BUSINESS ENVIRONMENT

Organisation is an open system Business environment: forces outside of business that affect business management’s ability to achieve their objective. Environment: influencing factors Definition of Environment

Why analyze the environment? a)the environment is major source of opportunities and threats; b)environmental developments will either confirm or invalidate planning assumptions; c)changes or the threat of changes in the business environment can in itself provide a trigger to strategy formulation; d)encouraging an ‘open organisation’ which is responsive to the needs of change).

Analyzing the Environment

Framework for Analyzing External Environment

Analyzing the Environment ENVIRONMENTAL ELEMENT BASIS OF ANALYSIS Macro-EnvironmentPESTEL Industry or SectorFive Forces Competitors and MarketsMarket Segments

MACRO ENVIRONEMENT Macro-environment describes those factors, which are beyond the company’s control but nevertheless affect an organization. For example: a)Changes in interest rates b)Changes in cultural tastes, or government regulations.

PESTEL PESTEL analysis framework for analyzing the general environment, and anticipating the future. a)P Political b)E Economic factors c)S Social or demographic developments d)T Technological developments affecting the methods of production or the types of products demanded e)E Environmental f)L Legal and regulatory

PESTEL: POLITICAL AND LEGAL The effect of these factors comes about due to: Laws and regulations passed in parliament – e.g. wages; Minimum wage in Kenya is approx 8,000/= Political stability – investor confidence Judicial systems – degree to which certain laws are enforced National pressure groups Fiscal policies – tax rates Monetary policies – interest rates Political instability

PESTEL: ECONOMICAL Main economic factors include: 1.Economic growth – change in the general level of economic activity. Indicators include: Unemployment levels Level of production in a country Personal income levels Infrastructure

PESTEL: ECONOMICAL cont’d… 2.Inflation – increase in the general level of prices of products over a specified period of time. Causes may be: Particular events which increase cost of production Strong consumer demand causing shortages 3.Interest Rates – the cost of borrowing money, determined by prevailing market rates. Effects Discourage firms wishing to borrow and expand Affect customers who wish to invest in certain businesses

PESTEL: SOCIAL/CULTURAL Include the following: Social institutions – family, religion, education, health Beliefs, lifestyles and values Standards of living Demographics – population, age, income, education levels Changing consumer preferences

PESTEL: TECHNOLOGICAL The effect of technology can be seen in production, marketing, personnel, research etc. Companies must remain at par or become obsolete. Specific effects may be seen in: Quality products Faster and more efficient operation Lower costs of production Faster and better communication Ecommerce Product development

PESTEL: ENVIRONMENTAL Concern for preserving and protecting the natural environment have led to legislations being formulated in this area. Social conscience and sound environmental management is highly rated in companies today

Group Work CASE STUDY ON NMS

INTERNAL/MICRO- ENVIRONMENTAL FACTORS These affect and are affected by the business, and the firm may have control over them. They may include the a)stakeholders and the firm’s resources. b)Internal Resource c)Management d)Intangible Resources e)Tangible resources

STAKEHOLDERS Owners/shareholders Creditors Employees Suppliers Customers Competitors

STAKEHOLDERS - OWNERS who organize, manage, and assume the risk of starting a business, or own shares in the organization. A firm has a responsibility to them to provide them with a decent return on their investment or they sell their firms and move to other firms. They may also refuse to invest more, leaving the firm vulnerable to take over.

CREDITORS Provide the firm with financial support beyond that provided by their owners in order to expand. Creditors are interested in getting loan security and profit from their loans. The firm must convince creditors that it will be sufficiently profitable to make the principal and interest payments for them to continue lending.

Stakeholders - Employees The performance of a firm is highly dependent on the decisions of its employees/managers. Employees are interested in pay, job security and gaining expertise. Should they be denied of these, they may resign, or sabotage the firm through actions like strikes, procrastination, internal politics..

Stakeholders Cont’d Suppliers Provide the firm with the materials to complete the production process. They are interested in continued business with the firm. They may affect the firm’s performance e.g. through delays or failure to deliver the materials, pricing policies etc.

v) Customers Customers are interested in the firm’s products and services. Should the firm not meet their needs, they switch to other suppliers. Firms need to attract customers and retain them. This can be done through providing the desired products/services, taking into consideration aspects like quality and price.

Vi)Competitors Two types of competitors: Enterprise – meeting the same need with the same product Generic – meeting the same need with different products Competitors may affect the firm by taking their market share or through the strategies they pursue that may force the firm to alter their own to remain competitive. The firm should assess the market to be aware of what the competition is doing in terms of pricing, promotion, products etc

Tangible Resources Tangible resources may include: Equipment/machinery Sales-force Financial resources Management etc

Intangible Resources Intangible resources may include: Location suitability Public image/reputation Research and development Time

Management Includes the management and leadership styles used, and the strategies employed in the organization. May also include management structures and the organizational culture, e.g. adaptive to change.

SWOT Analysis A critical assessment of the strengths and weaknesses; opportunities and threats in relation to the internal and environmental factors affecting an entity.

Class Presentation Students to present on SWOT analysis. They should identify a company and do its SWOT Analysis

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