Business Environment
Lecture 1 April 6, 2011
Business as a Transformation Process
All organisations are involved in some form of transformation process. They take inputs and turn them into outputs such as physical goods and intangible services. In many cases the output of a business is a combination of goods and services; for example in a restaurant you are buying a meal but also the environment and the service.
The aim of all organisations is to add value i.e. to create outputs that are worth more than the inputs. In many cases the value of inputs is measured in financial terms in which case we say that organisations aim to make a profit. A profit occurs when the revenue generated by sales exceeds the costs of providing the product.
In the case of non profit organisations such as schools and hospitals, other indicators are used to measure the value added. League tables of schools' performances, for example, might measure exam results and compare the grades achieved by students with their levels of achievement when they joined the school to measure the progress.
The nature of the transformation process obviously differs enormously from business to business. For example, it may involve manufacturing or providing services, it may be capital or labour intensive or be based on a single site or multi site.
To increase efficiency managers are always seeking ways of producing more with the same level of inputs or producing the same amount with less inputs. This can be achieved in a variety of ways: changing working practices, investing in new technology, motivating and inspiring staff more effectively and changing the way items are produced.
For example, an important development in manufacturing in the last twenty years is known as lean production. This seeks to reduce wastage at all stages of the production process. It includes Just in Time production in which items are produced to order rather than in advance. This reduces stock levels because materials are only ordered and used when needed - they do not wait around in stock.
Similarly finished goods are made to order and dispatched immediately rather than being produced and then waiting for someone to buy them. Just in time production therefore removes the costs involved in storing and protecting stock. Lean production also includes a technique known as kaizen which aims to use the knowledge of employees to find ways of continuously improving the way things are done. Small, incremental changes are used to reduce costs on an ongoing basis.
Adding value can also occur by generating outputs that customers are willing to pay more for. In marketing the role of the brand has become even more important in recent years as firms attempt to get customers to identify with particular values, a lifestyle and a set of aspirations. Through effective branding items can be sold for more.
Just think of a basic, plain T shirt and the effect on the price that can be charged if you add a particular brand name or logo to it. Think Prada, think Armani, think Gucci and you can see the value of a brand. Also the design features of a product can generate benefits that customers will pay more for (think of Dysons vacuum cleaners, Kenwood Food Factory, and Clarks shoes) as well as factors such as the speed of delivery (1 hour opticians and photo processing), convenience (think home delivery) and flexibility (think top restaurant compared to a fast food chain).
Organisations are continually reviewing what they provide and how they provide it to try and add more value. Given ongoing changes in the competitive environment with new competitors, new demands and new technologies adding value is a dynamic process. Your parents probably bought a CD and played it at home on a CD player. You download and listen on an iPod.
The world of music provision and retailing has changed radically forcing organisations to rethink their business models. Your parents probably went to a travel agent to book their holiday with a package holiday company. You go online and tailor make your own holiday. They probably went on holiday mainly within their own country or to relatively few locations overseas. You travel the world.
Organisations operate in a restless world and managers need to be looking constantly at the business environment to identify changes that could be of value to them or could possibly harm them. Interestingly any change will have different effects on different organisations. The banning of smoking in public places may damage sales of tobacco but boost sales on patches to help you give up smoking, for example.
Environmental Analysis
Environmental analysis, also known as environmental scanning or appraisal, is the process through which an organisation monitors and comprehends various environmental factors and determines the opportunities and threats that are provided by these factors. Thus, there are two aspects involved in environmental analysis. Monitoring the environment Identifying the opportunities
Understanding the nature of environment
Strategic decisions are made in uncertainty Managers deal with uncertainty by recipe, organisational routines and reliance on culture or through analysis. How uncertain is the environment? What are the reasons for uncertainty? How should the uncertainty be dealt with? Is the environment static or dynamic? Is it simple or complex?
Understanding the nature of environment
Audit of environmental influences
Identify which macro environmental influences are likely to affect the organizations development or performance This could be done by considering the way in which political, economic, social and technological influences impinge on organizations. It is useful to construct possible future scenarios to consider the extent to which strategies might need to change.
Understanding the nature of environment
The analysis of the immediate environment of the organization. For example, the competitive situation, in which to operate or five forces analysis to identify the key forces at work in the immediate or competitive environment and why they are significant.
Environmental Uncertainty
The more dynamic environmental conditions, the more the uncertainty or complexity. The degree of environmental dynamism is the rate and frequency of change. Complexity may be due to diversity of environmental influences. E.g., a multinational company operating in many different countries. The more the number of environmental influences, the more the complexity.
Understanding Simple/ Static Conditions
In simple and static conditions, environment is relatively straight forward to understand and is not undergoing significant change. Raw material suppliers and some mass manufacturing companies are examples where technical processes may be fairly simple. Competition and markets fixed over time Changes become predictable Past could be used as a predictor of the future So management time is invested in systematic auditing of environmental influences over time
Example of Static Conditions
In public services such as education, health, etc, data on demographics (birth rates) could be used as lead indicator to determine required provision of schooling or health services. Sales of consumer durable thought to be dependent upon real income
Understanding Dynamic Conditions
When environment shows signs of major changes, e.g., organisations faced with:
Technological advances, More sophisticated Customer, and Internationalisation of Markets
Decisions can no longer be made based on past performance.
Tackling Dynamic Conditions
In these conditions, managers need to consider environment of the future, not just the past. Managers may employ some structured ways to deal with dynamic conditions, such as scenario building approach Alternative scenarios are developed Evolve different strategies for these scenarios
The Nature of the Environment
Simple / static environment requires analysis of past environmental influences The more dynamic the environment, the more complex means to understanding environment The more complex the environment, the more sophisticated the techniques required (model building, simulation
Auditing Environmental Influences
Aspects of the environment that are important to organizations:
Microenvironment:
Actors close to the company
Macroenvironment
Larger societal forces
Business and the environment
The business transformation process does not take place in a vacuum. Firms operate in a particular context and they are influenced by and are able to influence this environment. The business environment can be divided into: The micro-environment The macro-environment
Actors in the Microenvironment
Major Macroenvironmental Forces
The Macroenvironment
Key Demographic Trends
World population growth
Now 6.2 billion Projected to reach 7.9 billion by 2025
The External Environment
This environment comprises a wide range of influences Economic, Demographic, Social, Political, Legal, Technological
Immediate or operational environment
Suppliers, Competitors, Labour markets, Financial institutions, and Customers May also include: Trading organisations, Trade unions, and possibly A parent company
The Political Environment
A number of aspects of the political environment clearly affect business activity. These range from;
General questions concerning the nature of the political system and its institutions and processes
To the more specific questions relating to;
Government involvement in the working of the economy, and Its attempts to influence market structure and behaviour
The Political Environment
Government activities, both directly and indirectly, influence business activity and government can be seen as the biggest business enterprise at national or local level. Given the trend towards the globalisation of markets and the existence of international trading organisations and blocs, international politico-economic influences on business activity represent one key feature of the business environment.
The Macroenvironment
The Political Environment
Includes laws, governmental agencies, and pressure groups that impact organizations and individuals.
The Macroenvironment
The Political Environment
Key trends include:
Increased legislation to protect businesses as well as consumers. Changes in governmental agency enforcement. Increased emphasis on ethical behavior and social responsibility.
The Economic Environment
Government, as indicated above, plays a major role in the economy at both national and local level and its activities help to influence both the demand and supply side. Nevertheless there are a number of other economic aspects related to business activity, which are worthy of consideration. These include various structural aspects of both firms and markets and a comparison of economic theory and practice.
The Macroenvironment
The Economic Environment
Affects consumer purchasing power and spending patterns. Consumers now spend carefully and desire greater value.
The social, cultural and demographic environment
Both demand and supply are influenced by social, cultural and demographic factors. Cultural factors, for example, may affect; The type of products being produced or sold, The markets they are sold in, The price at which they are sold and a range of other variables
The social, cultural and demographic environment
People are a key organisational resource and a fundamental part of the market for goods and services. Accordingly, socio-cultural influences and developments have an important effect on business operations, as do demographic changes
The Macroenvironment
Key Demographic Trends
Changing age structure
Changing household
Geographic population shifts
Better-educated, more white-collar workforce
Increasing Diversity
The Macroenvironment
The Natural Environment
Concern for the natural environment has grown steadily, increasing the importance of these trends:
Shortage of raw materials Increased pollution Increased governmental intervention
The Macroenvironment
The Cultural Environment
Is composed of institutions and other forces that affect a societys basic values, perceptions, preferences, and behaviors.
The technological environment
Investment in technology and innovation is frequently seen as a key to the success of an enterprise and has been used to explain differences in the relative competitiveness of different countries. It has also been responsible for significant developments in the internal organisation of businesses in the markets for economic resources.
The legal environment
Businesses operate within a framework of law, which has a significant impact on various aspects of their existence. Laws usually govern, among other things, the status of the organisation, its relationship with its customers and suppliers and certain internal procedures and activities. They may also influence market structures and behaviour.
The Ethical Environment
Ethical considerations have become an increasingly important influence on business behaviour, particularly among the larger, more high profile companies. One area where this has been manifest is in the demand for firms to act in a more socially responsible way and to consider the impact they might have on people, their communities and the natural environment.
The micro-environment consists of stakeholder groups that a firm has regular dealings with. The way these relationships develop can affect the costs, quality and overall success of a business. Issues in the micro-environment include:
Suppliers Distributors Customers Competitors
Micro-environment: Suppliers
Can they provide high quality products at a good price? Can they do this reliably in the volumes required? Have they got the flexibility to respond to a firm's demands? What is the bargaining power of these suppliers?
How dependent is the firm on them? Does their approach to their staff and resources fit with your ethics? Some firms take quite an aggressive attitude towards their suppliers by trying to push down the prices and delay payments. Others view the relationship more as a partnership in which they are working together with suppliers and that by helping each other both can benefit.
The importance of suppliers can be seen if things go wrong. In 2000 Ford's image was damaged when tyres on its Explorer vehicles started exploding. These tyres were produced by Bridgestone and the supplier ended up recalling over 6.5 million tyres. In 2007 Sony batteries in several Dell laptops caught fire which caused a terrible public relations issue for the computer manufacturer and led to over 4 million laptop batteries being recalled.
Distributors
Often getting products to the end customers can be a major issue for firms. Imagine you sell shampoo - what you need to sell this is to get it on the shelves in the leading chemists and supermarkets but this means moving someone else's products off the shelves! So the challenge is to get stores to stock your products; this may be achieved by good negotiating skills and offering appropriate incentives. The distributors used will determine the final price of the product and how it is presented to the end customer.
When selling via retailers, for example, the retailer has control over where the products are displayed, how they are priced and how much they are promoted in-store. You can also gain a competitive advantage by using changing distribution channels. Banks, insurance companies, holiday firms, hotels and many others businesses have seen the opportunities created by the internet.
Direct Line insurance, Dell computers and Amazon have reduced costs by selling direct. Some firms such as Betterware and Avon have used alternative distribution channels to their competitors by selling door to door; Ann Summers' products have sold well via parties.
Group Work
Levis-Strauss: a case of environmental recognition. Read the case study and discuss what went wrong at Levis-Strauss? Identify the changes in environment for LevisStrauss. To what extent do you think that moving its manufacturing overseas would help to solve Levis problems?
Porters Model for Structural Analysis
The Threat of Entry:
How easy or difficult it is for new entrants to start competing?
The Power of Buyers and Suppliers
How strong are the sellers and buyers?
The Threat of Substitutes
How easily a product or service can be substituted?
The Extent of Competitive Rivalry
Threats of Entry
Economies of Scale Capital Requirement of Entry Access to Distribution Channels Expected Retaliation Legislation or Government Action Differentiation
The Power of Suppliers
The Concentration of Suppliers
Are there few dominant suppliers?
Switching Costs
Are cost to switch from one supplier to the other higher?
Forward Integration by Suppliers
Suppliers might threaten to set up their own retail outlets
The industry is not a key customer group to the supplier
The Power of Buyers
Are there few dominant buyers and many sellers in the industry? Switching Costs: Are these costs higher for buyers? Are products differentiated? The nature of the product or service: Whether this is integral and high cost product or service? If yes, buyers will look for best price
The Threat of Substitutes
Quality: Is substitute better? Buyers willingness to substitute Relative price and performance of substitute Cost of switching to substitute
The Extent of Competitive Rivalry
The questions that need to be thought in the process of strategic analysis How intense is the competition? What is it based upon? Is it likely to increase or decrease in intensity? How can it be reduced?
Competitive Rivalry
Based on following: Extent to which competitors are in balance A market in slow growth High Fixed Costs in an industry Product differentiation or standardised products High exit barriers give way to high competition
Strategic Group Analysis
Nature of competition:
Who is the most direct competitor? On what basis competition is likely to take place?
So, there is a need of an intermediate mapping, that is why a strategic group analysis is done.
Characteristics to Identify Strategic Analysis
Extent of Product Diversity Extent of Geographic Coverage Number of Market Segments Served Distribution Channels Used Extent of Branding Marketing Effort Product or Service Quality R & D Capability Cost Position Utilisation of Capacity Pricing Policy Ownership Structure Size of Organisation
Market Structures & Market Power
Market Share: an important aspect of business Market share is a measure of market power.
Important to understand both market structure and relative power of competitors. Market structure: Segmentation
SWOT Analysis
Strengths Weaknesses Opportunities Threats
References
Johnson, G. and Scholes, K. (1999). Exploring Corporate Strategy: Text and Cases, PrenticeHall: London, Ch. 3
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