The External Environment

[Audio] The External Environment. The External Environment.

[Audio] What is meant by an organisation's business environment? According to Robbins and Coulter ( 2020) environment refers to " Institutions and forces that affect organizational performance" Two classifications of business environment: Internal business environment: the conditions and forces within an organization - The controllable environment External business environment: everything outside an organization's boundaries that might affect it - The uncontrollable environment.

[Audio] A business's external environment is comprised of the following: The Macro (remote) external environment The Micro (Task/Competitive) external environment Classifying the organization's external business environment?.

The External Environment. ..oe macro-environment austry (or sector) competitors The Organisation Markets -X.

[Audio] Business environments are constantly changing and developments are happening all the time Changes and developments create uncertainty for management within business organisation's Management must be willing and able to respond to these external changes and need to ensure that the organization is able to adapt to key changes that are happening now and those that are likely to occur in the future Nokia and Blackberry are examples of organization's that have been ineffectual in their responses to environmental changes – once market leaders in the mobile phone sectors. Can you think of examples from other industries?.

Environmental Uncertainty, Dynamism and Complexity.

Environmental Uncertainty, Dynamism and Complexity.

Environmental Uncertainty Matr ix. MGT 2205 Business Professional Lecturer 1: Lecture 5 - Business Environment.

Why Should Managers Be Concerned With The External Business Environment?.

Types of External Environment. MICRO ENVIRONMENT  The micro environment is also known as the task environment and operating environment because the micr....

Analysing the Macro Environment - The PESTEL Framework.

The PESTEL Framework (1). The PESTEL framework categorises environmental influences into six main types: Political Economic Social Technological Environmental Legal/regulatory A PESTEL analysis can provide a comprehensive list of influence on the possible success or failure of an organisations business strategy and strategic priorities and goals Can provide insight into possible trends and developments which will become more important in the next few years. Identify OPPORTUNITIES and THREATS - the main point of the exercise! Watch this video (9 minutes): https://www.youtube.com/watch?v=bYn4CyL3r5w.

The PESTEL Framework (2). Political Environment and Political Factors: Relates to government preferences and attitudes towards managing the economy and the activities of business Governments can control, restrict and influence activities by offering support, restricting business activities or introducing or amending laws and regulations Examples include government policies on taxation, changes to foreign trade regulations, political stability and risk in foreign markets, changes in trade blocks (EU) For business’s that operate in international markets political relationships and stability are important For organisations in the public and voluntary sector there can be significant implications for funding and how they operate and deliver services.

The PESTEL Framework (3). Economic Environment and Economic Factors: This refers to the aggregate nature of a country’s economic system and the economic policies of a government This includes how capital markets are organised, the characteristics of the business cycle the socio-economic infrastructure Economic factors include for example trends in Gross Domestic Product (GDP) interest rates, exchange rates, managing inflation, levels of personal disposable and issues relating to unemployment income Extent that the economy is globalised For organisations in the public and voluntary sector there can be significant implications for funding and how they operate and deliver services.

The PESTEL Framework (4). Social Environment and Social Factors: Relates to the value system within a society. Societal customs and conventions and people’s attitudes Highlights the significance of demographic/population changes Importance of the characteristics of a population. Factors such as size of the population, age and sex distribution, racial, ethnic and religious composition Changing attitudes towards work, health, factors such as work-life balance and the social responsibilities of business organisations Determines work culture and acceptability and suitability of business decisions Changes to factors such as levels of income and income distribution, changing lifestyles, attitudinal changes that can alter the nature of people’s needs and their expectations of service provision Changes in the socio-cultural environment can influence the size of the market for goods/services and consumer tastes and preferences.

The PESTEL Framework (5). Technological Environment and Technological Factors: Developments and advances in technology and the technology adopted within industries and by business organisations are significant. They affect the nature of competition and the types of goods and services offered to customers Information and communication technologies have revolutionised business operations and led to significant innovations They have had an impact on the characteristics of industries/sectors e.g. Uber Accelerated the rate of product obsolescence Changed organisational relationships with consumers and employees e.g organisational structures, systems, the nature of jobs and working patterns, skill requirements and people relationships.

The PESTEL Framework (6). Environmental (ecological) Factors: Relates to organisational responsibilities to the wider environment and ecological system in which it operates Highlights concerns relating to business ethics and the impact and sustainability of business in relation to the environment For example, energy consumption,climate change and global warming, pollution, waste disposal and recycling Issues relating to corporate social responsibilities (CSR) beyond the pursuit of profit Impact of pressure or interest groups.

The PESTEL Framework (7). Legal and Regulatory Environment and Legal Factors: Relates to the legislative framework and laws and regulations that affect how business’s can operate For example, competition law and anti-trust legislation, health and safety law, employment laws, licensing law The role and power of independent regulatory bodies e.g. Ofwat /Ofcom/OFGEM, the Competition and Markets Authority etc.

Using the PESTEL Framework. Apply selectively –identify specific/key factors which impact on the industry, market and organisation in question e.g. the birth rate is a key driver for those organisations planning nursery and education provision Identify factors which are important currently but also consider which will become more important in the next few years. Use data to support the points and analyse trends using up to date information Identify opportunities and threats – the main point of the exercise! Remember that the individual forces can combine in ways that are difficult to predict.

Understanding the Micro (Task/Competitive) Environment - Industries, markets and sectors.

Analysing the Micro (Task/Competitive) environment - Porter’s Five Forces framework.

[Audio] Figure 3.2 The Five Forces Framework. The Five Forces Framework.

The Five Forces Framework (1). The Threat of Entry & Barriers to Entry The threat of entry is low when the barriers to entry are high and vice versa The main barriers to entry are: Economies of scale/high fixed costs Access to supply and distribution channels Differentiation and market penetration costs Experience and learning Government restrictions – e.g. Licensing Entrants must also consider expected retaliation from those already in the market.

The Five Forces Framework (2). Threat of Substitutes Substitutes are products or services that offer a similar benefit to an industry’s products or services, but by a different process. Customers will switch to alternatives (and thus the threat increases) if: The price/performance ratio of the substitute is superior (e.g. aluminium maybe more expensive than steel but it is more cost efficient for some car parts) The substitute benefits from an innovation that improves customer satisfaction (e.g. high speed trains can be quicker than airlines from city centre to city centre).

The Five Forces Framework (3). The bargaining power of Buyers Buyers are the organisations immediate customers, not necessarily the ultimate consumer. If buyers are powerful, then they can demand cheap prices or product/service improvements to reduce profits. Buyer power is likely to be high when: Buyers are concentrated Buyers have low switching costs Buyers can supply their own inputs – the process of backward vertical integration.

The Five Forces Framework (4). The bargaining power of Suppliers Suppliers are those who provide what organisations need to produce the product or service Powerful suppliers can eat erode the organisations profits Supplier power is likely to be high when: Suppliers are concentrated (few of them) Suppliers provide a specialist or rare product/service Switching costs are high (disruptive or expensive to change suppliers Suppliers can integrate forwards – e.g. low cost airlines have cut out the use of travel agents.

The Five Forces Framework (5). The Rivalry between competitors Competitive rivals are organisations with similar products and services aimed at the same customer group and are direct competitors in the same industry/market (they are distinct from substitutes). The degree of rivalry is increased when: Competitors are of roughly equal size Competitors are aggressive in seeking leadership The market is mature or declining There are high fixed costs The exit barriers are high There is a low level of differentiation.

Implications of Five Forces Analysis. Watch this video: https://www.youtube.com/watch?v=ehSQR6oMBHA Identifies the attractiveness of industries – which industries/markets to enter or leave. Identifies strategies to influence the impact of the forces, for example, building barriers to entry by becoming more vertically integrated. The forces may have a different impact on different organisations e.g. large firms can deal with barriers to entry more easily than small firms. The Five Forces framework is used to analyse competition in an industry and CANNOT be used to analyse an organisation..

Questions?.