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. 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 Business DecisionInternal EnvironmentExternal Environment

6. Business Decision Internal Environment Mission / Objectives Management Structure Internal Power Relationship Physical Assets & facilities Company image Human resources Financial Capabilities Technological Capabilities Marketing Capabilities Financiers Suppliers Customers Competitors Public Mktg Intermediaries Micro Environment Economic Technological Global Demographic Socio-Cultural Political Macro Environment BUSINESS ENVIRONMENT

7. 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

8. 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.

9. Macro-environment – PESTEL (1)

10. 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

11. 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

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

13. 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

14. 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.

15. 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.

16. 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

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

18. 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

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

20. 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

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

22. 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

23. 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

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

25. Industry Analysis

26. 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

27. 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

28. 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.

29. 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

30. 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.

31. 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

32. The Life Cycle Model Develop- ment GrowthShakeoutMaturityDecline Users/ buyers Few: Early adopters Growing adopters: Trial of product Growing selectivity of purchase Saturation Repeat purchase reliance Drop-off in usage Competitive conditions Few competi - tors Competitor entry Fight for share Undiffer- entiated Many: Price- cutting Shakeout of weakest Fight to maintain share Emphasis on low cost Exit of some competitor s

33. 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.

34. 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.

35. 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?

36. 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

37. 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

38. 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

39. 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

40. 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.

41. 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?

42. POSITIVE/ HELPFUL to achieving the goal NEGATIVE/ HARMFUL to achieving the goal INTERNAL Origin facts/ factors of the organization Strengths Things that are good now, maintain them, build on them and use as leverage Weaknesses Things that are bad now, remedy, change or stop them. EXTERNAL Origin facts/ factors of the environment in which the organization operates Opportunities Things that are good for the future, prioritize them, capture them, build on them and optimize Threats Things that are bad for the future, put in plans to manage them or counter them

43. SWOT Analysis of Indian Economy 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 Weaknesses 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 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 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

44. AN ORGANIZATION’S ENVIRONMENT Industry Sector Competitors, Industry size and Characteristics, Related Industries Raw Materials Sector Suppliers, Manufacturers, Real Estate Human Resources Sector Labor Market, Employment Agencies, Universities, Training Schools, Employees in Other Companies, Unionization Financial Resources Sector Stock Markets, Banks, Savings and Loans, Private Investors Market Sector Customers, Clients, Potential Users of Products and Services Technology Sector Techniques of Production, Science, Research Centers, Automation, New Materials Economic Conditions Sector Recession, Unemployment Rate, Inflation rate, Rate of Investment, Economics, Growth Government Sector City, State, Federal Laws and Regulations, Taxes, Services, Court System, Political Processes Socio-Cultural sector Age, Values, Beliefs, Education, Religion, Work Ethic, Urban vs. Rural, Birth Rate ORGANIZATION DOMAIN Task Environment Macro Environment