4. External Analysis

Question 1

PESTEL

Answer 1

Politics
Economics
Social
Technological
Environmental
Legal

Question 2

PESTEL examines trends in

Answer 2

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

Question 3

Politics

Answer 3

Role of gov
Bilateral agreements
Government regulation of airlines
Interaction with other governments in international
Political instability
Political tensions between Chile and other countries

Question 4

ECONOMICS

Answer 4

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

Question 5

SOCIAL

Answer 5

Changing cultures + demographics, eg aging populations
Changing demographic of consumers wanting flights e.g. more urban less rural
Push for CSR, CSV

Question 6

TECHNOLOGICAL

Answer 6

Machine learning,
Highly sophisticated data systems utilised by competitors
THe buying and selling of data by companies to obtain a CA

Question 7

ENVIRONMENT

Answer 7

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

Question 8

LEGAL

Answer 8

Legislative constraints/changes
Bilateral agreements
Legislation

Question 9

Criticisms of PESTEL

Answer 9

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

Question 10

How to use PESTEL considering there are so many things to look at

Answer 10

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

Question 11

What is PESTEL & when is it useful?

Answer 11

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.

Question 12

Porter’s 5 Forces is a model that identifies

Answer 12

5 competitive forces that shape every industry and helps determine what an industry’s weaknesses & strengths are

1. Thread of entry
2. Threat of substitutes
3. Power of buyers
4. Power of sellers
5. Extent of rivalry

Question 13

For external analysis P5F what are the 2 things to do first

Answer 13

1. Define industry (worldwide arena, cargo & passengers)
2. 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)

Question 14

1. Thread of entry LAN

Answer 14

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

Question 15

2. Threat of substitutes

Answer 15

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

Question 16

impact of threat of substitutes

Answer 16

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

Question 17

Factors under threat of substitutes

Answer 17

price performance ratio- (offering greater performance that customers value means can charge higher price)
Extra-industry effects (substitutes come from outside the industry)

Question 18

Typical barriers for the threat of entry (noting to that compete successfully these barriers must be overcome)

Answer 18

1. Scale & experience (having economies of scale as LAN does)
2. Access to supply/distribution channels (LAN has extensive access to routes)
3. Expected retaliation (price wars etc)
4. Legislative/gov action (bilateral agreements vs. open air policies in europe)
5. Differentiation

Question 19

3. Power of buyers (buying power is high if)

Answer 19

1. concentrated buyers (a few large customers–> not here)
2. Low switching costs (potentially, however mitigated by loyalty scheme)
3. Buyer competition threat (no)

Question 20

4. Power of sellers

Answer 20

1. concentrated fuel suppliers leaves LAN in weak position (mitigated via hedging) + planes (only a few suppliers)
2. High switching costs (no alternative, same for planes)

Question 21

5. 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. )

Answer 21

1. Competitive rivals (ie Gol, US airlines)
2. Competitor balance, LAN is largest in LA (has size advantage)
3. Industry growth rate: high growth of low cost airlines
4. High fixed costs - here requires high investments,
5. High exit barriers boosts rivalry
6. Low differentiation (here, to some extent, loyalty program maybe mitigates this)

Question 22

Porter’s 5 forces must

Answer 22

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

Question 23

Limitations of P5F

Answer 23

1. hard to define the right industry (most can be analysed on different levels) –> Converging industries,
2. Analysis can become too static, since determining industry structure implies having stability to do so
3. Based on structure-conduct-performance (or Industrial Economics) approach
   that has largely been replaced by game theory
4. Absence of non-market actors
5. Does not explain new ways of competing
6. Does not explain why some firms perform better than others in the same
   environment (need RBV)

Question 24

P5F industry life cycle

Answer 24

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

Question 25

What are the boundary limitations of P5F?

Answer 25

o People
o Process
o Implementation
o Time

Question 26

Steps for P5F

Answer 26

1. Define industry
   (Don’t stick to organisation level)
2. Identify market participants (players or stakeholders)
3. Analyse player’s influence on profitability
4. Test the analysis
   Where do I stand with respect to the five forces?
5. Develop a way to deal (or respond) with the industry environment –> How to nullify the pressure?
6. Analyse how the factors influencing profitability may change (and response
   required)