COMM 491

Business Strategy
Class 3:
External Environment

The Business Environment

Factors that affect your business but are
generally outside your control, including:
Competitors
Customers
Suppliers
Government
The general public

Relationship between Organization

& Environment
Environment: Set of external conditions and forces that
have the potential to influence the organization
General environment (macro-environment): Overall
trends & events in a society such as - social trends,
technological trends, demographics, and economic
conditions
Industry (competitive environment): Consists of
multiple orgs that collectively compete with one another
by providing similar goods, services, or both

Why Does the Environment

Matter?
The environment provides both:
Resources (labour, raw supplies, credit, capital) needed
to create goods & services
Demand for products and services
Opportunities: Events and trends that create chances
to improve an orgs performance level
Threats: Events and trends that may undermine an
organizations performance
The environment shapes & influences the strategic
decisions that executives can choice from as they attempt
to lead their organizations to success

3.2 PESTEL Analysis

A analysis technique to organize factors within the general
environment & identify how these factors influence
industries & firms within them
P Political
E Economic
S Social
T Technology
E Environmental
L - Legal

PESTEL Analysis - Political

Centers on role of govts in shaping business.
Includes elements such as tax policies, changes in
trade restrictions & tariffs, and the stability of
governments
Immigration policy is one aspect that impacts many
orgs

Immigration

PESTEL Analysis - Economic

Includes: interest rates, inflation, GDP, unemployment,
disposable income, & overall state of economy
The 2008 economic crash had a tremendous negative
global effect, with rising unemployment reduced
consumer demand (but Walmart, Dollar Store & PSE
boom)
USA Bank failures led to a dramatic tightening of credit
markets around world, including Canada
Similar to Housing Bubble bursting, leads to new
Canadian government mortgage restrictions

Social Changes
What social changes have happened since your parents
or grandparents were your age?
Smoking
Internet
Declining birth rate McMansions
PSE
Marriage
Drinking and Driving Cell phones
Globalization
Facebook

The important aspect these changes, and any you

identified, is that each one creates corporate winners and
losers!

Women in the Workforce

In WWII (1940), with men away fighting the war, female
labour force participation rates suddenly increased,
including many traditionally male occupations
What other things have influenced the number of women
working?

PESTEL Analysis - Technology

Technological segment centers on improvements in products
and services that are provided by science.
Relevant factors include, for example, changes in the rate of
new product development, increases in automation, and
advancements in service industry delivery
From a computer on the desktop to a computer in your
pocket (& connected to internet 24/7)
Future technological changes will probably focus on greater
integration of computer with human body, and by intellegent
computers, decision making under complex situations (i.e.
driving, cancer detection)

Non-Computer Technology
While computer / internet technology are probably most
obvious to us in our day-to-day lives, technology and
technological change is everywhere!
Robotics
Energy (solar, wind, LNG fracking, nuclear)
Dramatically improved car gas mileage (litres/100km) &
safety
Sensors tracking, store shelves, active bar codes
Cameras from Photoshop to security
Even, automatic vacuum cleaners

PESTEL Environment

Environment
The environmental segment involves the physical
characteristics & conditions within org operates
Includes factors such as natural disasters, pollution levels,
and weather patterns (i.e. bottled water example)
Increased social awareness, community activism
Long term verses short term orientation
Environmental reviews, & Social License to Operate
Costs of pollution, garbage disposal (zoo poop)
Reduce, Reuse, Recycle

Business Op?

PESTEL Analysis - Legal

The legal segment centers on how the laws, regulations
& courts influence business activity
Examples include employment laws, health & safety
regulations, discrimination & antitrust laws
Intellectual property rights are a particularly daunting
aspect of the legal segment for many org
Arguably equally important to the laws themselves, are
the potential for change / degree of stability

Class Exercise
North Pole Inc.

What are the PESTEL (Political, Economic, Social,

Technological, Environment, & Legal) that might affect
Santa over the next 3 to 5 years?

Demographics
It turns out that demographics are an excellent
predictors of many things, including:
Income
Marital status
Crime
Health (food)
Fertility

And Canada has 3 significant demographic trends

underway right now
Aging baby boomers
Falling birth rates
Urbanization

Your Economic Life in 1 Slide!!

INCOME
EXPENSE
S

DEBT

Kids
->
House
->
Car
->
Apt
->

SAVINGS

Pay-off Loans
->

Good
Pension

Payoff
Mortgage ->

Kids finish PS
Graduat
->
e!

0
80

10

20

30
AGE

40

Bad Pensio

50

60

70

Industry Analysis

Objectives of Industry
Analysis

To understand how industry structure drives

competition, which determines the level of industry
profitability.
To assess industry attractiveness
To use evidence on changes in industry structure to
forecast future profitability
To formulate strategies to change industry structure to
improve industry profitability
To identify Key Success Factors

Porters Five Forces

Threat of Substitutes
Extent of competitive pressure from producers of
substitutes depends upon:
Buyers propensity to substitute
The price-performance-quality characteristics of substitutes.
Market distribution changes

Even a company with a strong position in an

industry unthreatened by potential entrants will
earn low returns if it faces a superior or a lowercost substitute product

Threat of New Entrants

Entrants threat to industry profitability depends upon the
height of barriers to entry.
Capital requirements
Economies of scale
Absolute cost advantage
Product differentiation
Access to channels of distribution
Legal and regulatory barriers
Retaliation
Geographical barriers
New entrant strategy
Routes to market
New entrants to an industry bring new capacity, the
desire to gain market share, and often substantial
resources.

Threat of New Entrants

What about the experience curve?
(Porter)
New competitors with no experience face
higher costs than established firms:
Economies of scale
Learning curve for labour
Capital-labour substitution

Achieving market leadership maximizes this;

aggressive defensive actions, such as price
cutting in anticipation of falling costs to build
volume

However

If a growing company can reap economies of scale

through more efficient, automated facilities and
vertical integration, then
Lowest-cost producer is the one with the largest, most efficient
facilities
If it has built the newest plant, it wont need to catch up

Free of the legacy of heavy past investments, the

newcomer or less experienced competitor can
purchase or copy the newest and lowest-cost
equipment and technology.
If experience can be kept proprietary, the leaders will maintain
a cost advantage.

The barrier can be nullified by product or process

innovations leading to a substantially new technology
and thereby creating an entirely new experience curve

Be careful
New entrants should be hesitant if:
Incumbents have previously lashed out at new entries
The incumbents possess substantial resources to fight
back, including excess cash and unused borrowing
power, productive capacity, or clout with distribution
channels and customers.
The incumbents seem likely to cut prices because of a
desire to keep market share or because of industrywide excess capacity.
Industry growth is slow, affecting its ability to absorb
the new arrival and probably causing the financial
performance of all the parties involved to decline.

Bargaining Power of Buyers

Buyers price sensitivity
Cost of purchases as % of
buyers total costs.
How differentiated is the
purchased item?
How intense is competition
between buyers?
How important is the item to
quality of the buyers own output?
Change cost/frequency

Relative bargaining power

Size and concentration of buyers
relative to sellers.
Buyers information
Ability to backward integrate.
Buyer choice
Volumes, JIT scheduling

Consumers tend to be more price sensitive if they are

purchasing products that are undifferentiated, expensive
relative to their incomes, and of a sort where quality is
not particularly important.

Can you manage

suppliers or buyers?

Find suppliers or buyers who possess the least

power to influence you adversely
If your company lacks a low cost position or a
unique product, selling to everyone is selfdefeating because the more sales it achieves,
the more vulnerable it becomes.
Build a beachhead in a customer segment
niche, before trying to be all things to all people
Understand WHY different customer segments may buy
from you.

Rivalry Between Established

Competitors
The extent to which industry profitability is depressed by
aggressive price competition depends upon:
Concentration (number and size distribution of firms)
Industry size and trends
Diversity of competitors (differences in goals, cost structure, etc.)
Product differentiation / strategy
Excess capacity and exit barriers
Cost conditions
Extent of scale economies
Ratio of fixed to variable costs

Applying Five-Forces Analysis

Forecasting Industry Profitability
If we can forecast changes in industry structure we can
predict likely impact on competition and profitability.

Strategic Positioning
Once we know which structural features of the industry
support profitability and which depress profitability, we
can choose a favorable positioning within the industry.

Strategies to Improve Industry Profitability

Which of the structural variables that are depressing
profitability can we change by individual or collective
strategies?

The Sixth Force

Complementary products..
Examples??

So why do Industry Analysis?

1. Highlight the critical strengths and
weaknesses of the company
2. Animate the positioning of the
company in its industry
3. Clarify the areas where strategic
changes may yield the greatest payoff
4. Highlight the places where industry
trends promise to hold the greatest
significance as either opportunities or
threats
5. Helps in considering areas for
diversification.