The External Environment and Global Environment (Business Strategy)

by Blogger of NepalAugust 06, 20140 Comments
 1. Why is it important to look at the PESTLE (political, economic, social, technological, legal, and ecological) factors in environmental scanning? Describe each and give examples of their importance to industries and various companies relative to strategic planning.
Ans:
PESTLE stands for Economic, Social, Technological, Legal; and Ecological. PESTLE is a macro Environmental Framework used to understand the impact of the external factors on the organization and is also used as strategic analytical technique. Before ETPS – Economic, Technological, Political, and Social– as the four important factors for Scanning the Business Environment. Later Legal and Environmental factors were also added by some analysts and thus evolved the term PESTLE Analysis. 
This analysis is a review of all the factors that a company is unable to control. Companies conduct this analysis to stay abreast of the issue in the current business environment. The main purpose of this analysis is to create a strategy that will leverage as many of these external factors as possible to the company’s favor. These factors have their own advantage and disadvantage to industry.
1.      Political 
Political factor define the legal and regulatory parameters within which firm must operate This factor is a major consideration on manager on formulating company strategy. It affects the organizations in terms of government regulations and legal issues and defines both formal and informal rules under which the firm must operate. Political constraint are placed on firm through
o    Political stability
o    Tax policy
o    Employment and labor law
o    Environmental regulations
o    Trade restrictions
o    Tariffs
o    Minimum wages legislation
o    Pollution and pricing policies
o    Administrative jawboning
o    Anti-trust law etc
For example, Microsoft performance in the Chinese market is greatly affected by the lack of legal enforcement of piracy and also by policies of Chinese government.

2. Economic factors concern the nature and direction of economy in which a firm operates. It affects the business operations and decision making of the organization due to various market segments. On both national and international market managers must consider the general availability of credit, the level of disposal income the propensity of people to spend.  For example the predicted recession is preventing the organizations from increasing the workforce. Other examples are:
o    Economic growth
o    Interest rates
o    Inflation rate
For example, despite the downturn in the U.S. economy in 2008-2009, Gap Inc. hoped to leverage its ongoing retrenchment efforts to achieve its turnaround strategy.

3. Social Factor
Social factors that affects the firm includes: belief, opinion, attitudes, and values, in the firm’s external environment as developed from cultural, ecological and demographic aspects of the environment. For example increase in the health consciousness may affect the demand of the company’s product. Other factor includes:
o    Age distribution
o    Population growth rate
o    Emphasis on safety
o    Career attitudes
 For example, in the recent year, the entry of large number of women in the labour market has not only affected the hiring and compensation policies and the resource capabilities of their employment but also created and expanded the demand of wide range of product and service necessitated by their absence from the home.

4. Technological Factors
Technological factors affect the cost and quality of the outputs. These also determine the barriers to entry and minimum efficient production level. To avoid obsolesces and promote innovation, a firm must be aware of technological changes that might influence its industry. Creative technological adaption can suggest possibilities for new products or for improvement in existing product or in manufacturing or marketing technique.
. Factors include:
o    Automation
o    Technology incentives
o    Rate of technological change
o    R&D activity
For example, The perfection in transistor changed the nature of  competition in radio and television industry but weaken the small firm that continue to base their product on vaccum tube.
5. Legal Factor
Legal factors influence the company’s operation, its costs, and the demand for its products. Factors include:
o    Consumer law
o    Antitrust law
o    Employment law
o    Discrimination law
o    Health and safety law
6. Environmental Factor
Environmental factors refer to ecological and environmental aspects such as weather, climate, and climate change. Climate change is a hot topic these days and organizations are restructuring their operations thus giving space to innovation and concept of Green Business.
 
For example, between 1975 and 1992, 3M cuts its pollution in half by reformulating products, modifying processes, redesigning production equipments and recycling by-products.

In conclusion:
PESTLE Analysis is used to examine the current and future state of the industry an organization belongs to. This helps in the strategic planning and gaining the competitive edge over the other firms in that industry. This analysis can not only be used for an organization as a whole but various departments can also be inspected under this framework. For example, it makes more sense for a company with diversified product range to analyze its departments separately than the organization as a whole. Importance of the factors varies depending on the nature of the industry and company. For example environmental factors are more important to tourism sector where as economic and political factors are more important for the Banking sector.

  

2.      Explain Porter’s five forces model of industry analysis and give examples of the influences of entry barriers, supplier power, buyer power, substitute availability, and competitive rivalry on a firm.

Ans: Harvard Professor Michel E. Porter has propelled the concept of industry environment into foreground of strategic thought and business planning. Porter Explains- Industry is influenced by his five forces. Competition in an industry is rooted in its underlying economic and competitive force. Customer supplier, potential entrants, and substitute products are all competitors that may be more or less prominent or active depending on industry. The collective strength of these forces determines the ultimate profit potential of an industry.

This model provides strategic manager to develop an edge over rival firm and better understand the industry context in which firm operate.
 1.      Industry competitor/ Rivalry
The intensity of rivalry among firms varies across industries. Economist measures rivalry by indicators of industry concentration. This measure the market share held by the firms. If the rivalry among the firm in an industry is low, then the industry is considered as disciplined. In pursuing an industry in discipline, firm can choose from several competitive forces including;
-        Changing prices
-        Improving product differentiation
-        Creative using channel of distribution
-        Exploiting relationship with supplier

The Intensity of rivalry is influenced by the following industry characteristics:
o    A large number of firms
o    Slow market growth
o    High fixed cost
o    High storage cost
o    Low switching cost
o    Low level of product differentiation
o    High exit barrier
o    Diversity of rivals
 2.      Threat of Substitutes
In Porters model, substitute products refer to products in other industry. Threat of substitute product exist when a product‘s demand is affected by the price change of substitute product. For example, the price of aluminum beverage cans is constrained by the price of glass bottles, steel cans and plastic containers. The new technological available and the changing structure are creating threat of substitutes in industry. Threat of New Entrants
New entrants into the industry affect the competitive dynamics and need to be taken into consideration when analyzing the competition.  New entrants see the market as attractive, they bring new capacity and resources, new ideas along with a desire to gain market share. Their impact depends on the barriers to entry already present, together with the anticipated reaction of existing competitors. There are many barriers that can be created to prevent new entrants or to slow down their arrival. For example, in the pharmaceutical industry, a new entrant may be faced with various hurdles erected by established businesses, such as:
o    Economies Of Scale - manufacturing, R&D, marketing, sales, distribution.
o    Product Differentiation - established products, brands and relationships
o    Capital requirements and financial resources
o    Access To Distribution Channels: preferred arrangements
o    Regulatory Policy: patents, regulatory standards
o    Switching Costs - employee retraining, new equipment, technical assistance
If the barriers are high the newcomer expects sharp retaliation from entrenched competitors, then the threat of entry is low.

3.      Buyers Power
The power of buyer is the impact that customers have on a producing industry. When the buyer power is stronger, buyer set the price. Their influence needs to be considered. In various ways, buyers can affect a business by seeking price reductions, - demanding higher quality and demanding better service.

A buyer is powerful in the following situations:
-        When buyer purchase large volumes,
-        When buyer buy  products from other suppliers because they are standardized
-        When buyer are knowledgeable and make demands based on this knowledge.
In short, buyers can exercise power by seeking price reductions and threatening to go to other suppliers to get their products. Powerful buyers demand costly service. The government requires an in-depth analysis that costs money, and consumers require up-to-date.
4.      Supplier Power 
In analyzing the business environment there is a need to consider how much bargaining power the suppliers actually have because the more power they have the more impact they can have. Suppliers can affect you in several ways: by threatening to raise prices or threatening to reduce the quality of goods and services. Both these prospects are unattractive to a business because of their affect on profitability
.
Different suppliers can have different levels of impact. Some have more bargaining power when they have significant influence in the market, for instance, when it is difficult for the industry to switch to other suppliers or when they threaten to withhold supply. Either situation can cause serious consequences. 

In business planning sessions, it is therefore important to know how much influence suppliers have on the business and what can be done to decrease the amount of their bargaining power.

3.      Compare and contrast the foreign market entry options available to firms wanting to start doing business internationally. 
Ans:
Going International is globalization. Globalization refers to the strategy of pursuing opportunities anywhere in the world that enable a firm to optimize its business functions in the countries in which its operates. Exporting can be a great way to grow a company, but it also entails risk. Any entrepreneur looking to expand into foreign markets must first gather information, prepare an export plan, make a series of key decisions and line up the necessary financing. Foreign market penetration can be done by a variety of different methods; each possibility should be assessed before the process begins. 

Following is a comprehensive list of various modes of entry that can be utilized when entering or expanding in a foreign market.
 1.       Acquisitions: Purchasing an existing company.
Pros:
-        Established market
-        Skilled workers available
-        Goodwill
-        Technology, clients, and vendors are instantly acquired
-        Increased knowledge base
Cons:
-        Hidden surprises
-        Which employees are politically connected, and with whom
-        Bad will
-        Often expensive and time consuming to complete an acquisition
-        Blending of corporate cultures
-        Potential tax and legal problems
 2.        Licensing
A contractual arrangement whereby a company transfers via a license, the right to distribute or manufacture a product or service to a foreign country or to use any type of expertise which may include some or all of the following: patents, trademarks, company name, technology/technological know-how, design, and/or business methods. The licensee pays a fee or percentage of sales in exchange for the rights. Import and investment barriers exist, when legal protection is possible in the target environment, when there is otherwise, a low sales potential in target country or a large cultural distance is present.
Pros: 
-        Quick and easy entry into foreign markets. 
-        With lower capital requirements.
-        Potential for a large ROI; returns are realized fairly quickly. 
-        Low risk 
Cons: 
-        Control by the licensee is low,
-        The licensee may become a competitor,
-        Intellectual property may be lost,
-        License period is usually limited;
-        Poor management of quality
 3.        Foreign direct investment:
The direct ownership of facilities in the target country.  It may be made through the acquisition of an existing entity or the establishment of a new enterprise. There is a high degree of commitment and high level of resources. 

For example; Japanese automobile manufacturers are well known for their use of wholly owned subsidiaries in the USA. 
Pros: 
-        Provides high degree of control in the operations;
-        The ability to better know the consumers and competitive environment (a direct presence). 
-        Provides jobs in target country. Governments will help you!
-        Provides the scale economies and efficiencies of production when across several markets;
-        Benefit of the comparative advantage of different economies such as the supply of labor or raw materials;
Has value of technology ownership (minimizes technology spillovers); considered an “insider”. 
Cons:
-        Higher risks; this entry strategy has the highest capital and management costs; 
-        Greater difficulty in managing local resources.
-        The largest array of uncontrollable factors affects the foreign direct investor including currency and exchange risks, performance requirement risks, discriminatory tax, and licensing requirements, to name a few.
4.        Joint ventures: 
A cooperative between two or more organizations that share a common interest in a business enterprise or undertaking; is a popular mode for quick entry. 
For example, General Mills teamed up with Nestlé to form Cereal Partners Worldwide in an effort to compete against Kellogg in the European cereal market.

5.       Exporting
A.  Direct:  Selling a product or service directly to a foreign firm by the home-country firm. Costs and prices may be lowest if production occurs in only a few locations around the world and the efficiently produced goods are exported to most markets. 
Pros: 
-        No investment in foreign production facilities is required;
-        Maintain more control; minimized risk and investment; speedy entry;
-        Maximize economies of scale;
-        Sell excess production capacity;
-        Gain information about foreign competition;
-        Stabilize seasonal market fluctuations;
-        Reduces dependence on existing markets.
Cons: 
-        More expensive due to tariffs, marketing expenses, transport costs;
-        Sometimes difficult to coordinate the cooperation of exporter, importer, transport provider, and government;
-        Limited access to local information; company viewed as “outsider”;
-        Need to develop customer base and logistics of moving the goods overseas;
-        May be difficult to overcome trade barriers;
-        May lose control over product's pricing and marketing;
 6.      E-commerce: 
Using inter-networked computers to create and transform business relationships. Applications provide business solutions that improve the quality of goods and services, increase the speed of service delivery, and reduce the cost of business operations. A new methodology of doing business in three focal areas:   Business-To-Business; Business-To-Consumer; Intra-Business     
It is most commonly associated with buying and selling information, products, and services via the Internet.
Pros: 
-        Quick, easy way to increase market share; if correct marketing methodologies are employed
-        Easy way to gain a “presence” in international markets;
-        After capital costs paid off, productivity, and therefore, profits increase;
-        Enables greater economies of scale.
Cons: 
-        Hardware and software are essential, and these are big expenses;
-        Distribution must be very efficient;
-        Website needs constant updates, which leads to extra labor, training, and retraining costs.
-        True costs of E-business difficult to calculate
-        Much less trust than “click and brick” entities

7.       Strategic Alliances: 
This is typically a business relationship where similar companies combine efforts to get a better price on materials, perform research and development, collaborate on marketing or distribution, or even seek new business. 
A good example of a strategic alliance took place in 1997 between Intel, Motorola, and Advanced Micro Devices.  The three separate corporations formed a not-for-profit company called Extreme Ultraviolet in order to collaborate on research and development.
Strategic alliances aim to achieve advantages of scale, scope and speed, increase market penetration, increase competitiveness, enhance product development, develop new business opportunities and markets, increase exports and reduce costs.



4.      Do you agree that all businesses will soon have to evaluate global environments? Explain why or why not. 
Ans:
It's essential for business to have a clear understanding of the culture, customs and economic conditions of the country where they want to do business. Research is needed to know potential buyers and learn everything you need to know about the competition, local rules and distribution channels. Different global environments such as political, legal, technological, economic, and technological and socio cultural creates greater impact on international businesses so these global environment should be taken care of and most be evaluated as soon as possible. 
There are five factors that contribute to increase in complexity in global environment which need to be evaluated to make risk free business.
1.    Global face multiple political, economic, legal, social, and cultural environments as well as various rate of changes with each of them.
2.    National sovereignty issue and widely differing social and economic problem.
3.    Geographic separation, cultural and national difference, variation in business practices all make communication  difficult
4.    Global faces extreme competition because of differences in industry structure.
5.    Restriction in selection of competitive strategies by various regional blocs.
Thus we can conclude that all business should have to evaluate global environments. 


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