Learning Outcomes
The environment is always changing, and this is just as true for the business environment as it is for the physical world around us. Managers try to avoid being “taken by surprise” by unexpected events that would impact their organizations through an ongoing process called environmental scanning. Environmental scanning is a high-level, broad-based process of gathering, analyzing, and dispensing information for purpose of developing strategies or tactics. The process entails getting both factual data and qualitative opinions. Organizations also scan when they are considering whether to enter a particular industry. PESTELYou may wonder just how you go about analyzing the total external environment that would affect your company. A commonly used management tool is called PESTEL. PESTEL is an organizing framework that allows decision makers to understand and make connections with a mass of information. (You may sometimes see the name of this tool written as PESTLE or even just PEST in older sources.) A PESTEL analysis examines six key macro-environmental factors in order to understand their interactions with the organization. Besides alerting top management to potential threats in the environment, a PESTEL analysis is a part of the external strategic analysis when conducting research into new markets. It gives an overview of the different macro-environmental factors that the company has to take into consideration. Descriptions of the six key PESTEL factors follow. PoliticalPolitical issues are a function of how much the government intrudes or is involved in an organization’s operations. In particular, it looks at taxation and tariffs, regulations, political stability, and 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 slapped with a $2.7 billion fine 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. EconomicEconomic factors start with indicators for the U.S. economy as a whole. These are growth, employment, inflation, and interest rates. Companies with foreign operations will worry about exchange rates. These factors are important in long-range forecasts for revenue and expenses. Businesses in the financial industry may pull back from aggressive strategies in times of rising interest rates. SocialSociety and culture have great impacts on the business environment. These factors include demographics like population growth, age distribution, and attitudes toward 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 and Kraft Foods. TechnologicalTechnology 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. 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. EnvironmentalWeather, 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. LegalLegal 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 successfully slowed the implementation of many rules, but compliance costs doubled and totaled $70 billion in 2016. Porter’s Five ForcesMichael Porter, a well-known business consultant and professor at Harvard University, identified five critical external factors that affect strategies being developed by organizations in any industry. This system, known as Porter’s Five Forces, has become an important management strategy tool. Managers use the tool to examine opportunities and threats and to facilitate decision making in the context of their company’s external environment. It measures the competitiveness of an industry and thus its attractiveness or potential profitability. An unattractive industry is one in which the combination of these five forces acts to drive down overall profitability. The five forces defined by Porter include:
An important thing to remember about Porter’s Five Forces is that it is useful at an industry level and not for groups or segments of a market. It is also a “snapshot” of what the industry looks like at a particular time and needs to be updated regularly. And as with any management tool, it is not perfect and infallible. When considered as a starting point for discussion and further investigation, however, Porter’s Five Forces is very useful. Competitive AnalysisEarlier in this module, you read about the concept of competitive advantage. You learned that knowing the strengths and weaknesses of your competitors are key elements in devising organizational goals and determining strategies to meet the goals. Once the external business environment has been analyzed for its suitability, industry competitors must be profiled to determine who your specific competitors are. Not all “players” in an industry will be in direct competition with your organization. (You don’t want to spend valuable resources on an in-depth competitive analysis of BMW and Mercedes if you sell Hyundais.) A robust competitive analysis will allow you to focus on those companies that will compete for customers in your target market. A competitive analysis looks at competitors and tries to answer such questions as these in the following categories:
There are many more questions that would be relevant to this kind of in-depth analysis. The more you know about your competition, the better prepared you will be when you go up against it. The next section will identify industry components that affect your ability to operate. It will introduce tools that allow organizations to focus on only the specific internal and external features that affect them. |