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Business Environment

Assessment of the Environment

(Internal and External)

Ms Faith Moono Simwamimo.simwami@gmail.com

THE MEANINING OF THE BUSINESS ENVIRONMENT

The external environment is everything outside an organization that might affect it. An organization's external environment consists of two layers:

• The general environment - refers to those nonspecific dimensions and forces in an organization's surroundings that might affect its activities. It includes all PEST factors.

• The task environment - refers to those specific organizations or groups that are likely to influence an organization. It consists of competitors, customers, suppliers, regulators, unions and owners.

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Assessment of the Environment (Internal and

External)• The analysis of strengths and weaknesses of

organizations should follow the formation of objectives.

• The task involves more than just identifying and evaluating an organization’s strengths and weaknesses.

• It requires capturing a sense of how those strengths and weaknesses combine to help an organization position itself in the market.

• This process of matching possibilities with capabilities is basic to the development of strategies for achieving objectives.

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Standard Techniques

• The following techniques are used to assess the internal and external environment:

1. PEST / STEP Analysis - used to analyze the external environment

2. SWOT Analysis - used to analyze both the internal and external environment

3. Porter's Five Forces Model - used to analyze an industry in

which an organization operates.

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What is PEST analysis?• PEST analysis is an analysis model examining

the external environment and the global factors that may affect a business.

• It can provide a quick understanding of the external pressures facing a business and their possible constraints on its strategy.

• It is usually divided into four external influences on a business – Political, Economic, Social and Technological.

Business Analysis Models -PEST Analysis

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Business Analysis Models -Illustrations for PEST Analysis

Models

Purposes: To find how political

development, locally, nationally, internationally affect the strategy of a business.

Areas to be considered: 1. Consumer laws and regulation2. Political pressures, 3. Government views on certain

business activities, including local, national and international government political issues affecting a business

Political

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THE GENERAL ENVIRONMENT

1. The Political/legal Environment

• The political/legal environment consists of the law and interpretation of laws that require firms to comply with.

• Ignorance or noncompliance with the laws, could result in fines.

• Operating within the legal framework is both socially responsible and ethical.

The Political/legal Environment Cont’d

• Organizations must be aware of state and local laws that influence their activities.

• The central and local government have established regulatory agencies to enforce laws i.e. CCPC, ZRA, NAPSA etc

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Business Analysis Models -Illustrations for PEST Analysis

Models

Purposes: To find how economic factors may

affect on the business. Areas to be considered:1. Consumer activities, such as

spending patterns2. Economic conditions, such as

inflation, unemployment, growth, etc. 3. Government policies, such as fiscal,

monetary, exchange rates, etc. 4. The changes in production and labor

market …

Economic

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2. Economic Environment

• The economic and competitive forces in the general environment influence business organizations and customers' decision and activities.

• The overall state of the economy fluctuates in all countries.

• The health of the economy influences how much consumers spend and what they buy.

• Therefore, present-day economic conditions and changes in economy have a broad impact on the success of organization

Economic Environment Cont’d

The consumption patterns of their potential customers are affected by economic forces such as:

The rate of inflation,

Interest rests,

The availability of credit for consumer purchases or investment purposes,

The rate of unemployment, and

The size of disposable personal income.

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Business Analysis Models -Illustrations for PEST Analysis

Models

Purposes: To find what competitive advantage a

business may gain by social changes.

Areas to be considered: 1. Aging population trend, which may

increase services for old people2. Birth rate increase, which may affect baby

product markets3. Security condition, e.g. increase in crime

may cause a business to increase insurance costs

4. Pressure groups, such as environmental groups, local community groups, etc. which may prevent a business from polluting a river…

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Social

4. Social/cultural Environment

Analysis of the social environment is concerned with understanding the potential impacts of society and social changes on a business, its industry and markets.

This may include changes in Tastes, fashion, lifestyle, preferences etc.

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Business Analysis Models -Illustrations for PEST Analysis

Models

Purposes: To find how new technologies might

affect the business activities.

Areas to be considered: 1. The rate of technological change2. The development of IT3. The wide use of Internet 4. The creation of new materials for

production …

Impacts: All these technological changes will lead

to some effects on the business, such as the product of the business may be replaced by new products or its production methods may have become out of date.

Technological

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3.Technological Forces

• The technological environment represents the application of knowledge based on discoveries in science, inventory and innovations.

• New technology results in new products and services for consumers, improved existing products and often lower prices through the development of more cost-efficient production and distribution methods.

• Technology affects the types of products that organizations can offer.

Monitoring the Technological environment

Reasons for monitoring the technological environment include;

Adopting technology may be the means by which a firm remains competitive.

• Applying new technology also gives organizations the opportunity to improve customer service e.g. 24 hours banking due to ATMs.

• New technology can lead to increased productivity and operating efficiency e.g. CAD and CAM speed up the production process in manufacturing companies.

Environment forces within the international business include:

• Language differences

• Changing currency exchange rates

• Different national laws affecting economic activity, political risks and stability,

• Tax laws of different nations, and

• Social/cultural differences between nations.

International Forces

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Business Analysis Models -SWOT Analysis

What is SWOT analysis?

SWOT analysis involves looking at the internal strengths and weaknesses of a business and external opportunities and threats.

It is used to analyze the possible internal advantages and problems that a business has, and helps determine the external factors of the business which may affect its strategy.

A SWOT analysis helps to conduct a quick analysis of a business’s current position so that it can help the business to develop or plan a direction of development or a proper strategy in future.

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Elements of SWOT Analysis

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Business Analysis Models -Examples or Illustrations for SWOT Analysis

Models

Good brand imageWell-known nameGood reputationCost advantage in

production High market shareConfidence in the market Customer loyalty or repeat

business More advanced technology

and R & D

Strengths

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Business Analysis Models -Examples or Illustrations for SWOT Analysis

Models

Ineffective in production Falling profit Falling sales of the productDeclining age of the life cycle

of a productPoor reputationLack of innovation and changeLack of adequate capital or

having some financial problemsCustomers’ losing confidence

or increasing complaints on the business

Poor management or inefficient organizational structure

Weaknesses

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Business Analysis Models -Examples or Illustrations for SWOT Analysis Models

Possible development of new products

Expansion into new marketsDevelopment of a global brand Joint –development with other

companies Possible growing demand for a

product in the marketPossible government policies

encouraging the growth of the business and its certain products

New sources of profit or income© PhotoDisc

Opportunities

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Business Analysis Models -Examples or Illustrations for SWOT Analysis

Models

Changes in law or regulations.

Growing competition from local companies

Increasing competition from foreign competitors

New products developed by other companies which may replace the product of the business

Marketing activities or strategies which will be implemented by competitors

Threats

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Question for your critical thinking:

Based on the Analysis Model discussed, in 10 minutes, Conduct a brief SWOT analysis on yourself.

Business Analysis Models -SWOT Analysis

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Question for your critical thinking:

What are the key differences between SWOT and PEST models.

Business Analysis Models -SWOT and PEST

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Porter Competitive Model

Intra-Industry Rivalry

Strategic Business Unit

BargainingPower

of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Figure 3-1

Source: Michael E. Porter“Forces Governing Competition in IndustryHarvard Business Review, Mar.-Apr. 1979

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Definitions

New Entrant:

An existing company or a startup that has not previously competed with the SBU in its geographic market. It can also be an existing company that through a shift in business strategy begins to compete with the SBU.

Substitute Product or Service:

An alternative to doing business with the SBU. This depends on the willingness of the buyers to substitute, the relative price/performance of the substitute and/or the level of the switching cost.

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Industry Rivalry Likelihood?

• Profit margins.

• Industry growth rate and potential.

• A lack of capacity to satisfy the market.

• Competitor concentration and balance.

• Diversity of competitors.

• Existing brand identity.

• Switching costs.

• Exit barriers.

• Fixed costs.

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A Buyer Has Power If:

1. It has large, concentrated buying power that enables it to gain volume

discounts and/or special terms or services.

2. What it is buying is standard or undifferentiated and there are multiple

alternative sources.

3. It earns low profit margins so it has great incentive to lower its purchasing

costs.

4. It has a strong potential to backward integrate.

5. The product is unimportant to the quality of the buyers’ products or services.

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A Supplier Has Power If:

1. There is domination of supply by a few companies.

2. Its product is unique or at least differentiated.

3. It has built up switching costs.

4. It provides benefits through geographic proximity to its customers.

5. It poses a definite threat to forward integrate into its customers’ business.

6. A long time working relationship provides unique capabilities.

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Possible Barriers to Entry

• Major switching costs.

• Limited or restrained access to distribution.

• Large capital expenditure requirements.

• Government policy.

• Definite strong competitor retaliation.

• Economies of scale.

• Strong, established cost advantages.

• Strong, established brands.

• Proprietary product differences.

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Threat of Substitutes

• Buyer propensity to substitute.

• Relative price/performance of substitutes.

• Switching costs.

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MANAGING ENVIRONMENTAL ELEMENTS

Managers have three major options in attempting to manage environmental uncertainty and its potential impact:

• 1 Adapt to the existing environmental elements

• 2 Attempt to influence environmental favorability

• 3 Shift the domain of operations away from threatening environmental elements towards more beneficial ones.

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1. Adaptation

The adaptation approach involves changing internal operations and activities-.to- make the organization more compatible with its environment.

Four common approaches used by organizations to adapt to environmental fluctuations are:

Buffering

Smoothing

Forecasting

Rationing

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Adaptation Techniques

Buffering:The use of buffering involves stockpiling either inputs into or outputs from a production or service process in order to cope with environmental fluctuations (demand).

Forecasting:Forecasting is the systematic effort to estimate future conditions. For example, grocery stores frequently hire part-time cashiers to supplement regular staff during busy periods.

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Adaptation Techniques Cont’d

Rationing

Rationing involves providing limited access to a product or service that is in high demand. For example, many universities and colleges ration slots for popular programs by establishing program prerequisites.

Rationing has the advantage of allowing the organization to avoid costs of expanding capacity.

Rationing has the disadvantage of denying a consumer a product or service, while the organization is forced to turn away potential business.

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2. Favorability Influence

The favorability influence approach involves attempting to alter environmental elements in order to make them more compatible with the needs of the organization.

Major methods that the organization use in attempting to influence significant elements in the environment are:

• Advertising and Public Relations,

• Negotiating contracts, co-opting, establishing

• Joint ventures, joining Trade associations and engaging in political activities.

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3. Domain Shifts

Domain shifts involve making changes in the mix of products and services offered.

One major approach is to move out of a current product, service or geographic area into a more favorable domain.

A second domain shift approach is to expand current domains through diversification, i.e. the expansion of products and services offered or the development of new and different products or services.

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Boundary Spanning

Boundary spanning involves creating roles within the organization that interface with important elements in the environment.

Examples of boundary spanning roles include:• Salespersons

• Purchasing specialists

• Personnel recruiters

• Admissions officers

• Shipping and receiving

• Agents, receptionists, scientists and Lawyers.

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Recruiting

• Recruiting involves attracting job candidates who meet the needs of the organization.

• This tool can be used for environmental influence when organizations seek job candidates who have a knowledge of and close ties to a significant element of the environment.

• For example, companies often hire executives from specific companies because of their environmental knowledge and connection.

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Negotiating contracts

• Negotiating contracts aims at seeking favorable agreements on matters of importance to the organization.

• Specific agreements with customers and suppliers are one common means of creating environmental favorability,

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Co-opting• Co-opting is the process of absorbing key members of

important environmental elements into the leadership or policy-making structure of an organization.

• A common example of co-optation is the addition of key members of the environment to boards of directors.

• For instance, some universities have prominent individuals on the council.

• These individuals often help the universities deal more effectively with environmental elements, particularly in the area of raising funds from business.

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Trade Associations

• Trade associations are organizations composed of individuals or firms with common business concerns.

• Because they represent the pooled resources of many organizations, trade associations are frequently in an enhanced position for conducting public relations campaigns affecting favorability of the environment within which their members operate

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Political Activity

• The use of political activity involves attempts by organizations to enhance their competitive

Situation.

• This is achieved through influencing the legislator or the behavior of government regulatory agencies.

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Questions?