The external environment Flashcards
ANALYSING THE OPERATIONAL ENVIRONMENT - RECOGNISING THE BOUNDARIES
What are the 4 boundaries within which an organisation operates as suggested by Johnson et al (2017)?
Expand on what the micro environment is. (Forces and influences and directors ability)
Can an organisation influence and change the positioning of its boundaries?
- Organisation (at the centre) = before considering the organisation itself in detail, it is important to recognise the differing influences of the boundaries that surround it
- Competitors and markets (micro environment)
- Industry or sector (micro environment)
Micro environment = forces and influences that will impact daily business but are not part of business itself = directors and managers will be forced to react, but have some level of ability to influence these layers and change the structure and impact that they have upon an organisation
- The macro environment = control and influence been replaced by the need to respond
Boundaries can be fluid across a passage of time = an organisation can influence and change the boundaries that exist within the fist 3 circles, but in the macro environment an organisation has very limited (if any) powers of influence
ANALYSING THE OPERATIONAL ENVIRONMENT - MACRO THINKING - THE ‘FAR’ ENVIRONMENT - PESTEL
An important and frequently used model for the analysis and deeper interrogation of the macro environment is PESTEL.
How is this model used?
Discuss briefly the impact of the ‘PE’ factors of a PESTEL analysis.
Name an example for each.
Primarily used as a checklist to force the brain to consider different environmental perspectives
- POLITICAL factors recognise the impact of the decision of government(s) on the organisation
E.g., in the defence sector or airline industry the government has a major influence in the far environment, but may also be a customer and a supplier (a National Air Force) in the same marketplace
- ECONOMIC factors consider the ‘macro’ impact on quantitative measures within the organisation (interest rates, exchange rates, and inflation rates) and the impact and influence from economic considerations and decisions of other countries
E.g., multinational company (BP) has to consider impact of currency exchange rates in strategic thinking
ANALYSING THE OPERATIONAL ENVIRONMENT - MACRO THINKING - THE ‘FAR’ ENVIRONMENT - PESTEL
Discuss briefly the impact of the ‘ST’ factors of a PESTEL analysis.
Name an example of S.
What are the 4 forces at play within the technological environment that are important to consider?
- SOCIO-CULTURAL factors require the strategic thinker to consider megatrends, such as increased human longevity, or wealth distribution
E.g., demographics = many western countries have increasing aging population = socio-cultural force affecting strategic thinking = increasing expectation of services/care for the elderly against diminishing supply of young people in the workforce
- TECHNOLOGICAL factors require an organisation to determine whether it leads or lags – will it be the first to try innovative technology, or will it wait until that technology is tried and tested
When analysing the macro environment important to consider:
(1) Technology push or market pull = org. anticipating technology to drive effective business solutions, or being forced down a particular route by customer/supplier?
(2) People skill divergence = the likely need for higher skilled, technologically aware people
(3) Diffusion = the process and likely timing of the spread (diffusion) of the use of technology
(4) Potential new influences = biotechnology, nanotechnology, 3D-printing
ANALYSING THE OPERATIONAL ENVIRONMENT - MACRO THINKING - THE ‘FAR’ ENVIRONMENT - PESTEL
Discuss briefly the impact of the ‘EL’ factors of a PESTEL analysis.
What are the 3 forces at play within the environmental environment that are important to consider?
What may an organisation suffer as a result of its handling of its wider operating environment? (2)
What are the 4 specific legal areas that need to be considered from a macro perspective?
- ENVIRONMENTAL factors will help an organisation to consider not just its own sustainability and CSR, but also the stewardship of the wider environment
When analysing the macro environment important to consider:
(i) Sustainability and stewardship = what damage is being done to natural resources?
(ii) Global warming = how will this affect strategic plans?
(iii) Public conscience = potential supply and demand implications that could arise from strategic planning
Suffer financial and reputational damage = BP suffered both due to the Deepwater Horizon oil spill
- LEGAL factors require an organisation to understand the breadth and depth of the legislation pertaining to its operational environment, but also to consider the underlying legal trends = an increased focus on the personal accountability of leaders
(1) labour and employment laws, (2) environmental protection legislation and consumer regulation, (3) finance, taxation and reporting requirements. (4) ownership, merger and competition law
ANALYSING THE OPERATIONAL ENVIRONMENT - FORECASTING AND SCENARIO PLANNING
To build an effective analysis of a range of different potential future scenarios, what should be done?
An interesting set of scenario planning dimensions was developed by Ringland 2014 to challenge the strategist to contemplate what really matters within a particular organisation.
What are the 6 dimensions that Ringland 2014 suggested and the questions that a scenario planner ought to be asking?
Important to first understand and identify the key parameters that are likely to change in the future (6 colours of a Rubik’s cube), and how these parameters (9 squares for each colour) interact with each other = taking the concepts of changeability and predictability into a 3rd dimension
- Vital issues = what is critical for the future as we currently perceive it?
- Positive outcomes = what does the best possible outcome look like and what difference would it make?
- Negative outcome = what does the worst possible outcome look like and what difference would it make?
- Internal systems = what are the culture, structure, and process drivers within the organisation and what might need to change?
- Key learnings = what have we learned from previous strategies?
- Personal dimension = what can I do to make a real difference?
ANALYSING THE OPERATIONAL ENVIRONMENT - MICRO THINKING - THE ‘NEAR ENVIRONMENT - ECONOMIC DYNAMIC
In a monopoly there is no what?
What is monopolistic strength? (Buyers)
When does an oligopoly exist? (High concentration)
What are the 2 risks in an oligopoly?
When does perfect competition exist?
Why it is important to consider, at an early stage of the development of strategy, the position of an organisation on the economics dynamic?
Monopoly = there is no competitive rivalry
Monopolistic strength = buyers are forced to take the price at which the product or service is being offered by the monopolistic provider (Facebook, Microsoft)
Oligopoly = there is a high concentration of a defined number of players e.g., professional accounting firms = lots exist but the Big 4 have significant market strength and reputation
Risk of (1) cartel pricing and (2) hyper-competitiveness (can be cut-throat and threaten the overall business longevity for 1 or more players)
Perfect competition = there are many competitors providing similar and largely undifferentiated products or services
Strategic planning requires an understanding of where an organisation sits in comparison to its competition = monopolistic end is price maker, perfect competition end is ‘price taker’ (important for strategic planner to recognise where the product/service currently sits and which direction it is moving in)
ANALYSING THE OPERATIONAL ENVIRONMENT - MICRO THINKING - THE ‘NEAR ENVIRONMENT - BUSINESS LIFECYCLE
What are the 4 basic phases of change in the business lifecycle?
Name the 4 different requirements from a strategic planning perspective to be considered during each of these phases.
What is the problem with the phases?
Introduction, growth, maturity, decline
Introduction = (1) high levels of strategic planning, (2) need to decide on market aim (small share vs large share), (3) high prices available but higher per unit overheads = lower profitability, (4) competitors will be showing moderate interests
Growth = (1) continued focus on strategic planning, anticipation of maturity levels, (2) consolidation of market positioning, (3) potential for good profitability as long as costs are contained, (4) competitors showing significant interest
Maturity = (1) strategic planning for volume maintenance and anticipation of decline, (2) maintenance of market share, (3) prices and profit margins likely to decrease as the market matures, (4) competitors focused on product differentiation
Decline = (1) strategic planning for either the next growth phase, or new products or markets, (2) minimisation of loss of volume, (3) potential for losses unless costs can also be reduced in line with volume, (4) competitors will be assessing their own position, potentially leading to opportunities
Not inevitable = different organisations, different consumers and different products can bring significant variability
ANALYSING THE OPERATIONAL ENVIRONMENT - MICRO THINKING - THE ‘NEAR ENVIRONMENT - PORTER’S 5 FORCES
1st Force = Existing Competition
What is existing competition?
What are the 5 aspects that define the interaction with the existing competition?
Today = the rivalry that exists between current players (greater no. = greater rivalry = lower level of certainty exists)
- Relative strength, and skew of strength, of the players in the arena = Is it dominated by one or two, or are there a number of equally strong players?
- The rate of growth or decline in the marketplace
- How easily the varying products of different players are differentiated
- The level of fixed costs that are required to enable a player to exist
- The ease with which a player can or cannot exit the marketplace
ANALYSING THE OPERATIONAL ENVIRONMENT - MICRO THINKING - THE ‘NEAR ENVIRONMENT - PORTER’S 5 FORCES
3rd Force = Customer Bargaining Power
What 4 things will influence the bargaining power of the customer?
What is critical mass and who holds the bargaining power?
In many cases, the power of the customer is a mirrored reflection of the power of the supplier and will be influenced by:
- Number of potential buyers = marketplace with many buyers, the customer bargaining power low (only 1, or a very defined number of buyers = bargaining power high)
- The bespoke nature of the customer requirement = If customer requires a specific design of product/service, customer’s bargaining power reduced = likely limited number of potential sources (this places economic power in the hands of the supplier)
- The ability to ‘make’ rather than ‘buy’
- If the customer is in turn a supplier to the end consumer, their bargaining power will be restricted by all the above but also be influenced by the bargaining power of the end consumer
= many high-street retailers base their price around what they believe a consumer is willing to pay, or as a means of attracting business
Critical mass = large companies with a significant market share in, and access to a market place will hold the bargaining power with smaller suppliers e.g., Rio Tinto
ANALYSING THE OPERATIONAL ENVIRONMENT - MICRO THINKING - THE ‘NEAR ENVIRONMENT - PORTER’S 5 FORCES
4th Force = Potential New Entrants
What are the 6 significant barriers for new entrants as identified by Porter?
Name an example.
- Economies of scale = new entrant must have a degree of certainty that they can gain market share rapidly to enable the financial and operational viability of their business
- Product differentiation = new entrant needs to find a USP to enable them to compete successfully (another barrier to entry = if the product is currently patented by competitor)
- Capital requirement = new entrant requires funds to be readily available to commence the production or service
- Customer persuasion = customers who are satisfied with their current supplier will need a reason to change (customer loyalty can be incredibly strong, Apple and Samsung)
- Government policy = legal restraints on competition, combined with consumer protection, may deter potential new entrants
- Organisational strength = if the existing player(s) are financially and commercially strong, then the potential retaliation from these players may deter new entrants because of their existing supplier and consumer relationships
The dominance of Microsoft in operating software makes it very difficult for a new entrant to achieve any significant market share
ANALYSING THE OPERATIONAL ENVIRONMENT - MICRO THINKING - THE ‘NEAR ENVIRONMENT - PORTER’S 5 FORCES
2nd Force = Supplier Bargaining Power
What is included in the term ‘supplier’?
What 4 things will influence the bargaining power of the supplier?
Supplier = everything required to enable production and delivery of product/service = tangibles and intangibles = premises, raw materials, labour, utilities and packaging, knowledge, information and expertise
- Number of potential suppliers = if small pool of suppliers and it is difficult to change supply, the supplier will hold the power (large pool = supplier power reduced)
- Reliance upon the production expertise of a particular supplier(s) = increased supplier power = supplier is price-maker rather than the price-taker
- If operating margins are low, a relatively small change in supplier cost could affect the overall profitability of an organisation = a supplier will be aware of this and may be able to use it to their advantage when negotiating terms of trade
- In a long and convoluted supply chain, the supplier themselves may be dependent upon one or more other suppliers = lead to a complexity of power and control within the supply chain
ANALYSING THE OPERATIONAL ENVIRONMENT - MICRO THINKING - THE ‘NEAR ENVIRONMENT - PORTER’S 5 FORCES
5th Force = Substitute Products
What are 2 different forms of potential threat of substitution?
Name 3 examples of substitute products.
- Direct alternative = could occur if a supplier is able to find an alternative product that is attractive to either the imagination or the price point of the customer
- Different branding = might enable a product that is similar, or even identical, to become a potential substitute for the customer (Coca Cola and Pepsi, Nike and Adidas)
Examples:
(1) the move to laptops instead of desktop computers
(2) the move to e-cigarettes instead of tobacco
(3) the move to aluminium instead of steel
