01c e3 the external environment 1 lecture notes
- 1. Enterprise Strategy/AW/01c Arj Wignaraja
- 2. STRATEGY: is concerned with the ability of the organisation to fit with, or cope with, its environment. ENVIRONMENT: all the factors outside of management control outside the organisation which can affect the performance of the business and the success of its strategies. CIMA Official Terminology: ENVIRONMENTAL IMPACT ASSESSMENT A study which considers potential environmental effects during the planning phase before an investment is made or an operation started.
- 3. …by helping to answer critical questions When entering a Competing in an Divesting/Exiting new market existing market a market • Is this a • How can we • How are the sensible market make sure that future for us to enter? we perform prospects of the • Is this market a better than our industry likely source of competitors? to be affected superior profits? and how does that affect my decision to sell?
- 4. 1. PEST/PESTEL Analysis: Macro 2. Porter’s Five Forces: Micro 3. Porter’s Diamond:National These models separate the mass of factors that have an impact on the firm into groups, or segments, to aid closer analysis.
- 5. Useful way of summarizing the external influences on the environment in which a business operates. PEST PESTEL DEEPLIST •Political/Legal •Political •Demographic •Economic •Economic •Economic •Social •Social •Environment •Technological •Technological •Political •Ecological/Ethical •Legal •Legal •Informational •Social •Technological Must be followed up by consideration of how a business should respond to these influences.
- 6. Potential Entrants Rivalry among Threat of New Existing firms Entrants Bargaining Competitors Bargaining Sellers Buyers The firm Power of Sellers Power of Buyers Threat of Substitute Product or Service Substitutes The collective strength of these forces determines the profit potential (long run return on invested capital) of the industry.
- 7. 1. Digitalization 2. Globalization 3. Deregulation Today’s markets are highly influenced by technological progress, especially in information technology. Therefore, it is not advisable – if not to say impossible – to develop a strategy solely on the basis of Porter’s models. Source: Larry Downes: Beyond Porter, 1997
- 8. Define the industry Linkages Government Source: Financial Management, Feb 2005
- 9. Ambiguity Complexity Lifecycle Source: Financial Management, Feb 2005
Editor's Notes
- #8: DIGITALIZATION:As power of information technology grows, all players in a market will have access to far more information.Totally new business models will emerge in which even players from outside the industry are able to vastly change the basis of competition in a market.E.g. Electronic shopping malls operated by credit card companiesGLOBALIZATIONImprovements in distribution logistics and communications have allowed nearly all businesses to buy, sell and cooperate on a global level.Customers, meanwhile, have the chance to shop around and compare prices globally.Competitive advantages emerge now from the ability to develop lasting relationships to more mobile costumers and to manage far-reaching networks of partners for mutual advantage.DEREGULATIONDramatic shrinking of government influence in many industries like airline, communications, utilities and bankingOrganizations in these industries were able and forced to completely restructure their businesses and to look out for alternatives.Globalization: even locally orientated mid-sized companies find themselves in a global market, even if they do not export or import themselves.
- #9: Need to carefully define the industry - boundaries are not always clear:Competitors vs. Substitutes; Vertically integrated companiesImportant factors tend to be linked – listing them separately may be counterproductive:Economic policies affected by political realities; Technological factors will have an impact only if they are socially accepted and permitted politically.Factor in role of Government – could be more powerful than all other forces:If the government acts as a supplier, buyer or substitute, then it should be analysed under those categories.A government can affect an industry in a number of ways in its own right by developing new policies
- #10: Degree of Ambiguity facing companies in the sector:A dynamic sector is more difficult to forecast because it will be in a constant state of flux. (e.g., Biotech)The Complexity of the industry:The diversity and number of industry inputs and outputs that the firm must take into account when making decisions (e.g., Electronics)Stage of the industry Lifecycle:Industries are not static and evolve over time – Birth, Growth & Adaptation, Growth & Maturity, Maturity & DeclineDifferent kinds of activities will occur at different stages of the cycle, so it’s always worth assessing which stage the industry is in.