THE ENVIRONMENT

LESSON 2
LEARNING OUTCOMES
➔ Analyse the broad macro-environment of organizations in terms of political, economic, social,
technological, environmental (green), and legal factors (PESTEL).
➔ Identify key drivers in this macro-environment and use these key drivers to construct
alternative scenarios concerning environmental change.
➔ Use five forces analysis to define the attractiveness of industries and sectors for investment
and to identify their potential for change.
➔ Identify strategic groups, market segments, and critical success factors, and use them to
recognize strategic gaps and opportunities in the market
NOTABLE QUOTE
"The opportunities and threats existing in any situation always exceed the resources needed to
exploit the opportunities or avoid the threats. Thus, strategy is essentially a problem of allocating
resources. If strategy is to be successful, it must allocate superior resources against a decisive
opportunity” —William Cohen
INTRODUCTION
INTRODUCTION
An external audit/analysis focuses on identifying and evaluating trends and events beyond the
control of a single firm, such as increased foreign competition, an aging society, consumer fear of
traveling, and stock market volatility.

An external audit/analysis reveals key opportunities and threats confronting an organization so
that managers can formulate strategies to take advantage of the opportunities and avoid or
reduce the impact of threats.

The purpose of an external audit/analysis is to develop a finite list of opportunities that could
benefit a firm and threats that should be avoided
LAYERS OF THE BUSINESS
ENVIRONMENT
 1. THE MACRO ENVIRONMENT
It consists of broad environmental factors that impact to a greater or lesser extent on almost all
organisations.
To perform an external audit, a company first must gather competitive intelligence and information
about political, economic, social, technological, environmental (‘green’) and legal environments (PESTEL
Framework)
The PESTEL framework provides a comprehensive list of influences on the possible success or failure
of particular strategies.
For managers, it is important to analyse how these factors are changing now and how they are likely to
change in the future, drawing out implications for the organisation.
The PESTEL framework categorises environmental influences into six main types: political, economic,
social, technological, environmental and legal forces.
ECONOMIC FORCES
Economic factors have a direct impact on the potential attractiveness of various strategies and these
variables presents opportunities or threats for organization.
Key economic variables that can be monitored are as follows;
• Availability of credit • Import/export factors
• Level of disposable income • Demand shifts for different categories of goods
• Interest rates and services
• Inflation rates • Income differences by region and consumer
• Money market rates groups
• Federal government budget deficits • Price fluctuations
• Gross domestic product (GDP) trend • Monetary policies Fiscal policies Tax rates
• Consumption patterns • European Economic Community (EEC) policies
• Unemployment trends • Organization of Petroleum Exporting Countries
• Worker productivity levels (OPEC) policies
• Value of the dollar in world markets • Coalitions of Lesser Developed Countries (LDC)
• Stock market trends policies
SOCIAL, CULTURAL, DEMOGRAPHIC
AND NATURAL RESOURCES
Social, cultural, demographic, and environmental changes have a major impact on virtually all
products, services, markets, and customers.

 Small, large, for-profit, and nonprofit organizations in all industries are being staggered and
challenged by the opportunities and threats arising from changes in social, cultural, demographic,
and environmental variables.
Cont.…
• Immigration and emigration rates
• Social Security programs • Population changes by race, age, sex, and level
• Life expectancy rates of affluence
• Per capita income • Population changes by city, county, state, region,
• Attitudes toward business and country
• Lifestyles • Regional changes in tastes and preferences
• Average disposable income • Number of women and minority workers
• Attitudes toward government • Recycling
• Buying habits • Waste management
• Attitudes toward saving • Air pollution
• Sex roles • Water pollution
• Attitudes toward investing • Ageing populations
POLITICAL, GOVERNMENTAL AND
LEGAL FORCES
Legal embraces legislative constraints or changes, such as health and safety legislation or
restrictions on company mergers and acquisitions.
For industries and firms that depend heavily on government contracts or subsidies, political
forecasts can be the most important part of an external audit.
Changes in patent laws, antitrust legislation, tax rates, and lobbying activities can affect firms
significantly.
Political, governmental, and legal factors, therefore, represents key opportunities or threats for both
small and large organizations.
Many companies have altered or abandoned strategies in the past because of political or
governmental actions.
TECHNOLOGICAL FORCES
Technological forces represent major opportunities and threats that must be considered in
formulating strategies.
Revolutionary technological changes and discoveries are having a dramatic impact on organizations.
Technological influences refer to innovations such as the Internet etc
The Internet has changed the very nature of opportunities and threats by altering the life cycles of
products, increasing the speed of distribution, creating new products and services, erasing
limitations of traditional geographic markets, and changing the historical trade-off between
production standardization and flexibility.
The Internet is altering economies of scale, changing entry barriers, and redefining the relationship
between industries and various suppliers, creditors, customers, and competitors.
Note: Not all sectors of the economy are affected equally by technological developments.
Cont.….
Technological advancements can dramatically affect organizations’ products, services, markets,
suppliers, distributors, competitors, customers, manufacturing processes, marketing practices, and
competitive position.
Technological advancements can create new markets, result in a proliferation of new and improved
products, change the relative competitive cost positions in an industry, and render existing products
and services obsolete.
Technological changes can reduce or eliminate cost barriers between businesses, create shorter
production runs, create shortages in technical skills, and result in changing values and expectations of
employees, managers, and customers.
Therefore, In high-tech industries, identification and evaluation of key technological opportunities and
threats can be the most important part of the external strategic-management audit.
KEY DRIVERS FOR CHANGE
The PESTEL analysis provides the broad ‘data’ from which to identify key drivers for change.
Key drivers for change are the high-impact factors likely to affect significantly the success or
failure of strategy.
Typical key drivers will vary by industry or sector.
Identifying key drivers for change helps managers to focus on the PESTEL factors that are most
important and which must be addressed as the highest priority.
Without a clear sense of the key drivers for change, managers will not be able to take the
decisions that allow for effective action.
BUILDING SCENARIOS
The key drivers are used to construct scenarios of possible futures.
Scenarios consider how strategies might need to change depending on the different ways in which the
business environment might change.
Scenario analyses are carried out to allow for different possibilities and help prevent managers from
closing their minds to alternatives.
 Scenarios offer plausible alternative views of how the business environment of an organization might
develop in the future based on key drivers for change about which there is a high level of uncertainty.
 Note that scenario planning does not attempt to predict the unpredictable
Cont.…
Scenarios are especially useful where there are a limited number of key drivers influencing the
success of strategy; where there is a high level of uncertainty about such influences; where
outcomes could be radically different; and where organisations have to make substantial
commitments into the future that may be highly inflexible and hard to reverse in adverse
circumstances
Sharing and debating alternative scenarios improves organisational learning by making
managers more perceptive about the forces in the business environment and what is really
important.
Managers should also evaluate and develop strategies (or contingency plans) for each scenario.
They should then monitor the environment to see how it is actually unfolding and adjust
strategies accordingly.
THE 4 STEP SCENARIO PLANNING
PROCESS
EXAMPLE; Uncertainties 1. Stay-at-home lockdowns
2. Disposable income of our customers
2. INDUSTRIES AND SECTORS
Economic theory defines an Industry as a group of firms producing the same principal product
or, more broadly, a group of firms producing products that are close substitutes for each other.
From a strategic management perspective it is useful for managers in any organization to
understand the competitive forces in their industry or sector since these will determine the
attractiveness of that industry and the likely success or failure of particular organizations within it.
The Michael Porter’s five forces framework helps identify the attractiveness of an industry or
sector in terms of competitive forces.
Porter’s five forces framework was originally developed as a way of assessing the attractiveness
(profit potential) of different industries.
Michael Porter’s Five Forces framework
THE THREAT OF ENTRY