Analysing the environment PDF

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BUSINESS MANAGEMENTLU 5Strategic relevance and structure of the external environment Strategic management is the process of aligning an organisation’s unique resources and capabilities to the ever-changing and increasingly competitive external environment. Organisations need to know and understand t...

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BUSINESS MANAGEMENT LU 5

Strategic relevance and structure of the external environment •

Strategic management is the process of aligning an organisation’s unique resources and capabilities to the ever-changing and increasingly competitive external environment.

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Organisations need to know and understand their external and their internal environments to obtain the relevant information they need for effective strategy formulation.

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The external environment includes everything outside an organisation at the global, country and industry levels that might affect the organisation ability of attaining its goals.

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The macro environment is part of the external environment, it includes political, legal, economic, socio-cultural, demographic, technological, and natural environment forces at the global level within a country.

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The industry environment includes actual and potential competitors, suppliers and buyers, organisations that provide products which are complements to those in the industry.

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The internal environment includes everything inside the organisation, resources and capabilities that might affect the ability of managers to pursue certain actions or strategies which management typically have control over.

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The global business environment provides a contextual frame of reference for the economies of individual countries.

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Strategic importance of the macro-environment Why is the macro-environment important in business ? •

The forces emanating from macro-environmental factors in the global environment and from individual countries, may have a profound impact on an organisation’s strategic direction, competitiveness, profitability, and ultimately on its survival.

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Management should consider the potential advantages of opportunities identified by analysing the external and internal environments when developing and ultimately deciding on an appropriate strategy for the organisation.

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It is evident that there is a clear link between the information obtained from the strategic analysis of the organisation’s external (macro- and industry) and internal (micro) environments, and its ultimate choice of strategy that needs to align the organisation’s internal resources, competencies and capabilities to the organisation’s identified market needs in the external environment.

Factors and forces of the macro-environment 1. Political-legal 2. Economic 3. Social culture 4. Technology 5. Demographic 6. Environment

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Political-legal A strong relationship exists between political and legal systems of the country. These factors may be limit or benefit the orgs they influence. The analysis for this factor in the macroenvironment should include an assessment of the potential for political risks. Notable political risks that the management should be aware of include the following:  Government nationalization of industries and the expropriation of property and private sector assets.  Unfair completion for the public sector.  Unexpected imposition of discriminatory taxation.  Unexpected imposition, or tightening, of foreign exchange controls.  National hostilities and military intervention.

Economic The economy has an impact on industries, non-profit sectors and businesses, consumers and the society. Hill and McShane identifies the following factors in the economic environment: ⁻

The growth rate of the economy: it leads to increased consumer spending, business expansion and higher profits.

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The level of interest rates: it can influence the demand for the orgs g/s.

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Currency exchange rates: it has the direct impact on the demand for an exporting orgs products to foreign markets.

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Inflation: it has a destabilizing effect on a national economy i.t.o. slower eco growth, higher interest rates, and depreciating currencies.

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Social cultural These factors and forces in the macroenvironment refer to the way in which changing social values, belief, attitudes, traditions, lifestyles and other culture-related elements of a nation, society or group affect and industry, and the orgs within that industry, where these changes can create opportunities or threats. Social trends in recent times include the following: ⁻

Single parents exhibit different buying and consumption patterns in SA compared to other.

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Increasing percentage of women in the workplace, it leads to higher disposal of income.

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Increasing trend in dual income families.

Technological Orgs must be aware of, and informed, about tech changes that might affect its industry. Tech changes can be both creative and disruptive. New tech products may present new opportunities for an organisation, or entirely new products may render an existing product outdated.

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Examples of macroenvironmental factors and forces:

Political-legal

Technology

 Political stability

 Product innovations

 Competition policy

 Technology transfer

 Tax law

 Internet marketing

 Labour legislation

 General ICT levels

 Legal system and rule of law

 Tech literacy

Economic

Demographic

 Economic growth

 Population size

 Level of interest rates

 Age distribution

 Levels of inflation

 Gender distribution

 Import and export factors

 Income levels

 Unemployment rates

 Consumer behaviours

Social culture

Environment

 Culture

 levels of pollution

 Women in the workforce

 air pollution

 Lifestyle changes

 carbon footprints

 Levels of education

 water recycling

 Levels of crime and corruption

 water pollution

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Assessing macro-environmental turbulence Changeability – the degree to which the macro-environment is likely to change Predictability – the extent to which the macro-environmental change can be predicted

Guidelines for environmental analysis

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Stage 1 -An initial evaluation to define and explore the basic characteristics of the environment including market size, market share and market growth.

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Stage 2 - Consideration of the degree of market turbulence in the environment.

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Stage 3 -Consideration of the background factors that influence the competitive environment .

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Stage 4 - Analysis of the stage of market growth as it relates to the industry life cycle.

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Stage 5 - Analysis of success factors specific to the industry to identify those factors relevant to strategy development.

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Stage 6 - Analysis of factors specific to power the balance in the industry.

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Stage 7 - Analyses of factors specific to cooperation in the industry by identifying current and future organisations for potential networking and cooperation.

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Stage 8 - Competitor profiling and analysing the relative market strengths of competitors.

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Stage 9 - Customer analysis, based on market segmentation studies to develop strategies targeting existing and potential customers.

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Conducting macroenvironmental analysis PESTEL APPROACH This approach provides a useful way of identifying factors and forces that are relevant to the orgs writhing the industry in which it operates.

The issues priority matrix •

Organisations often respond differently to the same environmental changes because of differences in the ability of managers to recognize, and understand, external strategic issues and factors.

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Few organisations can successfully monitor all of the important external factors.

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Even though managers agree that strategic importance determines what variables are consistently tracked, they sometimes miss, or choose to ignore, crucial new developments.

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The benefits of macro-environmental analysis ⁻

Increased managerial awareness of environmental change.

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Increased understanding of the context in which industries and markets function.

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Improved understanding of relevant multinational and global issues.

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Helps improve resource allocation decisions based on strategic priorities.

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Enables management to identify and reduce risk due to greater awareness and understanding of potential environmental threat.

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Focuses attention on importance of potential strategic change during the scanning process and looks at ways in which it can respond quickly to theses opportunities and threats. Page 8 of 9

The limitations of macro-environmental analysis ⁻

Be aware of the limitations and inaccuracies of macro-environmental analysis.

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Understand the complexity of the environment in which they operate and the sources of information on which the analysis is based.

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Carry out the analysis continuously as change happens frequently.

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Constantly seek to identify more appropriate source of information and techniques for analysis.

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Use the information to inform future strategy.

Scenario analysis and planning -

Scenario analysis is the identification and structured investigation of possible future configurations of the wider business environment at both global and individual country levels through consideration of political-legal, economic, sociocultural, demographic, technological, and ecological factors.

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Scenario planning involves the development of ‘what if’ plans with regard to a range of possible alternative futures based on different strategic assumptions,

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Scenario planning is therefore essentially an innovative approach to encourage managers to be alert to, and to understand, the dynamic and complex nature of the external environment, to think strategically, and to generate a range of strategic options that could be pursued under different circumstances and varying envisaged environmental conditions.

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Characteristics of a good scenario involves the following:  Relevance  Internal consistency  Archetypal  Non-transient

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