The External Environment
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Environmental
Climate change
Water resources Energy
Recycling
11
Segments of the General Environment (cont’d)
Legal
Employment law Company law
5
The public Legal structures
Source: Adapted from Johnson and Scholes
External Environment: Macro Factors
PESTEL ANALYSIS
(SEE ALSO PEST/ SLEPT)
Political
17
4: Suppliers Bargaining Power:
Suppliers can exert pressure for higher prices. Depends on: Dominance (number) of suppliers Threat of new entrants or substitutes to the supplier’s industry Reliance on customers for the majority of supplier’s sales Importance of supplier’s product to customer’s business Degree of differentiation of supplier’s product How much switching cost are to the customer
20
5 Stages of Environmental Analysis
1.
Audit of environmental influences
Strengths Weaknesses Opportunities Threats
2. Assessment of
the nature of the environment
and development (R&D) expenditures
Changing communication technologies Alternative means of providing services New discoveries
10
Segments of the General Environment (cont’d)
7
Segments of the General Environment (cont’d)
The Economic Segment
Taxation rates
Interest and inflation rates
Exchange rates Consumer confidence Disposable incomes Economic growth prospects
8
Segments of the General Environment (cont’d)
The Socio-cultural Segment
Demographics
Workforce diversity Levels of education Shifts in work and career preferences Shifts in consumer preferences
Industry Analysis done by using The Five Forces model
13
Porter’s Model: 5 competitive forces
14
1:Threat of New Entrants:
New entrants to an industry will bring more competition and extra capacity. Strength of threat depends upon:
3
The Effects Of The External Environment…
/articles/2013-01-03/for-
european-car-buyers-cheap-is-now-chic
/articles/2013-01-
Changes in lifestyle (attitudes to work & leisure/ family
composition)
9
Segments of the General Environment (cont’d)
The Technological Segment
New product potential, creating new competition Rates of private and government-supported research
Economic
Socio-cultural
Technological
Environmental
Legal
6
Segments of the General Environment
The Political Segment
Taxation policy
Government stability Privatisation/ deregulation policies Public expenditure controls European Union directives
EXTERNAL ENVIRONMENT
Macroenvironment
Microenvironment
Suppliers Social factors The organisation Customers Competitors Political structures Technology INTERNAL ENVIRONMENT
1.
2
External Analysis
A business exists within an external environment, consisting of the actions of other players who are outside the business. These external factors are beyond their control
INU3106
Semester 2: Lecture 1 The External Environment
1
Learning Outcomes
Explain the importance of analysing and understanding the firm’s external environment. 2. Define and describe the general environment and the industry environment. 3. Identify the five competitive forces and explain how they determine an industry’s profit potential. 4. Describe what firms need to know about their competitoernal Environment: Micro Factors
Industry Environment Analysis
Industry Defined: A group of firms producing products that are close substitutes Firms that influence one another Includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average returns
A substitute product is a good or a service produced by another industry that satisfies the same customer needs.
16
3: Customers Bargaining Power:
Depends on: How much customer buys How critical your product is to the customer’s success Switching costs Standard items or heavily specialised? Ability to bypass or take over supplier Importance of product quality
18
5:Competitor Rivalry:
Intensity of competition within an industry will affect the profitability of the industry as a whole. This depends on: Market growth Cost structure Switching Capacity Strategic importance
Barriers to entry (eg product differentiation, cost
advantages of existing producers, capital requirements)
Response of existing competitors
15
2:Substitute Products
17/health-insurance-now-sold-in-stores#r=nav-r-story
4
The Organisation’s Environment
The economy Cultural forces Channels (distributors, dealers & sales force) Demography
19
Using the Five Forces Model to analyse the External Environment
Helps identify what is happening and what might
happen in the industry Reveals opportunities and threats Makes strategists think about their proposed strategy and identify where the strategy might have to be changed Also helps strategists think about whether moving into or staying in an industry is a good thing Key aspect is the industry in which that organisation competes
General environment: PEST(EL) analysis
Macro level identifies the drivers of change
Competitive environment: 5 Forces analysis Micro level assessment of the industry Porter’s 5 Forces
Climate change
Water resources Energy
Recycling
11
Segments of the General Environment (cont’d)
Legal
Employment law Company law
5
The public Legal structures
Source: Adapted from Johnson and Scholes
External Environment: Macro Factors
PESTEL ANALYSIS
(SEE ALSO PEST/ SLEPT)
Political
17
4: Suppliers Bargaining Power:
Suppliers can exert pressure for higher prices. Depends on: Dominance (number) of suppliers Threat of new entrants or substitutes to the supplier’s industry Reliance on customers for the majority of supplier’s sales Importance of supplier’s product to customer’s business Degree of differentiation of supplier’s product How much switching cost are to the customer
20
5 Stages of Environmental Analysis
1.
Audit of environmental influences
Strengths Weaknesses Opportunities Threats
2. Assessment of
the nature of the environment
and development (R&D) expenditures
Changing communication technologies Alternative means of providing services New discoveries
10
Segments of the General Environment (cont’d)
7
Segments of the General Environment (cont’d)
The Economic Segment
Taxation rates
Interest and inflation rates
Exchange rates Consumer confidence Disposable incomes Economic growth prospects
8
Segments of the General Environment (cont’d)
The Socio-cultural Segment
Demographics
Workforce diversity Levels of education Shifts in work and career preferences Shifts in consumer preferences
Industry Analysis done by using The Five Forces model
13
Porter’s Model: 5 competitive forces
14
1:Threat of New Entrants:
New entrants to an industry will bring more competition and extra capacity. Strength of threat depends upon:
3
The Effects Of The External Environment…
/articles/2013-01-03/for-
european-car-buyers-cheap-is-now-chic
/articles/2013-01-
Changes in lifestyle (attitudes to work & leisure/ family
composition)
9
Segments of the General Environment (cont’d)
The Technological Segment
New product potential, creating new competition Rates of private and government-supported research
Economic
Socio-cultural
Technological
Environmental
Legal
6
Segments of the General Environment
The Political Segment
Taxation policy
Government stability Privatisation/ deregulation policies Public expenditure controls European Union directives
EXTERNAL ENVIRONMENT
Macroenvironment
Microenvironment
Suppliers Social factors The organisation Customers Competitors Political structures Technology INTERNAL ENVIRONMENT
1.
2
External Analysis
A business exists within an external environment, consisting of the actions of other players who are outside the business. These external factors are beyond their control
INU3106
Semester 2: Lecture 1 The External Environment
1
Learning Outcomes
Explain the importance of analysing and understanding the firm’s external environment. 2. Define and describe the general environment and the industry environment. 3. Identify the five competitive forces and explain how they determine an industry’s profit potential. 4. Describe what firms need to know about their competitoernal Environment: Micro Factors
Industry Environment Analysis
Industry Defined: A group of firms producing products that are close substitutes Firms that influence one another Includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average returns
A substitute product is a good or a service produced by another industry that satisfies the same customer needs.
16
3: Customers Bargaining Power:
Depends on: How much customer buys How critical your product is to the customer’s success Switching costs Standard items or heavily specialised? Ability to bypass or take over supplier Importance of product quality
18
5:Competitor Rivalry:
Intensity of competition within an industry will affect the profitability of the industry as a whole. This depends on: Market growth Cost structure Switching Capacity Strategic importance
Barriers to entry (eg product differentiation, cost
advantages of existing producers, capital requirements)
Response of existing competitors
15
2:Substitute Products
17/health-insurance-now-sold-in-stores#r=nav-r-story
4
The Organisation’s Environment
The economy Cultural forces Channels (distributors, dealers & sales force) Demography
19
Using the Five Forces Model to analyse the External Environment
Helps identify what is happening and what might
happen in the industry Reveals opportunities and threats Makes strategists think about their proposed strategy and identify where the strategy might have to be changed Also helps strategists think about whether moving into or staying in an industry is a good thing Key aspect is the industry in which that organisation competes
General environment: PEST(EL) analysis
Macro level identifies the drivers of change
Competitive environment: 5 Forces analysis Micro level assessment of the industry Porter’s 5 Forces