Topic 2: Evaluating the Business Environment

Dr. Aditi Shams

Topic 1 Summary 2

1. What is Business ?
2. What is Organization?
3. Business Environment
4. Characteristics of Business Environment
5. Types of Business Environment : 1. Internal & External (Internal
Environment, Task Environment, General Environment)
6. Macro Environment ( customer, supplier, market intermediaries, Public) &
Micro Environment ( economic system, economic position, political,
social, technological , Legal, global environment)
 3
Topic 2 Outline: Evaluating Business
Environment

 Porter’r Five Force Model

 PESTEL Analysis
 SWOT Analysis
 VRIO Analysis
 4
SWOT Analysis (Strengths, weaknesses,
opportunities, and threats)
 SWOT analysis is a method for identifying and analyzing internal strengths and weaknesses and external
opportunities and threats that shape current and future operations and help develop strategic goals.
 SWOT is used to help assess the internal and external factors that contribute to a company’s relative
advantages and disadvantages.
 A SWOT analysis is generally used in conjunction with other assessment frameworks, like PESTEL and
Porter’s 5-Forces.
 Strengths and weaknesses are internal factors. They are characteristics of a business that give it a
relative advantage (or disadvantage, respectively) over its competition.
 Opportunities and threats, on the other hand, are external factors. Opportunities are elements of the
external environment that management can seize upon to improve business performance (like revenue
growth or improved margins).
 Threats are elements of the external environment that may endanger a firm’s competitive
advantage(s), or even its ability to operate as a going concern (think regulatory issues or technological
disruption).
 5
Importance of SWOT analysis

 This framework can help support strategic planning and risk management.
 It may hep visualize relative advantages and disadvantages to better
understand where and how the organization should allocate resources-
towards growth or risk reduction initiatives.
 The financial analysts may use this framework to understand the strengths,
weaknesses, opportunities, and threats in order to assess the business more
completely.
 Equity researcher and credit analysts' may use this to better understand a
borrower’s creditworthiness.
 6
SWOT Analysis……
7
 8
PESTEL Analysis
 9
Political Environment

 Taxation, Tariff, Regulations, Political Stability, Elections

 For example,
 Google and other Internet providers have financial, legal, and ethical issues relating to
operating in countries like China or Iran, where repressive governments want to control
the flow of information. In another example, Google was fined $2.7 billion by the
European Union for antitrust abuses. Google can appeal this decision with the European
Court of Justice. Finally, the CEO of Apple is awaiting changes in the tax law before
bringing almost $250 billion in foreign reserves back to the United States. Often, decision
makers for these organizations must choose between making money or suppressing
information critical of the repressive regimes.
 10
Economic

 GDP, Growth, Inflation, Interest rates, Exchange rates

 Business in the financial industry may pull back from aggressive strategies in
times of rising interest rates.
 11
Social

 Demographics- population growth, age distribution of population, religion

dominance, culture, attitude towards safety and health consciousness.
 For example, rising rates of obesity have forced management to look
closely at marketing campaigns in giant food corporations such as Nestle.
 12
Technological

 Technology facts include research and development (R&D), automation

and robotics, and technology incentives. The rate of technological
change in the business environment is staggering. A term often paired with
technology is disruption, a description for innovations that completely
change the cast of leading competitors in an industry. Many organizations
not only scan the technological environment but also monitor closely for
new and disruptive processes.
 Example: Walt Disney and Alphabet (Google’s parent corporation) are
both investing heavily to become leaders in virtual reality. They are betting
billions that augmented reality will have the power to disrupt the gaming
and entertainment industries.
 13
Environment

 Weather, climate change, air quality, and natural disasters are all
environmental factors. Some industries are especially at risk from changes
in the natural environment, including manufacturing, agriculture, tourism
and travel, and sports and entertainment. Many pollution regulations
limiting water and air pollution have been passed that affect the
operation of businesses. Today, the impact of climate control is being
debated in Congress, and organizations in many industries are concerned
how this latest environmental threat will affect their operations.
 Recently, Shell Oil spent more than $7 billion exploring parts of the Arctic
Circle for oil—a venture that was not possible before global warming
increased drilling access in the area. They have since cancelled this
initiative due to a lack of results, as well as strong international protests that
it may cause further damage to an environmentally sensitive location.
 14
Legal

 Legal factors include discrimination laws, consumer protection laws, and employment, health,
and safety policies. Antitrust, piracy and copyright laws, as well as immigration issues are also of
growing importance in the business environment. All of these factors affect how organizations
operate, their costs, and the demand for products.
 For example, after the collapse of Enron, the government passed the Sarbanes-Oxley Act in
2002. This legislation completely changed accounting and reporting requirements for
corporations. These businesses have had to implement rigorous procedures to ensure
compliance with the new regulations. After the Great Recession of 2008–2009, Congress passed
the Dodd-Frank Act, which greatly increased regulations and oversight for banks and other
financial firms. Bank lobbyists slowed the implementation of many rules, but compliance costs
doubled and totaled $70 billion in 2016.
 15
Porter’s Five Forces Model:
 16
Porter’s Five Forces Model…….

 The threat of new entrants (or barriers to entry). This refers to the threat that new
competitors pose to the existing businesses in an industry. A profitable industry will
attract new competitors. If it is easy for new businesses to enter the industry, then the
businesses already operating in the industry are at a greater risk. There may be a high
threat of new entrants to an industry when brand names are not well-known, when it is
easy for customers to switch to a new supplier, and when trademarks or copyrights are
not involved in the production process.
 For example, it would be very hard to enter an industry such as airlines, which requires a
huge financial investment to pay for equipment, personnel, and airport gateways.
 17
Porter’s Five Forces Model………

 The threat of substitute products or services. A substitute product is not a similar

product from a competitor, but rather a different product or service altogether but that
performs the same purpose in the mind of the consumer. For example, a city subway
system could be a substitute product to an automobile manufacturer. Likewise, e-mails
may substitute for writing letters, olive oil may be a butter substitute, and tea may
substitute for coffee. If there are good substitutes to a product, the industry is less
profitable.
 18
Porter’s Five Forces Model………

 Competitive rivalry within the industry. Porter believes that the intensity or the level of
competition in an industry is one of the main forces that determines the profitability of
that industry. A highly competitive market suggests that the competitors are aggressively
trying to take market share from their rivals. Intensity can be affected by the number of
competitors, the size of the market, the growth of the industry, and how difficult it is to
differentiate your product (make it unique in some major feature). The airline and
automotive industries are examples of high rivalry industries.
 19
Porter’s Five Forces Model………

 The bargaining power of buyers. Buyer bargaining power refers to the amount of
pressure customers can put on a seller. The buyer wants to lower prices, increase service,
or improve the quality of the product. From the viewpoint of the seller, an industry
where the buyer has high bargaining power is not particularly attractive because
competitors will have many possible strategies for easily taking the customer away. High
buying bargaining power decreases potential profits if the seller responds to the buyers’
tactics. Remember that the buyer is not always a consumer; many businesses sell to
other businesses who also have buyer bargaining power. A company like Walmart has a
lot of buyer bargaining power because of the extremely high volume of its purchases.
 20
Porter’s Five Forces Model…………

 The bargaining power of suppliers. Supplier bargaining power is another force that
shapes the competitive measure of an industry because it limits the ability of the seller
to make a profit. Powerful suppliers can pressure buyers by raising prices, lowering
quality, or reducing the availability of the supply.
 21
Ansoff Matrix

 The Ansoff Matrix, often called the Product/Market Expansion Grid, is a two-
by-two framework used by management teams and the analyst community to
help plan and evaluate growth initiatives.
 In particular, the tool helps stakeholders conceptualize the level of risk
associated with different growth strategies.
 This framework evaluates relative attractiveness of growth strategies based
on products and markets.
 22
Ansoff Matrix
 23
Market Penetration

• Increasing marketing efforts or streamlining distribution processes

• Decreasing prices to attract new customers within the market segment
• Acquiring a competitor in the same market
 24
Market Development

• Catering to a different customer segment or target demographic

• Entering a new domestic market (regional expansion)
• Entering into a foreign market (international expansion)
 25
Product Development

• Catering to a different customer segment or target demographic

• Entering a new domestic market (regional expansion)
• Entering into a foreign market (international expansion)
 26
Diversification

 Related Diversification :
An example is a producer of leather shoes that decides to produce leather car
seats. There are almost certainly synergies to be had in sourcing raw materials,
although the product itself and the production process will require considerable
investment in R&D and production.
 Unrelated Diversification:
Moving from the leather show business to consumer packaged good product in
order to diversify.
 27
VRIO Analysis
 28
Value

 Resources must be valuable. According to Resource-Based-View ,

resources are valuable when they enable a firm to implement strategies
that improve a firms efficiency and effectiveness by exploiting
opportunities or mitigating threats.
 For example, Net Present Value of Investment.
 29
RARE (VRIO)

 Resources must be rare.

 Resources that can only be acquired by one or few companies are
considered to be rare.
 If a certain valuable resource is possessed by a large amount of
players in the industry, each of the players has a capability to exploit
the resource in the same way, thereby implementing a common
strategy that gives non of the players a competitive advantage. Such
a situation is indicated as competitive parity or competitive equality. In
case a company does possess a large amount of resources that are
valuable and rare, it is likely to have at least temporary competitive
advantage.
 30
Inimitable (VRIO)

 Resources should be hard and costly to imitate or substitute.

• Unique historical conditions: choices made in the past influence the options a company has in the
present and future (path-dependency). Similarly, a company that has located its facilities on
what turns out to be a much more valuable location than initially anticipated, has an imperfectly
imitable physical resource.
• Causal ambiguity: causal ambiguity exists when the link between the resources controlled by the
focal company and its sustainable competitive advantage is not fully understood. Competitors
won’t be able to duplicate the focal company, since they simply don’t know which resources
they should imitate.
• Social complexity: when the most important resource of a company relies on the strength of its
social network, interpersonal relations, a company’s culture and its reputation among both
suppliers and customers, the resource can be considered highly inimitable. It is very hard for
competitors to build an identical social network, since it is dependent on so many
 31
Organization-wide supported (VRIO)

 The resources themself do not create any advantage for a company if the company
is not organized in way to adequately exploit these resources and capture the value
from them. The focal company therefore needs the capability to assemble and
coordinate resources effectively.
 Examples of these organizational components include a company’s formal reporting
structure, strategic planning and budgeting systems, management control systems
and compensation policies. Without the correct organization to acquire, use and
monitor the resources involved, even companies with valuable, rare and imperfectly
imitable resources will not be able to create a sustainable competitive advantage.
 When all four resource attributes are present, a company is safe to assume it has
a distinctive competence that can be used as source of sustainable competitive
advantage.
32
 33
Competitive Analysis

• WHAT IS YOUR COMTETITIVE ADVANTAGE? How your company can produce goods or delivers services better than its
competitors. The ways your company excels compared to its rivals.
• General Background: Who are my competitors? Where are they located? Who are the key personalities? What type of
organizational structure is it?
• Financial: How profitable are they? Have they grown in the recent past? And any other data you can ethically discover.
• Products: What products do they sell? Have they introduced new products and what is their success rate? What brands do
they carry? Do they hold patents and licenses?
• Customers: What market segment do they serve? What is the customer growth rate? How strong is the customer loyalty?
• Advertising and Sales: What are their distribution channels? What is their promotional strategy? How large is their sales
force? What is their pricing and discount structure?
• Personnel: How many employees do they have? What is their compensation package including benefits? What kind of
managers and what management style do they show? More importantly, what skills is the competition hiring? If a
company is hiring experts in artificial intelligence, it tells the competition quite a bit about the plans for the future.
 34
PRACTICE PROBLEM

 DeBeers controls many of the world’s most productive diamond mines,

selling more than one-third of the world’s rough diamond production.
When analyzing the fine jewelry industry according to Porter’s Five Forces,
DeBeers’ control over diamond supplies reveals ________within the industry.
❑ A. Intense competitive rivalry.
❑ B. Low bargaining power of suppliers.
❑ C. High bargaining power of suppliers.
 35
PRACTICE PROBLEM

Sun Tzu was a Chinese military strategist whose classic treatise, The Art of War, continues to
influence both military and business strategy. Which of Sun Tzu’s sayings explains competitor
analysis?

❑ A. If you know the enemy and know yourself, you need not fear the result
of a hundred battles.
❑ B. Know yourself and you will win all battles
❑ C. Strategy without tactics is the slowest route to victory. Tactics without
strategy is the noise defeat.
 36
Practice Problem

 Amir goes to industry conferences twice a year. The prepared speeches contain few
surprises, but the side conversations give him a read on what other firms are doing and
perhaps the trade-offs that they see in the industry. Amir is engaged in_
a. Stakeholder mapping
b. SWOT analysis
c. Environmental scanning
 37
Practice Problem

 The resource-based perspective suggests that unique firm resources

should be the starting point for developing successful strategies.

A. the business opportunity should be the starting point for developing

successful strategies
B. unique firm resources should be the starting point for developing
successful strategies.
C. both business opportunity and unique firm resources should be the
starting point for developing successful strategies.
D. neither business opportunity nor unique firm resources should be the
starting point for developing successful strategies.
 38
CASE : Porter’s Five Forces

Mr. Afridi is the owner of a processed food company. He wants to expand his business in Thailand.
To understand the opportunity better, he, along with one of his marketing managers, initiated a study of the
practice and cultural variation of the Thai market. He found that the demand for processed halal food is high in
Thailand, not from the local side but because of enormous tourist traffic.
In addition, there are a few companies that are operating in this market with limited items, which could be
positive for Mr. Afridi. With further analysis, he also revealed that opening a new business in Thailand requires a
lengthy legal process along with enormous expenses for rent purposes. However, the needed ingredients for
processed goods are readily available, and the quality of those ingredients is considerably good, which will help
maintain the standard of food quality.

USE Porter’s Five Force Model to analyze the situation in which Mr. Afridi operates his business.