1.1 External Environment of Business

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The External Environment of Business : 

The External Environment of Business Tools for Business Analysis Presented by: Christopher Zobrist

Lecture Outline : 

Macro Environment Analysis PESTEL Issues Priority Matrix Porter’s Diamond Scenario Analysis Industry Analysis Porter’s 5 Forces Model BCG Growth-Share Matrix Life-Cycle Model Lecture Outline

Slide 3: 

Understanding the Environment- Issues Diversity - Many different influences Complexity and Interconnected influences Eg. Information Technology Changes the nature of work Changes lifestyles Alters consumer behaviour Speed of change Particularly Information and Communications Technology (ICT) – means more and faster change

Slide 4: 

Layers of the business environment

Slide 5: 

Macro-environment – PESTEL

Slide 6: 

Macro-environment – PESTEL Political Government stability Tax policy Foreign trade regulations Social welfare policies Economic Business cycles GNP trends Interest rates Money supply Inflation Unemployment Disposable income

Slide 7: 

Macro-environment – PESTEL Sociocultural Population demographics Income distribution Social mobility Lifestyle changes Attitudes to work and leisure Consumerism Levels of education Technological Government spending on research Government and industry focus on technological effort New discoveries /developments Speed of technology transfer Rates of obsolescence

Slide 8: 

Macro-environment – PESTEL Environmental Environmental protection laws Waste disposal Energy consumption Legal Competition law Employment law Health and safety Product safety

Slide 9: 

Key Aspects of PESTEL Analysis Not just a list of influences Need to understand key drivers of change Focus is on future impact of environmental factors Combined effect of some of the factors likely to be most important

Likely Future Trends : 

Portable Information Devices Alternative Energy Sources Geothermal, hydroelectric GM foods and farming Globalization and Growth of MNCs Environmental Awareness Likely Future Trends

Slide 11: 

External Environment Issues Priority Matrix Identify likely trends: Societal and task environments Strategic environmental issues Assess probability of trends occurring Low to High Ascertain likely impact of trends on the corporation Low to High

Slide 12: 

Issues Priority Matrix

Porter’s Diamond : 

PESTEL factors differ from country to country –their competitive impact will differ from country to country Porter’s (1990) suggests reasons why some countries are more competitive than others Porter’s Diamond

Slide 14: 

Porter’s Diamond The Determinants of National Advantage Source: M. Porter, Competitive Advantage of Nations, Macmillan, 1990.

Porter’s Diamond : 

Factor conditions Education, infrastructure, cash Demand Conditions Japan - demand for quality. Firm Strategy, Structure & Rivalry Taiwan - SME sector Supporting Industries Italy - leather Silicon Valley - computer related industry Porter’s Diamond

Scenario Analysis : 

How the business environment might develop in the future based on key environment changes around which there is a high degree of uncertainty. Newspaper Industry Influence of electronic media Energy Industry Environmental issues Middle East Situation Scenario Analysis

Slide 17: 

Industry Analysis Industry A group of firms producing a similar product or service, such as soft drinks or financial services.

Industry Analysis : 

Industry Analysis

Slide 19: 

Industry Analysis Threat of New Entrants -- Barriers to entry: Economies of Scale Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Size Government Policy

Slide 20: 

Industry Analysis Rivalry Among Existing Firms -- Intense rivalry related to: Number of competitors Rate of Industry Growth Produce or Service Characteristics Amount of Fixed Costs Capacity Height of Exit Barriers Diversity of Rivals

Slide 21: 

Industry Analysis Threat of Substitute Products/Services Substitute Products: Those products that appear to be different but can satisfy the same need as another product. To the extent that switching costs are low, substitutes can have a strong effect on an industry.

Slide 22: 

Industry Analysis Bargaining Power of Buyers -- Buyer is powerful when: Buyer purchases large proportion of seller’s products Buyer has the potential to integrate backward Alternative suppliers are plentiful Changing suppliers costs very little Purchased product represents a high percentage of a buyer’s costs Buyer earns low profits Purchased product is unimportant to the final quality or price of a buyer’s products

Slide 23: 

Industry Analysis Bargaining Power of Suppliers -- Supplier is powerful when: Supplier industry is dominated by a few companies but sells to many Its product is unique and/or has high switching costs Substitutes are not readily available Suppliers are able to integrate forward and compete directly with present customers Purchasing industry buys only a small portion of the supplier’s goods.

Industry Analysis : 

The collective strength of these forces determines the ultimate profit potential of an industry. The stronger each of these forces the more limited industries are in their ability to raise prices and increase profits Industry Analysis

Slide 25: 

BCG Growth-Share Matrix

Slide 26: 

The Life Cycle Model

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