4. External Analysis Flashcards
PESTEL
Politics Economics Social Technological Environmental Legal
PESTEL examines trends in
political, economic, social, technological environment (green) & legal environments that might impinge on/influence orgs.
Provides broad data to id. key drivers of change→ to construct possible future scenarios
Politics
Role of gov
Bilateral agreements
Government regulation of airlines
Interaction with other governments in international
Political instability
Political tensions between Chile and other countries
ECONOMICS
Macroeconomic factors, (exchange rates, business cycles, economic growth)
Demand for services
Recessions/inflation would all affect costs and revenues
Prices of three major costs - labor, planes, fuel
SOCIAL
Changing cultures + demographics, eg aging populations
Changing demographic of consumers wanting flights e.g. more urban less rural
Push for CSR, CSV
TECHNOLOGICAL
Machine learning,
Highly sophisticated data systems utilised by competitors
THe buying and selling of data by companies to obtain a CA
ENVIRONMENT
Green issues, waste, climate change Pollution Push for sustainability in consumers and government Fuel shortages Impact of planes on the environment Waste and packaging trends
LEGAL
Legislative constraints/changes
Bilateral agreements
Legislation
Criticisms of PESTEL
o Not about industry, sector or segment analysis
o Does not tell you what to do
o Only tells possibilities
o Identify possible scenarios but does not take you to end decision
o Not internal analysis
o Because of scope, a lot to cover
o Some shocks hard to anticipate
How to use PESTEL considering there are so many things to look at
must build scenarios based offering plausible alternative iews of how the business environment of an organisation might develop into the future.
Good to have optimistic, middling and pessimistic scenarios
What is PESTEL & when is it useful?
framework used to analyse and monitor the macro-environmental factors that may have a profound impact on an organisation’s performance.
This tool is especially useful when starting a new business or entering a foreign market.
Porter’s 5 Forces is a model that identifies
5 competitive forces that shape every industry and helps determine what an industry’s weaknesses & strengths are
- Thread of entry
- Threat of substitutes
- Power of buyers
- Power of sellers
- Extent of rivalry
For external analysis P5F what are the 2 things to do first
- Define industry (worldwide arena, cargo & passengers)
- Identify market players (Other airlines based on Latin America who have or are planning international expansion, who have a comparable size to LAN
In terms of operating income, most relevant would be TAM and Gol + other cargo airlines)
- Thread of entry LAN
High costs of capital outlay in the form of labour, fuel and aircraft
Deregulation welcomed new competitors, however ultimately still highly regulated and needed to satisfy strict requirements
Need for bilateral agreements prevent international expansion often
Need to obtain permission or ‘flying rights’ from local governments to operate routes
Domestic - need national subsidiary
Many low-cost carriers currently operating in a similar fashion to LAN
Bigger companies have the capacity to undercut costs and leverage their superior route networks to drive out smaller entrants
Economies of scale in schedule maintenance and pilot training by having similar planes in both the passenger and cargo version and the scale of expansion reached by airlines makes it hard to enter the market
Direct marketing to LanPass frequent flyer program which already has large market reach of 28 mil - hard to compete
- Threat of substitutes
Substitutes for plane travel would be other forms of transport like car, bus, ship or train
For international routes, which make up about 76% of the business, there is low threat of substitutes given the advantage plane travel has to other forms of transport in terms of time and convenience
Given that there are no secondary airports in Latin America, and the lack of Internet access in a large number of households, the threat of substitution is higher in Latin America
With cargo, often airplane is the best method especially for perishable goods, and the value to weight ratio being high
impact of threat of substitutes
Can reduce demand for a particular ‘class of products as customers switch to alternatives But the risk of substitution itself can place a cap on market prices
Factors under threat of substitutes
price performance ratio- (offering greater performance that customers value means can charge higher price)
Extra-industry effects (substitutes come from outside the industry)
Typical barriers for the threat of entry (noting to that compete successfully these barriers must be overcome)
- Scale & experience (having economies of scale as LAN does)
- Access to supply/distribution channels (LAN has extensive access to routes)
- Expected retaliation (price wars etc)
- Legislative/gov action (bilateral agreements vs. open air policies in europe)
- Differentiation
- Power of buyers (buying power is high if)
- concentrated buyers (a few large customers–> not here)
- Low switching costs (potentially, however mitigated by loyalty scheme)
- Buyer competition threat (no)
- Power of sellers
- concentrated fuel suppliers leaves LAN in weak position (mitigated via hedging) + planes (only a few suppliers)
- High switching costs (no alternative, same for planes)
- Extent of rivalry
(he wider competitive forces of suppliers, potential entrants, buyers and subs all impinge on direct competitive rivalry btw an organisation & its most immediate rivals. Thus low barriers to entry increase no. rivals, powerful buyers w low switching costs force their suppliers to high rivalry in order to offer the best deals. More competitive rivalry there is, the worse it is for incumbents within the industry. )
- Competitive rivals (ie Gol, US airlines)
- Competitor balance, LAN is largest in LA (has size advantage)
- Industry growth rate: high growth of low cost airlines
- High fixed costs - here requires high investments,
- High exit barriers boosts rivalry
- Low differentiation (here, to some extent, loyalty program maybe mitigates this)
Porter’s 5 forces must
PROMPT INVESTIGATION OF IMPLICATIONS
Which industries to enter/leave?
What influence can be exerted?
How are competitors differently affected?
Don’t just list forces but assess attractiveness
Limitations of P5F
- hard to define the right industry (most can be analysed on different levels) –> Converging industries,
- Analysis can become too static, since determining industry structure implies having stability to do so
- Based on structure-conduct-performance (or Industrial Economics) approach
that has largely been replaced by game theory - Absence of non-market actors
- Does not explain new ways of competing
- Does not explain why some firms perform better than others in the same
environment (need RBV)
P5F industry life cycle
1. development stage Start small, experimental, few players exercising little direct rivalry 2. Go thru period of rapid growth 3. Culminating in ‘shake out’ period 4. Period of slow/even 0 growth 5. Final stage of decline
What are the boundary limitations of P5F?
o People
o Process
o Implementation
o Time
Steps for P5F
- Define industry
(Don’t stick to organisation level) - Identify market participants (players or stakeholders)
- Analyse player’s influence on profitability
- Test the analysis
Where do I stand with respect to the five forces? - Develop a way to deal (or respond) with the industry environment –> How to nullify the pressure?
- Analyse how the factors influencing profitability may change (and response
required)
