Business Policy and Strategic Management

UNIT – 2

Definition of Environment:

The term ‘business environment’ connotes external forces, factors and institutions that
are beyond the control of the business and they affect the functioning of a business
enterprise.

These include customers, competitors, suppliers, government, and the social, political,
legal and technological factors etc.

While some of these factors or forces may have direct influence over the business firm,
others may operate indirectly.

Thus, business environment may be defined as the total surroundings, which have a
direct or indirect bearing on the functioning of business. It may also be defined as the
set of external factors, such as economic factors, social factors, political and legal
factors, demographic factors, technical factors etc., which are uncontrollable in nature
and affects the business decisions of a firm.

Nature of Business Environment

On the basis of the above discussion the features of business environment can be

summarised as follows:

(a) Business environment is the sum total of all factors external to the business firm and

that greatly influence their functioning.

(b) It covers factors and forces like customers, competitors, suppliers, government, and

the social, cultural, political, technological and legal conditions.

(c) The business environment is dynamic in nature, which means, it keeps on changing.

(d) The changes in business environment are unpredictable. It is very difficult to predict

the exact nature of future happenings and the changes in economic and social

environment. .

(e) Business Environment differs from place to place, region to region and country to

country. Political conditions in India differ from those in Pakistan. Taste and values

cherished by people in India and China vary considerably.

Need / Importance of business environment

There is a close and continuous interaction between the business and its environment.
This interaction helps in strengthening the business firm and using its resources more
effectively.

As stated above, the business environment is multifaceted, complex, and dynamic

in nature and has a far-reaching impact on the survival and growth of the business.

To be more specific, proper understanding of the social, political, legal and

economic environment helps the business in the following ways:

(a) Determining Opportunities and Threats: The interaction between the business
and its environment would identify opportunities for and threats to the business. It helps
the business enterprises for meeting the challenges successfully.

(b) Giving Direction for Growth: The interaction with the environment leads to
opening up new frontiers of growth for the business firms. It enables the business to
identify the areas for growth and expansion of their activities.

(c) Continuous Learning: Environmental analysis makes the task of managers easier
in dealing with business challenges. The managers are motivated to continuously
update their knowledge, understanding and skills to meet the predicted changes in
realm of business.

(d) Image Building: Environmental understanding helps the business organizations in

improving their image by showing their sensitivity to the environment within which they
are working. For example, in view of the shortage of power, many companies have set
up Captive Power Plants (CPP) in their factories to meet their own requirement of
power.

(e) Meeting Competition: It helps the firms to analyse the competitors’ strategies and
formulate their own strategies accordingly.

(f) Identifying Firm’s Strength and Weakness: Business environment helps to identify
the individual strengths and weaknesses in view of the technological and global
developments.
Types of business environment :

Business environment is of two types-

1. Micro environment or the internal (controllable) environment - Micro

environment comprises of the factors in the immediate environment of the company that
affect the performance of the company. In includes the suppliers, competitors,
Marketing intermediaries, customers, pressure groups and the general public

2. Macro environment or the external (uncontrollable) environment -

The forces and institutions outside of the organization that can potentially affect the
performance of the organization come under the external environment of Business. It
consists of the economic, demographic, natural, cultural and political forces.

The external environment of business is often categorized as:

(A) Economic environment - The economic environment includes economic

conditions, economic policies and economic system of the country.

(B) Non-economic environment - Non-economic environment comprises social,

political, legal, technological, demographic and natural environment.

(A) Economic Environment

The main factors that affect the economic environment are:

(a) Economic Conditions: These include gross domestic product, per capita income,
markets for goods and services, availability of capital, foreign exchange reserve, growth
of foreign trade, strength of capital market etc. All these help in improving the pace of
economic growth.

(b) Economic Policies: All business activities and operations are directly influenced by
the economic policies framed by the government from time to time. Some of the
important economic policies are:

(i) Industrial policy (ii) Fiscal policy (iii) Monetary policy

(iv) Foreign investment policy (v) Export –Import policy (Exim policy)

The government keeps on changing these policies from time to time. Every business
firm has to function strictly within the policy framework and respond to the changes
therein.

(c) Economic System: The world economy is primarily governed by three types of
economic systems :

(i) Capitalist economy - Emphasis on private ownership.

(ii) Socialist economy - Resources are owned and managed by the state.
(iii) Mixed economy - Co-existence of public and private sectors. India has adopted the
mixed economy system.

(B) Non Economic Environment

The various elements of non-economic environment are as follow:

(a) Social Environment

The social environment of business includes social factors like customs, traditions,
values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the
values that a society cherishes have a considerable influence on the functioning of
business firms.

For example, during festive seasons there is an increase in the demand for new
clothes, sweets, fruits, flower, etc.

Due to increase in literacy rate the consumers are becoming more conscious of the
quality of the products.

Due to change in family composition, more nuclear families with single child concepts
have come up. This increases the demand for the different types of household goods.

It may be noted that the consumption patterns, the dressing and living styles of people
belonging to different social structures and culture vary significantly.
(b) Political Environment

This includes the political system, the government policies and attitude towards the
business community and the unionism. All these aspects have a bearing on the
strategies adopted by the business firms.

The stability of the government also influences business and related activities to a
great extent. It sends a signal of strength, confidence to various interest groups and
investors.

Further, ideology of the political party also influences the business organisation and
its operations. You may be aware that Coca-Cola, a cold drink widely used even now,
had to wind up operations in India in late seventies.

Again the trade union activities also influence the operation of business enterprises.
Most of the labour unions in India are affiliated to various political parties. Strikes,
lockouts and labour disputes etc. also adversely affect the business operations.

(c) Legal Environment

This refers to set of laws, regulations, which influence the business organisations and
their operations. Every business organisation has to obey, and work within the
framework of the law. The important legislations that concern the business enterprises
include:

(i) Companies Act, 1956 (ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948 (iv) Industrial Disputes Act, 1972
(v) Payment of Gratuity Act, 1972
(vi) Industries (Development and Regulation) Act, 1951
(vii) Prevention of Food Adulteration Act, 1954

(viii) Essential Commodities Act, 2002

(ix) The Standards of Weights and Measures Act, 1956
(x) Monopolies and Restrictive Trade Practices Act, 1969
(xi) Trade Marks Act, 1999
(xii) Bureau of Indian Standards Act, 1986
(xiii) Consumer Protection Act, 1986

(xiv) Environment Protection Act

(xv) Competition Act, 2002
(d) Technological Environment

Technological environment include the methods, techniques and approaches adopted

for production of goods and services and its distribution. The varying technological
environments of different countries affect the designing of products.
For example, in USA and many other countries electrical appliances are designed for
110 volts. But when these are made for India, they have to be of 220 volts.
In the modern competitive age, the pace of technological changes is very fast. Hence, in
order to survive and grow in the market, a business has to adopt the technological
changes from time to time. Now a days infact, no firm can afford to persist with the
outdated technologies.

(e) Demographic Environment

This refers to the size, density, distribution and growth rate of population. All these
factors have a direct bearing on the demand for various goods and services.
For example a country where population rate is high and children constitute a large
section of population, then there is more demand for baby products.
Similarly the demand of the people of cities and towns are different than the people of
rural areas.
The high rise of population indicates the easy availability of labour. These encourage
the business enterprises to use labour intensive techniques of production.

Moreover, availability of skilled labour in certain areas motivates the firms to set up their
units in such area. For example, the business units from America, Canada, Australia,
Germany, UK, are coming to India due to easy availability of skilled manpower.

(f) Natural Environment

The natural environment includes geographical and ecological factors that influence the
business operations. These factors include the availability of natural resources, weather
and climatic condition, location aspect, topographical factors, etc.
Business is greatly influenced by the nature of natural environment. For example,
sugar factories are set up only at those places where sugarcane can be grown. It is
always considered better to establish manufacturing unit near the sources of input.
Further, government’s policies to maintain ecological balance, conservation of natural
resources etc. put additional responsibility on the business sector.

(g) Market Environment

It consists of the factors related to the groups and other organizations that compete with
and have an impact on an organization’s marketsand business.
Some of the factors and influences operating in the market environment areas follows:
(i)Customers and client factors, such as the needs, preferences, perceptions,
attitudes, values, bargaining power, buying behaviour and satisfaction of customers.

(ii) Product factors such as the demand, image, features, utility, functions, design, life
cycle, price, promotion, distribution, differentiation, and availability of substitutes of
products and services.
(iii) Marketing intermediary factors, such as ,levels and quality ofcustomerservice,
middlemen, distribution channels, logistics, costs, delivery systems, and financial
intermediaries.
(iv) Competitor related factors, such as, different types of competitors, entry and exit
of major competitors, nature of competition, and the relative strategic position of major
competitors.

(h) Supplier Environment

It consists of factors related to the cost, reliability, and availability of the factors of
production or service that have an impact on the business of an organization.
Some of the factors and influences operating in the supplierenvironment areas follows:
1.Cost, availability and continuity of supply ofraw materials, subassemblies, parts and
companies.
2. Cost and availability of finance for implementing plans and projects.
3. Cost, reliability and availability of energy used in production.
4. Cost, availability and dependability of human resources.
5. Availability of infrastructural support.

(i) International Environment:

It consists of all those factors that operate at transnational, cross cultural, and across
the border level which have an impact on the business of the organization.

Some of these are:

1. Globalization, its process, content and direction.
2. Global economic forces, organizations, blocs and forums.
3. Global trade and commerce.
4. Global financial system, sources of financing and accounting standards.
5. Global demographic patterns.

6. Global information systems, communication networks, and media.

7. Global markets and competitiveness.
8. Global legal system etc..

Internal Environment :

The factors in internal environment of business are to a certain extent controllable

because the firm can change or modify these factors to improve its efficiency. However,
the firm may not be able to change all the factors.

The varios internal environment factors are:

a. Value system : The value system of an organisation means the ethical beliefs that
guide the organisation in achieving its mission and objectives. It is a widely
acknowledged fact that the extent to which the value system is shared by all in the
organisation is an important factor contributing to its success
b. Mission and objectives : The business domain of the company, direction of
development, business philosophy, business policy etc are guided by the mission and
objectives of the company.
c.Organisation structure : The organisational structure, the composition of the board
of directors, the professionalism of management etc are important factors influencing
business decisions. An efficient working of a business organisation requires that the
organisation structure should be conducive for quick decision-making.

d. Corporate culture : Corporate culture is an important factor for determining the

internal environment of any company.
In a closed and threatening type of corporate culture the business decisions are taken
by top level managers while the middle level and lower level managers have no say in
business decision making.
In an open and participating culture, business decisions are taken by the lower level
managers and top management has a high degree of confidence in the subordinates.

e. Quality of human resources : Quality of employees of a firm is an important factor

of internal environment of a firm. The characteristics of the human resources like skill,
quality, capabilities, attitude and commitment of its employees etc could contribute to
the strength and weaknesses of an organization.
f. Labour unions : Labour unions collectively bargains with the managers for better
wages and better working conditions of the different categories of workers etc. For the
smooth working of business firm good relations between management and labour
unions is required.

g. Physical resources and technological capabilities : Physical resources such as

plant and equipment and technological capabilities of a firm determine its competitive
strength which is an important factor for determining its efficiency and unit cost of
production. Research and development capabilities of a company determine its ability to
introduce innovations which enhances productivity of workers.
ENVIRONMENTAL SCANNING

Definition

Environmental scanning is a process of gathering, analyzing, and dispensing

information for tactical or strategic purposes. The environmental scanning process
entails obtaining both factual and subjective information on the business environments
in which a company is operating or considering entering.
Careful monitoring of an organization's internal and external environments for detecting
early signs of opportunities and threats that may influence its current and future plans.

Factors affecting Environmental Scanning

1. Events -Important specific occurrence takes place in different environment sector

2. Trends –Course of action in response to event takes place
3. Issues -Current concern that arise in response to event and trends

4. Expectations -These are the demands made by interested groups in the light for their
concern for issues
Example - Gas leakage in Bhopal in Dec 1984 was an EVENT followed by the general
TREND started on the part of regulatory authorities to be conscious about safety
measures. ISSUE is rising of the environmental concern .Now the EXPECTATION of
general public from govt is of legislating . changes in the rules and regulation ,pertaining
to safety measures . . Strict enforcement of regulation.
5. External Environment

6. Internal Environment

Kinds/Approaches of environmental scanning

1. Systematic: Information related to markets & customers, changes in legislation &
regulations that have a direct impact on organization’s activities that could be collected
continuously to monitor changes.
2. Ad-hoc: Conduction of special surveys & studies to deal with specific environmental
issues.
3. Processed form: Information available from different sources both internal &
external of the organization in processed form
Purpose of environmnetal scanning

1. It helps an organization capitalize on early opportunities rather than lose these to

competitors.
2. It provides an early signal of impending problems, which can be defused if
recognized well in advance.
3. It sensitizes an organization to the changing needs and wishes of its customers.

4. It provides a base of objective qualitative information about the environment that

strategists can utilize.
5. It provides intellectual stimulation to strategists in their decision making.
6. It improves the image of the organization with its publics by showing that it is
sensitive to its environment and responsive to it.
7. It is a means of continuing broad-based education for executives, especially for
strategy developers.

Sources of Information for environmental scanning:

A company can obtain information from different sources, but it should be ensured that
the information is correct. The correct source should be tapped for specific information
for more accuracy. Information received form secondary sources may sometimes even
misguide strategy managers.
The various sources from where information can be gathered include:
1. An internal document viz, files, records, management information system,
employees, standards, drawings, charts, etc.

2. Trade directories, journals, magazines, newspapers, books, newsletters, government

publications, annual reports of companies, case studies, etc.
3. Internet, television, radio news etc.
4. External agencies like customers, suppliers, inspection agencies, marketing
intermediaries, dealers, advertisers, associations, unions, government agencies, share
holders, competitors, etc.

5. Market research reports, consultants, educational institutions, testing laboratories etc.

6. Spying considered as a powerful way of extracting information from other companies.

Sources of Information for Environmental Scanning in India

1. International publications

(a) Intergovernmental and international agencies like UN, UNESCO, ILO, WHO, UNDP,
FAO, World Bank, OECD and others are a rich source of international statistical data .
World Development Report, World Economic Survey, Statistical Yearbook of UN,
International Trade Statistics Yearbook of UN, among others are some examples of
major interna tional publications

(b) International private data agencies such as country-rating agencies like Standard &
Poor, Moody's, and others provide ranking of countries with regard to their
attractiveness for foreign investments.
2. Government publications :

(a) Governmental information sources such as the Census of India reports, five-year
plan reports, statistical abstracts of Indian Union, and others provide valuable macro-
level data useful for planning purposes. Statistical abstracts and statistical handbooks
are published by several central and state government agencies.

(b) Periodic reports like economic surveys, annual surveys of industries, annual reports
of ministries, and so on, which provide current data and reflect governmental thinking
and priorities.
(c) Occasional reports brought out by various statutory agencies, such as, guidelines to
industries, policies related to specific industry, export-im port policies, and so on, which
are relevant for business and industry. RBI's Department of Statistics also publishes
valuable occasional pa pers related to different aspects of the economy and industry.
(d) References, such as,India — A Reference Annual published by the Min istry of
Information, contains comprehensive information on the geo graphic and demographic
features of India, its political and social institutions, economy and culture, plans,
programmes, and so on.
3. Institutional publications :

(a) The Bombay Stock Exchange Directory

(b) The Centre for Monitoring India Economy (CMIE), which is a private in stitution,
provides publications which contain comprehensive and timely information on economic
indices

(c) Publications of market research agencies such as the National Council for Applied
Economic Research (NCAER).
4. Periodicals and newspapers
5. Online databases and systems

6. Industrial espionage agencies

Techniques of Scanning External Environmental:

1. SWOT Analysis
2. ETOP Analysis
3. QUEST

4. PESTLE Analysis
5. Porter’s Five Forces Model

1. SWOT Analysis
Diagram:

SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats.

By definition, Strengths (S) and Weaknesses (W) are considered to be internal
factors over which you have some measure of control.

Also, by definition, Opportunities (O) and Threats (T) are considered to be external
factors over which you have essentially no control.

SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic
position of the business and its environment.
Its key purpose is to identify the strategies that will create a firm specific business model
that will best align an organization’s resources and capabilities to the requirements of
the environment in which the firm operates. It views all positive and negative factors
inside and outside the firm that affect the success.
A consistent study of the environment in which the firm operates helps in
forecasting/predicting the changing trends and also helps in including them in the
decision-making process of the organization.

An overview of the four factors (Strengths, Weaknesses, Opportunities and

Threats) is given below-
1. Strengths - Strengths are the qualities that enable us to accomplish the
organization’s mission. Strengths can be either tangible or intangible. Strengths are the
beneficial aspects of the organization or the capabilities of an organization, which
includes human competencies, process capabilities, financial resources, products and
services, customer goodwill and brand loyalty.
Examples of organizational strengths are huge financial resources, broad product line,
no debt, committed employees, etc.
2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our
mission and achieving our full potential. Weaknesses in an organization may be
depreciating machinery, insufficient research and development facilities, narrow product
range, poor decision-making, etc. Weaknesses are controllable. They must be
minimized and eliminated. For instance - to overcome obsolete machinery, new
machinery can be purchased.
Other examples of organizational weaknesses are huge debts, high employee turnover,
complex decision making process, narrow product range, large wastage of raw
materials, etc.
3. Opportunities - Opportunities are presented by the environment within which our
organization operates. Organizations can gain competitive advantage by making use of
opportunities. Organization should be careful and recognize the opportunities and grasp
them whenever they arise.
Opportunities may arise from market, competition, industry/government and technology.
Increasing demand for telecommunications accompanied by deregulation is a great
opportunity for new firms to enter telecom sector and compete with existing firms for
revenue.
4. Threats - Threats arise when conditions in external environment jeopardize the
reliability and profitability of the organization’s business. Threats are uncontrollable.
When a threat comes, the stability and survival can be at stake.
Examples of threats are - unrest among employees; ever changing technology;
increasing competition leading to excess capacity, price wars and reducing industry
profits; etc.

Advantages of SWOT Analysis

SWOT Analysis helps in strategic planning in following manner-

1. It is a source of information for strategic planning.

2. Builds organization’s strengths.
3. Reverse its weaknesses.
4. Maximize its response to opportunities.
5. Overcome organization’s threats.
6. It helps in identifying core competencies of the firm.

7. It helps in setting of objectives for strategic planning.

8. It helps in knowing past, present and future so that by using past and current data,
future plans can be chalked out.
9. SWOT Analysis provide information that helps in synchronizing the firm’s resources
and capabilities with the competitive environment in which the firm operates.

Limitations of SWOT Analysis

SWOT Analysis is not free from its limitations.

1. It may cause organizations to view circumstances as very simple because of which

the organizations might overlook certain key strategic contact which may occur.
2. Moreover, categorizing aspects as strengths, weaknesses, opportunities and threats
might be very subjective as there is great degree of uncertainty in market.
3. SWOT Analysis does stress upon the significance of these four aspects, but it does
not tell how an organization can identify these aspects for itself.

There are certain limitations of SWOT Analysis which are not in control of management.
These include-
Price increase;
Inputs/raw materials;

Government legislation;
Economic environment;
Searching a new market for the product which is not having overseas market due
to import restrictions; etc.

Internal limitations may include-

Insufficient research and development facilities;
Faulty products due to poor quality control;
Poor industrial relations;
Lack of skilled and efficient labour; etc
2. ETOP (Environmental Threat and Opportunity Profile) Analysis

It is a description of the structure of external factors. These factors may have neutral,
favourable or unfavourable impact on operations of an organization in the environment.

Steps in preparing ETOP:

1. Identify major environmental sector- social, economical, political, technological,

ecological, natural, legal etc.
2. Sub - divide the sectors in to subsectors
3. Identify major issues in the subsectors
4. Assess the possible impact – favourable, unfavourable or neutral

Factors Included in ETOP analysis:

1. Economic factors: General economic condition, Rate of inflation, Interest

rate/Exchange rate.
2. Technological factors: Source of technology, Technological development, Impact of
technology.
3. Socio cultural factors : Demographic characteristics, Social attitudes, Education level,
awareness, and consciousness of rights.
4. Environmental factors : Weather change, Climatic change, Demand related factors,
Suppliers related factors.
5. Political factors : Political system, Political structure , its goals and stability.

6. Legal factors : Government policies , degree of intervention, Policies related to

licensing , monopolies, Policies related to export and import, Policies related to
distribution and pricing.

Advantages of ETOP

1. It provides a clear of which sector and sub sectors have favourable impact on the
organization.
2. It helps interpret the result of environment analysis.
3. The organization can assess its competitive position.
4. Appropriate strategies can be formulated to take advantage of opportunities and
counter the threat.
5. To consolidate and strengthen organization’s position
Limitations of ETOP

1. It doesn’t show the interaction between the factors.

2. It can’t reflect the dynamic environment.

3. It’s a subjective analysis tool.

Diagram
3. QUEST
The Quick Environmental Scanning Technique is a scanning procedure designed to
assist executives and planners to keep side by side of change and its implications for
the organizational strategies and policies.
QUEST produces a broad and comprehensive analysis of the external environment.
QUEST is a four-step process which uses scenario-writing for scanning the
environment and identifying strategic options. The four steps involved in applying this
technique are:

1 Strategists make observation about the major events and trends in their industry
2. Then they speculate on a wide range of important issues that might affect the future
of their organizations by scanning the environment broadly and comprehensively
3. The QUEST director prepares a report summarizing the major issues and their
implications, and three to five scenarios incorporating the major themes of the
discussion

4 The report and scenarios are reviewed by a group of strategists who identify feasible
strategic options to deal with the evolving environment. The options are ranked and
teams are designated to develop strategies.

4. PESTLE Analysis

PEST analysis (Political, Economic, Social and Technological analysis) describes

a framework of macro-environmental factors used in the environmental scanning
component of strategic management.
It is a part of the external analysis when conducting a strategic analysis or doing market
research, and gives an overview of the different macro-environmental factors that the
company has to take into consideration.

It is a useful strategic tool for understanding market growth or decline, business

position, potential and direction for operations.
There are variations of PEST Analysis that bring other factors into consideration.
These include:
(a) PESTLE/PESTEL: Political, Economic, Socio-Cultural, Technological, Legal,
Environmental.
(b) PESTLIED: Political, Economic, Socio-Cultural, Technological, Legal, International,
Environmental, Demographic.
(c) STEEPLE: Social, Technological, Economic, Environmental, Political, Legal, Ethical.
(d) STEEPLED: Social, Technological, Economic, Environmental, Political, Legal,
Ethical, Demographic.
(e) SLEPT: Socio-Cultural, Legal, Economic, Political, Technological.
(f) STEER : Socio-cultural, Technological, Economic, Ecological, Regulatory
(g) LONGPESTLE: Local, National, and Global versions of PESTLE. (These are best
used for understanding change in multinational organizations.)

It is very critical for one to understand the complete depth of each of the letters of the
PESTLE. It is as below:
1. Political: These factors determine the extent to which a government may influence
the economy or a certain industry. [For example] a government may impose a new tax
or duty due to which entire revenue generating structures of organizations might
change. Political factors include tax policies, Fiscal policy, trade tariffs etc. that a
government may levy around the fiscal year and it may affect the business environment
(economic environment) to a great extent.
2. Economic: These factors are determinants of an economy’s performance that
directly impacts a company and have resonating long term effects. [For example] a rise
in the inflation rate of any economy would affect the way companies’ price their products
and services. Adding to that, it would affect the purchasing power of a consumer and
change demand/supply models for that economy. Economic factors include inflation
rate, interest rates, foreign exchange rates, economic growth patterns etc. It also
accounts for the FDI (foreign direct investment) depending on certain specific industries
who’re undergoing this analysis.
3. Social: These factors scrutinize the social environment of the market, and gauge
determinants like cultural trends, demographics, population analytics etc. An example
for this can be buying trends for Western countries like the US where there is high
demand during the Holiday season.
4. Technological: These factors pertain to innovations in technology that may affect the
operations of the industry and the market favorably or unfavorably. This refers to
automation, research and development and the amount of technological awareness that
a market possesses.
5. Legal: These factors have both external and internal sides. There are certain laws
that affect the business environment in a certain country while there are certain policies
that companies maintain for themselves. Legal analysis takes into account both of these
angles and then charts out the strategies in light of these legislations. For example,
consumer laws, safety standards, labor laws etc.
6. Environmental: These factors include all those that influence or are determined by
the surrounding environment. This aspect of the PESTLE is crucial for certain industries
particularly for example tourism, farming, agriculture etc. Factors of a business
environmental analysis include but are not limited to climate, weather, geographical
location, global changes in climate, environmental offsets etc.
Advantages of PEST Analysis

1. Simple and only costs time to do.

2. Provides an understanding of the wider business environment.
3. Encourages the development of strategic thinking.

4. May raise awareness of threats to a project.

5. Can help an organisation to anticipate future difficulties and take action to avoid or
minimise their effect.
6. Can help an organisation to spot opportunities and exploit them.
Disadvantages of PEST Analysis

1. Usually a simple list and not critically presented.

2. The rapid pace of change in society makes it increasingly difficult to anticipate
developments that may affect an organisation in the future.

3. Collecting large amounts of information may make it difficult to see the wood for the
trees and lead to "paralysis by analysis."
4. The analysis may be based on assumptions that prove to be unfounded.
5. PEST analysis only covers the external environment and the results need to be
considered with other factors, such as the organisation itself, competitors and the
industry in which it is working.
5. Michael Porter’s Five Forces Model

Porter five forces analysis is a framework to analyze the level of competition within an
industry and business strategy development.
This analysis is associated with its principal innovator Michael E. Porter of Harvard
University.
Porter identified five factors that act together to determine the nature of
competition within an industry. These are the:

1. Threat of new entrants to a market

2. Bargaining power of suppliers

3. Bargaining power of customers ("buyers")

4. Threat of substitute products
5. Degree of competitive rivalry
Let's look at each one of the five forces in a little more detail to explain how they work.

1. Threat of New Entrants

If new entrants move into an industry they will gain market share & rivalry will intensify.

The position of existing firms is stronger if there are barriers to entering the market

If barriers to entry are low then the threat of new entrants will be high, and vice versa

Barriers to entry are, therefore, very important in determining the threat of new entrants.
An industry can have one or more barriers. The following are common examples of
successful barriers:

What makes an industry easy or difficult to enter? The following table helps summarise
the issues you should consider:
2. Bargaining Power of Suppliers

If a firm's suppliers have bargaining power they will:

 Exercise that power

 Sell their products at a higher price
 Squeeze industry profits

If the supplier forces up the price paid for inputs, profits will be reduced. It follows that
the more powerful the customer (buyer), the lower the price that can be achieved by
buying from them.

Suppliers find themselves in a powerful position when:

 There are only a few large suppliers

 The resource they supply is scarce
 The cost of switching to an alternative supplier is high
 The product is easy to distinguish and loyal customers are reluctant to switch
 The supplier can threaten to integrate vertically
 The customer is small and unimportant
 There are no or few substitute resources available

Just how much power the supplier has is determined by factors such as:
3. Bargaining Power of Customers

Powerful customers are able to exert pressure to drive down prices, or increase the
required quality for the same price, and therefore reduce profits in an industry.

Several factors determine the bargaining power of customers, including:

Customers tend to enjoy strong bargaining power when:

 There are only a few of them.

 The customer purchases a significant proportion of output of an industry
 They possess a credible backward integration threat – that is they threaten to
buy the producing firm or its rivals
 They can choose from a wide range of supply firms
 They find it easy and inexpensive to switch to alternative suppliers

4. Threat of Substitute Products

A substitute product can be regarded as something that meets the same need

Substitute products are produced in a different industry –but crucially satisfy the same
customer need. If there are many credible substitutes to a firm's product, they will limit
the price that can be charged and will reduce industry profits.

The extent of the threat depends upon:

  The extent to which the price and performance of the substitute can match the
industry's product
 The willingness of customers to switch
 Customer loyalty and switching costs

If there is a threat from a rival product the firm will have to improve the performance of
their products by reducing costs and therefore prices and by differentiation.

5. Overall Degree of Competitive Rivalry

If there is intense rivalry in an industry, it will encourage businesses to engage in

 Price wars (competitive price reductions),

 Investment in innovation & new products
 Intensive promotion (sales promotion and higher spending on advertising)

All these activities are likely to increase costs and lower profits.

Several factors determine the degree of competitive rivalry; the main ones are: