ENVIRONMENTAL FACTORS THAT INFLUENCES THE OPERATIONS OF THE BUSINESS

Socio-Cultural Forces

(c) UNCLE BEN Strategic Management 1

What are Social, Cultural, and Demographic Forces?

The attitudes, values, standards, beliefs, and tastes held

by people including ethnic minority groups.

Factors that regulate the values, traditions, ethics,

morals, and customs of society

Consist of:

Culture

Demography

Social structure

Social factors affect economic factors


What are Social, Cultural, and Demographic Forces (2)

Social and cultural changes include:

Changing population characteristics

Changing consumer values and lifestyles

Changing consumer purchasing power

Changing religious beliefs and practices

Demographic changes include:

Shifts in population characteristics such as income, education, and age levels

Geographic distribution of the population

Population growth


Social, Cultural, and Demographic Forces

• Child bearing rates

• Number of births

• Number of deaths

• Number of marriages

• Number of divorces

• Immigration and emigration rates

• Life expectancy rates per capita income

• Attitudes towards business

• Lifestyles

• Traffic congestion

• Trust in government

• Attitudes towards government

• Attitudes towards work

• Buying habits

• Ethical concerns

• Attitudes towards savings

• Racial equality

• Attitudes towards investing

• Sex roles

• Attitudes towards product quality

• Attitudes towards customer service

• Attitudes towards foreign people

• Pollution control

• Waste management

• Air pollution

• Water pollution

• Number of churches and church members


Impact of Social, Cultural, and Demographic Forces on Business

Demographic factors (e.g., size of the population, population growth, age, life expectancy, family size, occupational status, employment pattern etc.,) demand for goods and services, working hours

Consumer behaviour and attitudes different demand patterns and different marketing strategies

Mobility of labour availability and price of labour

Geographic distribution of population demand for goods/services, availability of labour for work

Income distribution purchasing power of workers


Technological Forces


What is the Technological Environment?

Factors that affect the way an organisation does its work and also the products and services it offers

Factors that create problem-solving inventions

The current state of knowledge regarding the

production of products and services


Some technological factors that affect business activities

• Government expenditure on technology (i.e. R/D)

• Industry expenditure on technology (i.e. R/D)

• Patent protection

• Technological advancements

• Lifecycle of technology available

• The role of internet and the changes to it (if any)

• Availability of new products and srevices

• New developments in technology transfer from the labs to the marketplace

• Improvements in productivity through automation

• Availability of internet facilities

• Telecommunication infrastructure

• Computer hacking activities

• Biotechnology and new industries

• Information technology, computing and associated implications for production

• Transportation and distribution

• Production processes


Impact of Technological Forces on Business

1. Type of products or services that are made and sold

2. The way in which products are made

3. The way in which services are provided

4. The way in which markets are identified

5. The way in which employees are recruited and trained


Impact of Technological Forces on Business (2)

– Creation of new markets

– Proliferation of new and improved products

– Changing the relative competitive cost

positions in an industry

– Rendering existing products and services

obsolete


Impact of the Internet on Business Activities

– altering the life cycles of products,

– increasing the speed of distribution,

– creating new products and services,

– erasing limitations of traditional geographic

markets,

– changing the historical trade-off between

production standardisation and flexibility.


Impact of the Internet on Business Activities (2)

– altering economies of scale (i.e., reduction in

input cost with an increase in output as the

business grows)

– changing entry barriers,

– redefining the relationship between industries

and:

various suppliers,

creditors,

customers, and

competitors


Environmental or Ecological Forces


Environmental or Ecological Forces

All the factors that influence or are determined by the surrounding environment.

Vital for certain industries such as tourism, crop farming, horticulture, fisheries, forestry, and livestock farming

Examples include:– Climate

– Weather

– Geographical location

– Global changes in climate

– Environmental offsets, etc.


Example of PEST Analysis

Political

• Government has passed legislation which requires further reductions of CO2 , HC and NC emissions for vehicles until 2020

• New political forces, which are against tax reductions, may be elected in the next years’ elections

• Import restrictions will increase in 2016

• Government is increasing its funding to ‘priority’ industries

• Government is easing regulations for employment

• Increasing tensions between our government and our major export partner’s government

Economic

• GDP will grow by 3% in 2015• Availability of credit for businesses

will slightly grow or remain unchanged in 2015. The same applies for the cost of credit in the last quarter of increase to 15%

• Inflation will rise to 15% or 16% in 2015

• Corporate tax rate will decrease by 2% next year to 23%

• Dollar exchange rates are expected to decrease compared to euro

• Disposable income level will decrease• Oil prices will increase by 5% and 6%

respectively in 2016


Example of PEST Analysis (2)

Socio-cultural

• Positive attitude towards “green” vehicles

• Number of individuals and companies buying through the Internet is 10% and 4% respectively and is expected to grow

• Immigration is increasing• Increasing attitude toward jobs with

shorter work hours• Increasing attitude toward “blue-

collar” jobs • People tend to buy more foreign

rather than domestic products• People change their eating habits and

now tend to eat unhealthier food

Technological

• New machinery that could reduce production costs by 20% is in development

• Country’s major telecom company announced its plans to expand its internet infrastructure and install new optic fibre cables

• Driverless cars may be introduced in the near future

• “New” type of chair will be introduced into the market next year


Advantages and Disadvantages of PEST Analysis

Advantages

• The tool is simple and easy to understand and use.

• The tool helps understand the business environment better.

• The tool encourages the development of strategic thinking.

• The tool helps reduce the effect of future business threats.

• The tool enables projects to spot new opportunities and exploit them effectively.

Disadvantages

• The tool allows users to over-simplify the data that is used. It is easily possible to miss important data.

• The tool needs to be updated regularly to be effective.

• The tool is most effective when users come from different perspectives and departments.

• The tool requires users to have access to data sources which could be time consuming and expensive.

• Much of the data used by the tool is on an assumption basis.

• The business environment is changing drastically. Thus, it is becoming increasingly difficult for projects to anticipate developments


THE TASK ENVIRONMENT

What is the Task Environment?

A. k. a. Micro environment or Industry environment

Those specific outside elements or groups with which the business interacts when conducting its activities.

Has immediate impact on the business and, in turn, is affected by the business.

Management has no control over it in the short term; instead management has control over it in the long term

UNCLE BEN (c) STRATEGIC MANAGEMENT

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Elements of the Task Environment

government,

local communities,

suppliers,

competitors,

customers,

creditors,

employees/labour unions,

business owners

special-interest groups, and

trade associations.UNCLE BEN (c) STRATEGIC

MANAGEMENT20

Industry Analysis


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Industry Analysis

A. k. a. Competitive Analysis

The in-depth examination of key factors within

the task environment of business.

Assists managers to:

– Identify rival firms

– Determine the strengths, weaknesses,

capabilities, opportunities, threats, objectives, and

strategies of rival firms


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Industry Analysis

Determines the intensity of competition

using the Competitive Forces Model

Rivalry among existing firms

Threat of new entrants

Threat of substitute products

Bargaining power of buyers

Bargaining power of suppliers

Relative power of other stakeholders


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Existing Firm Rivalry


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Rivalry Among Existing Firms

Competitive pressures arising from the efforts of rivals to get better market position, market share, higher prices, and competitive advantage

Rivalry is stronger when:

Competing sellers are active in making fresh moves to improve their market standing and business performance

Slow rate of growth of industry -- Buyer demand is growing slowly

Extra capacity-- Buyer demand falls off and sellers find themselves with excess capacity and/or inventory

Large number of competitors -- The number of rivals increases and rivals are roughly of equal size and competitive capability


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Rivalry Among Existing Firms (2)

Little opportunity to practice product differentiation -- The products of rival sellers are commodities or else weakly differentiated

Buyer costs to switch brands are low

One or more rivals are dissatisfied with their current position and market share and make aggressive moves to attract more customers

Diversity of rivals -- Rivals have diverse strategies and objectives and are located in different countries

Outsiders have recently acquired weak competitors and are trying to turn them into major contenders

No industry leader -- One or two rivals have powerful strategies and other rivals are struggling to stay in the business


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Rivalry is generally weak when:Industry members move only infrequently and are in a

non-aggressive manner to draw sales and market share away from rivals

Buyer demand is growing more rapidlyProduct or service characteristics -- The products of

rivals are strongly differentiated and customer loyalty is high

High exit barriers -- Buyer costs to switch brands are high

There are fewer than 5 sellers or else so many rivals that one company’s actions have little direct impact on rival’s business

High fixed costs


Typical weapons for fighting rivals and attracting buyers include:

1. Lower prices

2. More or different features

3. Better product performance

4. Higher quality

5. Stronger brand image and appeal

6. Wider selection of models and styles

7. Better/bigger dealer network


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8. Low interest rate financing

9. Higher levels of advertising

10. Stronger product innovation capabilities

11. Better customer service capabilities

12. Stronger capabilities to provide customers with custom-made products

New Entrants


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Threat of New Entrants

Competitive pressures arising from the threat of new entrants to an industry who bring new capacity including the desire to gain market share and substantial resources

Entry threats are stronger when:

The pool of new entrants is large and some of the new entrants have resources that would make them formidable market contenders

Entry barriers are low or can be readily hurdled by the likely new entrants

New entrants can expect to earn attractive profits

Buyer demand is growing fastUNCLE BEN (c) STRATEGIC

MANAGEMENT31


Industry members are unwilling or unable to contest the entry of new entrants

Access to distribution channels -- When existing industry members are looking to expand their market reach by entering product segments or geographic areas where they currently do not have a presence

Favourable government policy/action such as legislation

Product differentiation

Low switching costs


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Entry threats are weaker when:

The pool of new entrants is small

Capital requirements of entry are high

Existing competitors are struggling to earn healthy profits

The industry’s outlook is uncertain or risky

Lack of access to distribution channels

Buyer demand is growing slowly or is stagnant

Unfavourable government policy/action such as legislation


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Expected retaliation -- Industry members will strongly contest the efforts of new members to gain a foothold in the market

High switching costs


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Substitute Products or Services


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Threat of Substitute Products or Services

Competitive pressures arising from the attempts of companies outside the industry to win customers over to their products that appear different but can satisfy the same need as another product

Forms of substitution are:

Product- for- product substitution

Substitution of need

Generic substitution

Product not a necessity


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Competitive pressures from substitutes are stronger

when:

Good substitutes are readily available or new ones are

emerging

Substitutes are attractively priced

Substitutes have comparable or better performance

features

End-users have low costs in switching to substitutes

End-users grow more comfortable in using substitutes


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Indicators that competition from substitutes is strong:

Faster growth in sales of substitutes than sales of the

industry being analysed. This shows that sellers of

substitutes are drawing customers away from the

industry in question.

Producers of substitutes are moving to add new

capacity

Increasing profits of producers of substitutes


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Competitive pressures from substitutes are weaker when:

Good substitutes are not readily available or do not

exist

Substitutes are higher priced in relation to their

performance

End-users have higher switching costs to substitutes


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Power of Buyers


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Bargaining Power of Buyers

Competitive pressures arising from ability of buyers to force prices down, bargain for higher quality, and play competitors against each other including buyer-seller collaboration

Bargaining power of buyer is stronger when:

The identity of a buyer adds prestige to the sellers list of customers

Improvement in the quantity and quality of information to buyers

Buyers can postpone their purchases to later periods if they do not like the offer of the suppliers

There is threat of backward integration by the buyer into the seller’s business so that the buyer becomes a competitor


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Bargaining Power of Buyers (2)

Switching costs of buyers to competing brands or substitute products (i.e., change to new suppliers) are low

Buyers are many and can demand concessions when buying large quantities

Large-volume purchases by buyers are important to suppliers

Buyer demand is weak or declining

There are only a few buyers so each buyer’s business is very important to sellers

There is concentration of buyers

There are alternative sources of suppliers


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Bargaining power of buyer is weaker when:

Product represents a high percentage of buyer’s cost

Buyer earns low profits

Product is unimportant to buyer

Buyers buy the items infrequently or in small amounts

The switching costs of buyers to competing products are high


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The brand reputation of a seller is important to the buyer

A surge in demand by buyers creates a “seller’s market”

The quality or performance of a product is very important to buyers but it is not matched by other products

A partnership or cooperation of buyers with sellers provides attractive win-win opportunities


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Power of Suppliers


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Bargaining Power of Suppliers

Competitive pressures arising from the ability of suppliers to raise prices or reduce quality of raw materials, parts, components, and other resource inputs including supplier-seller collaboration

Bargaining power of supplier is stronger when:

There are only a few suppliers of a particular input

Supplier offers unique product or service

Substitutes are not readily available

Unimportance of product or service to the supplier

Cost of switching to another supplier is high


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Bargaining Power of Suppliers

There is a threat of forward integration by supplier into the business of industry members thereby making it possible of the supplier to become a rival

The supplier’s customers are highly fragmented so they have low bargaining power


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Bargaining Power of Suppliers (2)

Bargaining power of supplier is weaker when:

Switching costs to other suppliers are low

Good substitute inputs exist or new ones are coming onto the market

The collaboration or partnership of sellers with selected suppliers provides attractive win-win opportunities

Items supplied are commodities that are readily available from many suppliers at the existing market prices

There is a surge in the availability of supplies, thus greatly weakening the pricing power of suppliers


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Bargaining Power of Suppliers (2)

Industry members account for a large proportion of a sellers’ total sales and a continued volume high purchases are important to the well-being of suppliers

Industry members are a threat to integrate backwards into suppliers’ businesses and to self-manufacture their own requirements


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Other Stakeholders


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Relative Power of Other Stakeholders

Competitive pressure stemming from attempts by other stakeholders to influence business activitiesGovernmentLocal communitiesCreditorsTrade associationsSpecial interest groupsUnionsShareholdersComplementors- products that work well with a firm’s

product


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ENVIRONMENTAL FACTORS THAT INFLUENCES THE OPERATIONS OF THE BUSINESS

News & Politics

Transcript of ENVIRONMENTAL FACTORS THAT INFLUENCES THE OPERATIONS OF THE BUSINESS