4. The External Environment

Question 1

How doe the external environment affect a business?

What are the levels of the external environment?

What are the drivers of change?

Define strategic drift?

Answer 1

• The external environment can be analysed in terms of the (macro-environment) or those relevant to a specific market (micro-environment). It is a source of threats (external changes which could damage a business) and also opportunities (external changes which a business could exploit to its advantage).
• The levels of the external Environment - see picture.
• Changes in the external environment can act as DRIVERS OF CHANGE, in how businesses operate, organisations generally, need to take advantage of opportunities and respond to threats which arise in the external environment
• STRATEGIC DRIFT An organisation’s strategies fail to address its strategic position, particularly in response to environmental change, leading to a deterioration in the organisation’s performance.

Question 2

Explain the phases of the strategic drift?

Answer 2

• Phase 1: Incremental change: The organisation takes a series of logical, incremental steps of its plan to change ahead of the market and develop a competitive advantage.
• Phase 2: Strategic Drift: The rate of change in the market speeds up, and the firm’s incrementalist approach is not enough to maintain its advantage, and it is left behind.
• Phase 3: Strategic Flux: Faced with a stimulus for action, managers may seek to extend the market for their business, but may assume that it will be similar to their existing market, and therefore set about managing the new venture in much the same way as they have been used to. If this is not successful, strategy development is likely to go into a state of flux, with no clear direction, further damaging performance.
• Phase 4: Transformational change or demise: Eventually transformational change is required if the demise of the organisation is to be avoided. Transformational change tends to occur when performance has fallen off significantly, i.e. in times of crisis.

Question 3

How can business analyse the Macro-Environment?

Answer 3

Organisations can use P.E.S.T or P.E.S.T.E.L analysis as a framework for analysing the general business environment (macro-environmental), and the opportunities and threats present in the environment.

• P olitical
• E conomic
• S ocial
• T echnological
• E nvironmental
• L egal

Question 4

What is Porters Diamon used for?

and

Briefly describe the Elements?

and

How does Clustering and Government Policy come into effect?

Answer 4

Used when analyzing foreign markets for potential entry:-

1. When thinking about investing in a new country, and assessing the opportunities and threats.
2. How competitive the country is?

Components of Porters Diamond:-

1. Factor conditions – relates to a country’s resources, (so in effect are ‘supply-side’ factors).
   
   • Basic Factors - basic pre-conditions which are needed for the industry to be
     successful, generally provide no strategic advantage.
   • Advanced Factors - their presence can help to promote competitive advantage.
2. Home Demand Conditions - the tough domestic market is likely to encourage competitiveness
3. Related and supporting industries
4. Firm strategy, structure and rivalry – Cultural factors, social attitudes and management styles can all lead to competitive advantage. Intense domestic rivalry means firms need to perform well.

Combination of these factors can create CLUSTERING of extremely competitive firms, which can support each other and are well placed to compete on an international stage. e.g Silicon Valley.

Government policy can also be important in nurturing the elements of the diamond, for example, investing in infrastructure and higher education.
The tax regime and government’s attitudes to foreign investors could also affect a multinational company’s decision about whether or not to invest in a country.

Question 5

What is porters 5 forces model used for?

and

Briefly describe the model?

Answer 5

Used for?

1. Analysing the inherent profitability (and therefore attractiveness) of a particular industry or market segment.
2. Identify actions to take on the competitive forces on an organisation that
   – Mitigate their damaging effects (threats)
   – Promote the beneficial effects (opportunities)
3. Considering whether all competitors are affected equally by the forces.

Components

1. Threat of New Entrants

• Barriers to entry
• How will the market respond to New Entrants

2. Bargaining power of Suppliers

3. Bargaining power of Buyers - Factors such as size, ability to switch or alternatives available.

4. Threat of substitutes

5. Competition and rivalry - between existing firms.

Question 6

Briefly explain the stages of the industry life cycle?

Answer 6

• - Development
• - Growth
• - Shakeout
• - Maturity
• - Decline

Question 7

How do Customers and Markets affect the strategy of a business?

Answer 7

Businesses need to also look at how there products and services are attractive to customers of the market. To be successful, a company needs to satisfy its customers better, and respond to market opportunities more effectively, than its competitors.

Customers,how does the business meet customers demands?“CSF” Critical Success Factors.

Market Attractiveness - How attractive is the market to the business, determined by factors such as

• the size of the market;
• profit margins
• market growth (and growth expectations);
• existing suppliers; and
• the intensity of competition.

Question 8

What is scenario planning? and How does it affect the business?

Answer 8

Scenario planning: Involves constructing plausible views of how the business environment of an organisation might develop in the future, based on sets of key drivers for change.

The aim of scenario planning is to learn rather than predict the future, so organisations are often advised to produce multiple scenarios, to maximise the learning and contingency planning if necessary.

Stages of Scenario Planning see image