitudes to work and leisure
‘Green’ environmental issues
Education and health
Demographic changes
Distribution of income
Social mobility
Strategic Management

13. PEST Analysis - Technological
Government and EU investment policy on research
Government and industry focus on technological effort
New patents and products
Speed of change and adoption of new technology
Rates of obsolescence
The impact of the Internet
Strategic Management

14. M84 Strategic Management
Five Forces Framework
M84 Strategic Management
Gerry Johnson & Kevan Scholes: Exploring Corporate Strategy, Sixth Edition, © Pearson Education Ltd 2002

15. Five Forces Framework (cont.)
Threat of new entrants (entry barriers)
Economies of scale
Differentiation
Brand loyalty
Start-up capital requirements
Switching costs
Access to supply and distribution channels
Legislation or government action
Retaliation (e.g. price cuts and advertising campaigns)
Entry deterring price
Strategic Management

16. Five Forces Framework (cont.)
Determinants of substitution threat
Product-for-product substitution (e.g. post mail and )
Substitution of need (more reliable transports reducing the need for cars)
Generic substitution (disposable income: boats/homes/furniture/holidays, etc.)
Relative price/performance of substitutes
Switching costs
Effectiveness in meeting specific customer needs
Willingness of buyers to substitute
Product differentiation
Brand loyalty
Strategic Management

17. Five Forces Framework (cont.)
Determinants of supplier power
Concentration (number and size of the firms)
Importance of suppliers’ sales that an industry represents
Importance of the buyers in the industry as customers of the suppliers
Differentiation of the product/service and alternative sources
Switching costs
The threat of backward integration by the buyer (the company in analysis)
The threat of forward integration by the supplier
Strategic Management

18. Five Forces Framework (cont.)
Determinants of buyer power
Concentration (number and size of the firms)
Importance of buyers’ purchases to the total volume sold by the company
Differentiation of the product/service and alternative sources
Switching costs
The threat of backward integration by the buyer (the company in analysis)
The threat of forward integration of buyers by the company
Access to information
Strategic Management

19. Five Forces Framework (cont.)
Competitive rivalry determinants
Market growth rates (life cycle)
Overcapacity
Fixed costs
Number of competitors in the industry
Similarity of the size and power of the competitors
Differentiation of the products/services provided (switching costs for buyers)
Brand loyalty among consumers
Barriers to exit (fixed costs of exit, emotional attachment, government restrictions, etc)
Strategic Management

20. Five Forces Framework (cont.)
Key questions arising from the ‘Five Forces’ Framework
What are the key forces at work in the competitive environment?
What are the underlying forces in the macroenvironment that are driving competitive forces?
Is it likely that the forces will change, and if so, how?
How do particular competitors stand in relation to these competitive forces?
What can managers do to influence the competitive forces affecting the company?
Are some industries more attractive than others?
Strategic Management

21. External Changes and Value Creation
Creating value is contingent on industry and market conditions
The relation between the growth of market demand and the growth of industry capacity is central to value creation analysis
Two possibilities exist:
Market demand outruns industry capacity
Industry capacity outruns market demand
Make reference to market equilibrium theory…optimum is where market demand is equal to industry capacity but can greater value be created if market demand outruns industry capacity? Discuss critically with students.

22. Knowledgecast Summary
Communicate an in-depth understanding of the complexity of the environment and its applications on decision-making process
If different management functions, such as marketing and finance were to undertake the analysis using the same tool would the ‘output’ differ? What are the implications of this?
Assess current developments in the organisational environment and alternative responses related to strategy
How valuable are tools such as PESTEL or Porter’s Five Forces to businesses?
Demonstrate the ability to construct and present quantitative and qualitative data effectively by the application of IT skills and methodological techniques
Tools such as these can be used to analyse and present both quantitative and qualitative data.
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24. Seminar Environmental Audit – Part One
Carry out an analysis of the internal business environment of your case study organisation using one of the tools/methods covered in this unit.
Bring your preparatory research to the seminar. On the whiteboard your tutor will ‘populate’ the tool/method chosen drawing on your research.

25. Group Activity Environmental Audit – Part Two
Assessment Preparation – Research
You have an opportunity to use this time to continue to gather information regarding the business environment of your case study organisation, which will be invaluable in preparing you for the first assignment.
Assessment Preparation – Presentation Design
You will also have an opportunity to use this time to design your presentation regarding the business environment of your case study organisation, which will be invaluable in preparing you for the first assessment. Ensure each member of the group understands and accepts their role and responsibilities.