Module 1, Chapter 2 - Analysing The Business Environment

Question 1

Why is effective situational analysis useful?

Answer 1

Effective situational analysis is crucial in helping organisations realise their vision by identifying factors
that may impact on their current mission activities. Since the business environment changes constantly, organisations need to constantly analyse their environment to develop the capacity to identify potential issues and anticipate changes that may affect their activities and be able to respond accordingly.

Question 2

Insufficient analysis of the internal and external business environment can have detrimental effects on an organisation and its survival. Provide examples why.

Answer 2

It can result in senior management developing and implementing unrealistic or inappropriate business strategies that cause issues such as a decline in profitability, loss of market share, reputational damage, a decreased level of sales or even causing the organisation to fail completely.

Similarly, being slow to respond to issues identified in an analysis of the business
environment, not developing an appropriate response, or failing to respond at all, can also cause an organisation to miss out on opportunities or eventually fail.

Question 3

Name two examples of situational analysis methods used to understand an organisation’s external environment.

Answer 3

PESTEL and LoNGPESTEL used to understand an organisation’s external environment.

Question 4

Name the method of situation analysis used to understand the interconnection between an organisation’s internal and external environment.

Answer 4

SWOT analysis is used to understand the interconnection between an organisation’s internal and external
environment.

Question 5

What is the purpose of PEST/ PESTEL analysis?

Answer 5

The purpose of this analysis is to identify the external political, economic, social/
sociocultural, technological, legal and environmental factors that might affect an organisation’s operations.

Question 6

What are political factors?

Answer 6

Political factors look at the government regulations and legal issues affecting an organisation’s activities that can only be changed by political parties. For example, tax policies, copyright and property law enforcement, political stability, trade regulations, social and environmental policy, employment laws and safety regulations.

Question 7

What are economic factors?

Answer 7

Economic factors are anything that influence the economy (e.g. taxes, inflation rates, stock market trends, wage costs).

Question 8

What are sociocultural factors?

Answer 8

Sociocultural factors mainly revolve around consumer behaviour and potential customers (e.g. buying trends, demographics, population growth rates, age distribution). Attitudes towards work and job market trends affect how consumers spend their money. As most organisations need customers, this part of the PESTEL analysis is extremely important when trying to understand the organisation’s external environment.

Question 9

What are technological factors?

Answer 9

Technological factors consist of levels and advancements in technology. Changes that impact how organisations can use technology to sell products and communicate with consumers will be of particular interest in a PESTEL analysis and technological factors will be the most important factors to understand for IT-based organisations

Question 10

What are environmental factors?

Answer 10

Environmental (or ecological) factors look at issues such as climate change, weather patterns and ecological-friendliness of products. The leisure and tourism, forestry, and agriculture industries and any organisations whose business is often dependent on the weather are affected by these factors more than other industries. Bad weather can affect revenue and profits (e.g. large outdoor events being cancelled or experiencing low turnout due to poor weather).

Question 11

What are legal factors?

Answer 11

Legal factors affect how an organisation operates, facilitates business and handles product demands (e.g. obtaining a patent to ensure a competitor doesn’t copy a product). Legal factors also include laws covering consumer protection, health and safety and data protection.

Question 12

What are the three geographical levels defined as?

Answer 12

Geographical level is defined as:

• Local level – the organisation’s home town, city or region.
• National level – the organisation’s home country.
• Global level – any region beyond the local or national level.

Question 13

What is the difference between PESTEL VS A LoNGPESTEL?

Answer 13

PESTEL does not consider geographical factors whereas LoNGPESTEL does.

Question 14

What is one disadvantage to PESTEL when used in isolation?

Answer 14

Used in isolation however, a PEST/PESTEL/LoNGPESTEL analysis is limited as it doesn’t consider the organisation’s internal or competitive environments.

Question 15

What does SWOT identify and analyse?

Answer 15

SWOT analysis is taken from the perspective of the organisation by identifying sources of
Opportunities and Threat (its external environment) and analysing the organisation’s Strengths and Weaknesses (its internal environment)

Question 16

What is the purpose of SWOT?

Answer 16

SWOT examines the organisation’s current and future situation to help plan strategies to help the organisation react effectively to changes in the business environment. By building on current strengths and reducing current weaknesses, organisations can develop the capability to respond to opportunities in the market, whilst reducing the impact that any threats within the market may have on the organisation, its activities and future success.

Question 17

Define strength (in relation to a company).

Answer 17

Strengths describe the positive attributes, tangible and intangible, internal to the organisation that are within its control.

Question 18

Define weakness (in relation to a company).

Answer 18

Weaknesses are aspects of the organisation that detract from the value it offers in the market or that place the organisation at a competitive disadvantage. Weaknesses need to be enhanced to compete effectively in the market.

Question 19

Define opportunities (in relation to a company).

Answer 19

Opportunities are external attractive factors that represent reasons the organisation is likely to prosper.

Question 20

Define threats (in relation to a company).

Answer 20

Threats are external factors beyond the organisation’s control that could place its strategy, or the organisation itself, at risk. Even though the organisation has no control over these factors, it is beneficial to have contingency plans in place to address them should they occur

Question 21

Using SWOT, list internal strengths of a company.

Answer 21

Strengths (internal, positive factors)

• Advantages over competitors
• Special expertise – what does the organisation do
  well?
• Cost advantages
• Reputation or unique selling point

Question 22

Using SWOT, list internal weaknesses of a company.

Answer 22

Weaknesses (internal, negative factors)

• Disadvantages
• Limitations
• Deficiencies
• Problems and issues (e.g. staff problems, poor
  management decisions)

Question 23

Using SWOT, list external opportunities of a company.

Answer 23

Opportunities (external, positive factors)

Identify opportunities the organisation can take
advantage of, for example:

• New technology or services
• Lack of competition in the market
• New markets to enter
• Areas where the organisation can improve

Question 24

Using SWOT, list external threats of a company.

Answer 24

Threats (external, negative factors)

• New or increased competition in the market
• Obstacles the organisation may face
• Changes in external factors that may influence operations (e.g. government policy, economy
  downturn)