CH4 Nature Of The Global Business Environment Flashcards
The environment a business operates in exerts 3 basic forms of influence- what are they?
Threats - to well being, and opportunities to exploit
Resources- human, funds supplies
Pressure groups-government bodies, action groups, general public
In what ways can an organisation react to its environment?
Do nothing- if convinced problem is insignificant
Monitor environment carefully, but not respond yet
Increase its flexibility through contingency planning and product market development
Plan major strategic change- if decide situation is important
What different types of environment are there and how does each affect strategy development ?
Stable and unchanging- organisation can focus on past decisions and results and on attempting to correct past mistakes. Tactical planning more important than strategic planning
Stable with minor fluctuations- e.g. An environment characterised by cyclical or seasonal fluctuations. Here, policies and procedures can be implemented which only need to take into account changes in activity levels.
Gradually changing in predictable fashion- organisation recognises that its environment is slowly being changed to something new and predictable. It can make necessary adjustments to its goals, strategic direction and organisational structure and systems so it can proceed for the future
Rapidly changing in an unpredictable fashion- highly turbulent. Strategic planning more important than tactical planning. Effectiveness (doing the right things) just as important as efficiency (doing things the best way). Organisations must find creative ways of adapting to their environments in order to survive.
Which part of corporate appraisal deals with environmental analysis?
The opportunities/threats part.
What is the macro environment and what approach is used to analyse the environment?
Macro environment consists of factors that cannot be directly influenced by the organisation itself. A company must respond to these factors rather than try to control them.
Use PESTLE approach
Where is PESTLE used and what does the acronym stand for?
The PESTLE approach is used the assess the macro environment, to understand opportunities and threats- crucial to shaping future strategic decisions
POLITICAL influences and events, legislation, government policy, changes to competition policy or import duties. E.g. In UK rail industry- balance of public/private involvement in running costs and capital investment for future rail development is a major issue
ECONOMIC influences - changes in GDP, changes in consumer income and expenditure, population growth. E.g. U.K. Rail- rail system at full capacity, high cost of fuel make car travel expensive. Their is a need for investment in infrastructure and financing this investment may be difficult.
SOCIAL influences- includes social, cultural or demographic factors. (Population shifts, age profiles etc) and refers to attitudes, values and beliefs of people; also changes in lifestyle, education and health etc
TECHNOLOGICAL influences- changes in material supply, processing methods and new product development e.g. In U.K. Rail - introduction of tilting train, internet access for passengers etc
LEGAL influences- changes in laws and regulations affecting for example competition, patents, sale of goods, pollution, working regulations etc
ECOLOGICAL/ ENVIRONMENTAL influences- include impact organisation has on external environment in terms of pollution etc
It doesn’t matter under which category an influence has been listed
What is porters five forces model ?
A well established framework for analysing and understanding the nature of the competitive environment.
Identifies 5 competitive forces that help determine the level of profitability for an industry or business within an industry. Porter emphasises that some industries and some position within and industry are more attractive than others.
Companies must analyse the 5 forces and assess the relative strength of each force. Their will determine the POTENTIAL PROFIT OF THE INDUSTRY.
Identify and explain each of porters five forces.
1 - NEW ENTRANTS - New entrants bring extra capacity and intensify competition. How easy it is for competitors to enter depends on barriers to entry:
Economies of scale - where unit cost decline significantly with increase production it will be harder for a new company to compete
Product differentiation- established companies brand image and customer loyalty can be difficult to overcome
Where large investment of Capital required- e.g. Steel industry
Switching costs - where cost of moving from one supplier to another are high, can make if difficult for new company to establish a supply chain.
Restricted access to distribution channels can make it difficult for a new product to gain shelf space. E.g. Major toiletries brands 90% of sales go through less buying points ( large chemists and major retailers)
Cost advantage of existing producers patents special knowledge etc
Government policy-can limit or stop entry to industries. Control such as licence requirements and limiting access to raw materials.
RIVALRY AMONGST COMPETITORS - existing competition and it’s intensity:
Number and strength of competitors
Rate of growth- where market is expanding rapidly competition is low key
High fixed costs- companies will cut prices to marginal cost to protect volume
Ease of switching suppliers- if buyer can switch -competition will be stronger.
Exit barriers- if high companies hang on until forces out, increasing competition and depressing profit
Strategic need-organisation will be highly competitive if it is in the market as a result of a strategic need.
SUBSTITUTES - threat across all industries, limit potential returns.
POWER OF BUYERS - powerful buyers can force price cuts or improved quality.
Bargaining power of buyers affected by:
Proportion of suppliers business to individual buyers purchases
Importance of quality or delivery timing. Where these are less important prices will be forced down.
Level of differentiation. Products with good brand image will be demanded by customers and retailers will be forced to stock these products.
POWER OF SUPPLIERS- can charge higher prices and force down profit margins. Affected by :
Degree to which switching costs apply and substitutes available
Presence of 1 or 2 dominant suppliers controlling prices
Extent to which products offered have a uniqueness of brand, technical performance or design not matched elsewhere
What are the benefits of using recognised environmental models for external analysis (PESTLE, porters 5 forces)
- ensure management consider wide range of environmental impacts when divising strategy
- allow division of the work- i.e. One team deals with suppliers, another with buyers
- well known so provides common language for managers
- provide insight into key strategic issues
In what ways are companies affected by globalisation?
- Relocation of manufacturing facilities- to countries with lower cost base (offshoring) or, in the case of Nissan, building factory in Sunderland to avoid EU Import quotas/tariff. Also some non western countries have developed regional areas of excellence - Bangalore India telecommunications.
- Emergence of growth markets - previously closed markets, opening up to western firms. If tastes are becoming more homogeneous this presents opportunities for firms to sell in countries previously discounted.
- global expansion plans and relaxed trade barriers has resulted in increased competition. It has also facilitated greater access. Increased calls for protectionism, countries trying to protect their domestic industries - by taxes on foreign imports and trade barriers.
- Cross national business alliances/ mergers - to exploit opportunities e.g. Greater economies of scale, obtain expertise, better tax positioning etc
- Widening economic divisions between countries - opponents to globalisation argue that it’s creating new gaps between rich and poor.
Not all countries taking part in information revolution and are falling further behind the “digital divide”
Drive to liberalise trade e.g. Reduce regulation (including legal protection of workers) has a negative impact on lives of millions of people
Many poor countries pressured to orientate their economies towards exporting and to reduce already inadequate spending on public services such as health and education so they can repay their foreign debt.
Porters diamond shows the determinants of national competitive advantage. What are the 4 main factors that make the diamond?
Factor conditions- including availability of raw materials and suitable infrastructure
Demand conditions- goods or services have to be demanded at home as this starts international success
Related and supporting industries- these allow easy access to components and knowledge sharing
Firm strategy, structure and rivalry- if home market is very competitive, a company is more likely to become world class
Give three reasons why demand conditions are important in the home market according to porters diamond.
1 - if demand substantial it enables company to obtain economies of scale and experience to compete globally
2 - experience gained supplying domestic consumers will give global advantage providing
- its customers are varied enough to permit segmentation into groups similar to those found in global market.
- its customers are demanding enough to force world class quality levels
- its customers are innovative in their purchasing behaviour and hence encourage the company to develop new and sophisticated products
3- if maturity stage is reached quickly, this will give the company incentive to enter export markets before others do
When talking about porters diamond related and supporting industries, what is clustering?
Successful companies from a particular country tend to have linkages between them - this is called clustering. Clustering allow for development of competitive advantage by:
- Transfer of expertise
- concentration of advanced factors(e.g. Telecommunications, training,workforce)
- better supplier customer relations in the value chain
Clustering may take place in 2 ways
- common geographical location
- expertise in key industry
In porter diamond what are the two types of factor conditions?
Basic factors- raw materials, semiskilled or unskilled labour and initial capital availability. Largely occur naturally.
Advanced factors- such as infrastructure, levels of training and skill, r & d experience etc.
Porter argues only advanced factors are the roots of sustainable competitive advantage.
What other factors outside of porters diamond theory can lead countries to produce world class companies.
1 - role of government - subsidies, legislation and education can impact on the other four elements of the diamond to benefit industrial base of country
2- role of chance events - chance discoveries, wars, civil unrest - can change four elements of diamond unpredictably
