The External Environment & The Global Environment

Week 3 DQs

1.      Why is it important to look at the PESTLE (political, economic, social, technological, legal, and ecological) factors in environmental scanning? Describe each and give examples of their importance to industries and various companies relative to strategic planning.

The PESTLE Analysis is basically used as a framework or tool to identify, analyze and scan the firm’s external remote environment so as to make the strategic planning efficiently and effectively for achieving a competitive advantage. The abbreviation used in PESTLE stands for Political, Economic, Social, Technological, Legal, and Ecological factors It is important to look at this analysis because it provides the firm to assess the current environment and potential changes that are likely to occur in the future. The main idea here is that if this analysis is done properly than its competitors, it would be able to respond to changes more effectively and efficiently. The PESTLE analysis comprises the following major components:

1.      Political Factors: Political factors are concerned with the legal and regulatory parameters within which firms must operate (Pearce II, J.A.,& Robinson, R.B., 2012). These factors include employment laws, tax policies, trade reforms, trade restrictions, environmental regulations, political stability, tariffs and the like.

2.      Economic Factors: Economic factors refer to the nature and direction of the economy in which a firm operates. It comprises the three basic factors such as economic system: free market, planned and mixed economy, economic policies such as monetary, fiscal & industrial policies, and economic conditions such as interest rates, economic growth, recession, inflation, exchange rate, minimum wage rates, unemployment rates, level of people’s income, & credit facility.

3.      Social Factors: They refer to socio-cultural factors in which a firm operates.  Social factors include the social norms, values, beliefs & attitudes, social institutions such as family, reference group, social class, social change and mobility, and demographics such as size, distribution & growth of population, age mix, urbanization etc.

4.      Technological Factors: With the advancement of technology, the companies are finding very hard to adapt in new context as the time period of advancement is very short. However, if the company cannot adapt itself according to the change in technological factors, then the company might be handicapped. For instance, after the digital revolution in photography, Kodak Company, though being the pioneer company in photography field, collapsed badly as they couldn't realize the need of change brought by the revolution in photography.

5.      Legal Factors: Legal factors refer to legal surroundings in which a firm operates.  These include all legal aspects like employment, quotas, taxation, resources, imports and exports, etc.

6.      Ecological Factors: This factor takes into consideration ecological and environmental aspects that could be either economic or social in nature. These include temperature, monsoons, natural calamities, access by rail, air, and road, ground conditions, ground contamination, nearby water sources, and so forth.

In conclusion, the PESTLE analysis is an important tool to analyze the external environmental factors which provides the foundation for strategic planning and decision making for any industry and firms. It helps to understand the environment, encourage the strategic thinking, reduce the future potential risks, and ideally enable the firms or industries to spot new opportunities and threats.

References

Pearce II, J.A.,& Robinson, R.B. (2012). Strategic Management: Formulation, Implementation, and Control. New York: McGraw-Hill Irwin.

(n.d.) Retrieved from http://www.brighthubpm.com/project-planning/51754-components-of-a-pestle-analysis/

2.      Explain Porter’s five forces model of industry analysis and give examples of the influences of entry barriers, supplier power, buyer power, substitute availability, and competitive rivalry on a firm.

Porter's five forces model of industry analysis is one of the important analyses to gain a clear picture of the industry-specific environment. The five forces and examples of the influences on them are discussed as follows:

1.      Bargaining power of suppliers: It refers to those situations where suppliers have the ability to force the firm to pay higher prices which are driven the product's key input, uniqueness of the product and services and so on. It affects the industrial profit. For example, the bargaining power of drug industry is high as there are specific or limited industries.

The bargaining power of suppliers is high when:

·         Suppliers are few and buyers are many

·         Products/services are unique and not easily available

·         Firms are not a significant customers for supplier group

·         Suppliers’ goods are essential to buyers’ market success

·         Suppliers’ have ability to integrate forward

2.      Bargaining power of buyers: It means that the buyer has the capacity to reduce the price of the products and also demand for high quality goods and services and so on. For example: the bargaining power of auto manufacturers for purchases of its parts.

The bargaining power of buyers is high when:

·         Buyers are few and they place large orders

·         Alternative sellers are high and they sell at a lower price

·         Low cost for switching the product

·         Undifferentiated products and ability to do backward integration

·         Buyer has full information

3.       Competitive Rivalry: It means that the strong competitors has the ability to keep impact upon the market. As there are large and strong competitors who offers homogeneous goods then they result in less power then it definitely affects the market. For example, customers switching their bank accounts from one bank to other.

The competitive rivalry is high when:

·         There is presence of more or equally balance competitors

·         They have high fixed storage costs

·         There is lack of product differentiation or low switching costs

·         There are diverse competitors and existence of global customers

·         There is slow industry growth

4.       Threat of Substitute products: Substitute good means those goods which has ability to satisfy the same need of the customers. Due to the availability of substitute products in the market, the customer, if not satisfied can switch their product as substitute goods. For example, the threat of substitute goods is high in tea, coffee products.

The threat of substitute products is high when:

·         Customers face lower switching costs

·         Substitute’s product’s price is lower

·         Substitute’s product’s quality and performance is high

·         Buyers have more propensity to substitute

5.      Threat of New Entrants: It explains about the chance that new entrant will enter into the industry. For example, the difficulties for new automobiles industries to entry in the market because of the technologies and cost of those products. It is affected by two major factors such as

a)      Barrier to entry

·         Economics of scale

·         Product differentiation

·         Switching costs

·         Capital requirements

·         Access to distribution channels

·         Government policies

·         Cost disadvantages independent of scale

b)      Expected retaliation from existing firms

References

Pearce II, J.A.,& Robinson, R.B. (2012). Strategic Management: Formulation, Implementation, and Control. New York: McGraw-Hill Irwin.

3.      Compare and contrast the foreign market entry options available to firms wanting to start doing business internationally.

Strategic options for firms that are attempting to move globalization can be categorized by the degree of complexity of each foreign market being considered and by the diversity in a company’s product line (Pearce II, J.A.,& Robinson, R.B., 2012). Some of the major foreign market entry options available to firms wanting to start doing business internationally are compared and contrasted as follows:

1.      Exporting: Exporting is the easiest and simplest form of entering into the foreign market. In this option, goods and services will be sold and distributed from one country-home country, to the other country (host counties). This option does not require much investment like other options do.

2.      Licensing/Contract Manufacturing: It is a contractual agreement between the parent company-licensor and the foreign company-licensee whereby the licensor allows the licensee to manufacture a company's product for a fixed term in a specific market and in return the licensor must pay a royalty or specific amount to the parent company. Licensing is generally given for a fixed period of time. After the expiration of agreement, the company can decide whether to renew the agreement or not.

3.      Franchising: It is special form of licensing in which franchisor allows the franchisee to sell highly publicized products or services, using the parent’s brand name or trademark along with operational and marketing strategies. In return, the franchisee must pay a fee to the parent company based on the volume of the sales on that particular market or country. However, a franchisee or local investor must adhere to the strict rules or policies of the parent company-franchisor. Some of the common examples of franchising are Coca-Cola, Pepsi, Kentucky Fried Chicken, McDonald, Avis, and Burger King.

4.      Joint Venture: Joint venture is the safest mode of entering into the foreign market in which the company makes an agreement and partners with the local firm for attaining common objectives. Since it begins with a mutually agreeable pooling of capital, production, marketing, patents, trademark or management expertise Joint venture is generally done for a long period of time, it offers more permanent cooperative relationships than exporting or contract manufacturing. However, there is a chance of having high conflicts among the involved parties in terms of authority, control and secret information.

5.      Foreign Branching: A foreign branching is an extension of the company in its foreign country- a separately located strategic business unit directly responsible for fulfilling the operational activities such as sales, customer service, and physical distribution as per the company. This option requires to comply with host countries’ rules and regulation in its operational activities so it is often short term and has to be renewed after its expiry.

6.      Equity Investment: This option is suitable for small and medium-size enterprises with strong growth potential which requires additional funds to grow further before deciding to trade their stock publicly in the marketplace. These companies often need a support from a venture capital firm or private equity in start-ups and other risky but potential very profitable.

7.      Wholly Owned Subsidiaries: Wholly-owned foreign subsidiaries require the highest investment commitment along with an ability and willingness to do by companies. These companies insist on full ownership for reasons of control and managerial efficiency. It can be of two types-Green field investment which can be started from scratch and Acquisition which is purchasing of already established firms in the host country. Choosing this option has to face a number of risks to their normal mode of operations. First, it requires a high investment for start-ups or acquisitions. Second, it has to tackle with foreign culture or language problems. Third, host country expects a long term commitment from parent company to include the local employees in the organization and comply with its parent company’s standards.

References

Pearce II, J.A.,& Robinson, R.B. (2012). Strategic Management: Formulation, Implementation, and Control. New York: McGraw-Hill Irwin.

4. Do you agree that all businesses will soon have to evaluate global environments? Explain why or why not.

Yes, I agree that all businesses will soon have to evaluate the global environment. However, how much is needed depends upon the nature of businesses and the level of complexities or risks involved. It is true that the businesses whose operations are world-wide need a higher level evaluation and the businesses which operate locally may not need that much level of evaluation. Having said this, however, every business needs more or less evaluation of global environment. It is essential that every business organization should have a clear understanding of the global environment so that they can compete over their rivals and gain a competitive advantage. The main reasons why all businesses must evaluate the global business environment are outlined below (Pearce II, J.A.,& Robinson, R.B., 2012):

·         The increased scope of the global management task

·         The increased globalization of firms

·         The information explosion

·         The increase in global competition

·         The rapid development of technology

·         Strategic management planning breeds managerial confidence

In short, due to above mentioned reasons, it has become an essential task for any businesses to evaluate the global business environment. Many businesses are already involved in the globalization process and many are going to be globalized soon so that it would not be enough to think just locally, they have to think globally so they need to have a clear picture of global environment through its assessment.  

References

Pearce II, J.A.,& Robinson, R.B. (2012). Strategic Management: Formulation, Implementation, and Control. New York: McGraw-Hill Irwin.