2. An Organisation's Environment Flashcards
What is the PESTEL model?
Looks at at environmental influences that are large and powerful:
The macro-environment
What does PESTEL stand for?
- Political
- Economic
- Social
- Technological
- Ecological/environmental
- Legal
Describe political environmental influences.
For example:
- Joining/leaving the EU
- Political tensions
- War
- Alliances
- Change of government
Describe economic environmental influences.
For example:
- Interest rates
- Exchange rates
- Tax rates
- Global economy health
Describe social environmental influences.
Aka demographic change.
For example:
- Many western countries have decreasing number of young people compared to old people.
- Taste/fashions/fads (e.g. veganism)
- Expectation for easily available travel (flights)
- Streaming services more popular than TV (Netflix)
Describe technological environmental influences.
For example:
- Banks need fewer branches
- Bookshops and music shops affected by Amazon
- Information on customer preferences
- Movement to electric vehicles
Describe ecological environmental influences.
For example:
- Airlines under pressure for high emissions
- Pressure for effective waste disposal
Should improve long-term sustainability.
Describe legal environmental influences.
For example:
- Consumer protection
- Employment protection
- Safety laws
What is Porter’s 5 Forces model?
A framework to analyse industry sectors and industry attractiveness.
What is industry attractiveness?
How easily a business will be able to make reasonable profits?
What are reasonable profits?
A profit large enough to compensate investors for their risk while making enough to reinvest to keep the company successful.
What are the five forces of Porter’s 5 Forces model?
- Rivals/competitors
- Customers/buyer pressure
- Suppliers
- Potential entrants
- Substitute products
Describe competition (Porter’s 5 Forces).
- Ranges from perfect competition to monopoly.
- Perfect competition is where selling prices are governed by market prices.
- The seller with monopoly can mostly determine the price, and this will govern the demand.
When might a monopoly be bad?
If you have a monopoly of something nobody wants.
How might a business gain a monopoly?
By taking over rivals or forcing them out of business by lowering prices temporarily.
Describe buyer pressure (Porter’s 5 Forces).
- If buyers are powerful, they can exert pressure on prices, quality and delivery time.
- Having fewer customers will make them more powerful
How might a business decrease the power of buyers?
- By having lots of buyers
- By making it hard for them to switch between suppliers. Can do this by creating switching costs/impediments
Describe suppliers (Porter’s 5 Forces).
- Buying components from a monopoly supplier can be disadvantageous
- They could raise prices
- They could be taken over by rival, leaving you with no supplies.
- Combat this by trying to multi-source supplies, set up own supply organisation or take over an existing supplier.
Describe potential entrants (Porter’s 5 Forces).
- Are on the edge of the industry and may be attracted into it by potential for good profits.
- They can be deterred if there is a legal monopoly or regulations.
- E.g. banking is hard to get into because of regulatory authorities that need to give permission. Other deterrents include high initial capital requirement, and expert knowledge.
Describe substitute products (Porter’s 5 Forces).
- Usually arise from advance of technology.
- Can catch businesses off-guard.
- Can’t really be avoided.
- Most old industries have to join the new industry.
- E.g. landline companies thought they almost had monopoly due to cost of laying landlines, but mobile phones meant that coverage could be achieved with lower expense.
What is Porter’s value chain?
A method used to examine how a business makes profits or margin.
Describe the Porter’s value chain diagram.
- Looks like a house turned 90° clockwise.
- The bottom half has the primary activities next to each other horizontally.
- The top half has the secondary/support activities above and below each other vertically.
- The right side (roof of house) represents profit or margin.
What are the primary activities in Porter’s value chain?
Equate to direct costs
- Inbound logistics
- Operations
- Outbound Logistics
- Marketing & Sales
- Service
What are the secondary/support activities in Porter’s value chain?
Equate to indirect costs
- Infrastructure
- Technology & development
- Human resources management
- Procurement
Are any costs excluded from Porter’s value chain?
No, every activity is shown in the diagram, and every activity has an associated cost.
What is value-added (Porter’s value chain)?
It is the explanation for why buyers are willing to spend more on goods/services than the sum of it cost the business to procure them.
For example:
- Bringing expert skills
- Providing convenience
- Having lower prices than competitors
- Having good research and development.
Give examples of how sections of the Porter’s Value Chain are linked.
- Spending more on human resource management may reduce cost of operations (because staff are better trained)
- Spending more on technology and development may reduce cost of after-sale service (because quality of goods are higher)
What is a value network?
A set of organisations, each with their own value chain, that each contribute in some way to the value of the final product.
What does SWOT stand for in SWOT analysis?
Refers to an organisation’s:
- Strengths
- Weaknesses
- Opportunities
- Threats
Which factors in a SWOT analysis are internal?
Strengths and weaknesses
- An organisation may have strong finance but a weak portfolio of products.
Which factors in a SWOT analysis are external?
Opportunities and threats
- An organisation may have the threat of an overseas competitor moving into the country, or there could be opportunities to take over a competitor.
What should organisations aim to do in relation to a SWOT analysis?
Match strengths to opportunities
- Strong finance would give the opportunity to takeover a weak competitor.
Avoid relying on areas they are weak, or try to improve the weakness to defend themselves.
