Chapter 1: Business Environments PDF

# Chapter 1: Business Environments ## In Grade 10 you looked at the three business environments: * Macro environment * Market environment * Micro environment ## In Grade 11 we will build on your knowledge and deepen your understanding of how a business can use different tools to scan and assess th...

# Chapter 1: Business Environments ## In Grade 10 you looked at the three business environments: * Macro environment * Market environment * Micro environment ## In Grade 11 we will build on your knowledge and deepen your understanding of how a business can use different tools to scan and assess the business environments, while developing strategies that will help the business to create or maintain a competitive advantage. ## 1. Environmental Scanning ### 1.1 Definition of Environmental Scanning Environmental scanning can be defined as the process of obtaining information about possible current and future events that may have an impact on the performance of the business. Environmental scanning is done to ensure that the business is ready for developments in the internal and external environments by adapting timeously to realign resources to take advantage of opportunities and overcome threats. ### 1.2 The Purpose of Environmental Scanning * Environmental scanning is done to identify possible challenges, but also possible opportunities for the business in a constantly changing environment that the business operates in. * It is important to gain a better understanding of the nature of changes taking place in the external environment, but also the pace at which these changes are taking place. * A quick and unexpected change is a crisis, because the business did not anticipate the change and therefore the business will probably not have a contingency plan in place to deal with the crisis. * Changes which occur over a period of time can be identified as trends and the business will be forewarned to adapt its current strategies to deal with the change taking place. * Management has to use the information gained to develop flexible strategies that will assist the business to respond quickly to crises and opportunities. * Environmental scanning will also help management to understand the impact of business decisions on the competitive position and the sustainability of the business. ### 1.3 Where does Environmental Scanning fit into the Strategic Vision / Mission | Stage in Strategic Vision/Mission| Stage in Environmental Scanning | | ----------- | ----------- | | Vision / Mission | | | Formulate a strategy | Continuous Environmental Scanning | | Implement a strategy | | | Evaluation and control | | When we decide to travel to a new and unknown destination, we program our GPS with the address of our destination. The GPS then calculates the best route to take and gives us directions to get there. These directions may change depending on traffic patterns detected by the GPS and whether the traveller wants the most direct route or the fastest route. In business, management functions as the GPS. It has to take into consideration where the business wants to go to (vision) and then formulate a mission and strategies that will give the business directions on how to get to the destination. Environmental scanning monitors the business environment to "detect traffic jams" that should be avoided and "areas with limited traffic" where the business has the opportunity to get ahead of competitors on the business road. ### 1.4 Conducting Environmental Scanning It is no good if management scans the road ahead at the beginning of the journey and then does not "recalculate” (evaluation and control) based on problems detected. | Stage| Component | | -------- | -------- | | Environmental scanning | External environment | | | Internal environment | | | Macro environment | | | Market environment | | | Micro environment | | | | From the above illustration it is clear that a SWOT-analysis is a very handy tool to conduct an environmental scan. The SWOT-analysis can be used to identify: * opportunities (O) and threats (T) in both the Macro and Market environments * strengths (S) and weaknesses (W) in the Internal (Micro) environment. ## 2. SWOT Analysis | Internal Factor| | | ----------- | ----------- | | Strengths | Weaknesses | | Opportunities | Threats | It is important to remember that strengths and weaknesses are internal factors that the business has control over and should be used to create value in the business. These strengths or weaknesses are both tangible and intangible elements such as; assets, skills and resources that the business has (or that the business lacks). Opportunities and threats are those factors a business cannot control as they emerge from the competitive dynamics of the external environment of the business. * Opportunities are those factors or situations that could add value to the business * Threats are those factors or situations that could destroy some of the value of the business. When looking at each of the elements of the SWOT analysis, the goal is for the business to see a complete picture of both the internal and external environments. ### 2.1 Strengths Strengths are those factors (tangible and intangible) within the business which add value to the performance of the business and/or which give the business a competitive advantage within the market place, when compared to competitors. The business should develop strategies which will enable it to use its strengths to overcome weaknesses and threats and to take advantage of opportunities. * Examples of possible strengths: * *Operational efficiency (good quality)* * *Competitive price* * *Location* * *Access to financing and other resources* * *Strengths* * *Unique product: Patents (know-how)* * *Good marketing and a strong brand,* * *Business culture* * *Work skills* * *Competitive price:* If the business sells the product or service at a better price than competitors, it is differentiating itself within the market. Consumers that are price conscious may prefer a more reasonably-priced product, providing the business with a good selling proposition. * *Location:* Some businesses such as food outlets and convenience stores depend to a large extent on "impulse purchases". For these businesses it is important to have a location where there is a lot of "foot traffic". The location should also be easily accessible to the target market and for this reason the business should pay close attention to the demographics (age, income levels etc.) of the target market when choosing the location. * If the business is going to manufacture products, it has to determine if it is easier to transport the raw materials or the finished product instead and then choose the location accordingly. * Sometimes it is better to establish the business close to the source of the raw materials, e.g. if the business is going to produce canned fish, it is easier to transport the finished product than the raw fish. In this case the business may decide to locate itself close to the ocean. * Other times it may be easier to transport the raw materials rather than the finished product. For example, it is much easier to transport wooden logs (tree trunks) than furniture which can easily be damaged. In this case it would be a better choice to locate the business close to the target market. * **Additional factors to consider when choosing the location of the business to ensure it is a strength:** * The type of business has to "fit in with the neighbourhood". It does not make sense to establish a hair and nail salon in an industrial area. * Also consider how a complementary business in close proximity may be considered a strength, namely a pharmacy close to a doctor or a sports shop near an indoor cricket / soccer / netball facility. * It is important that customers should have easy access to the business. Look at the availability of parking. * Security is an important aspect to consider, otherwise customers may not feel safe to come into the business. * Find out about future developments in the area, for example, a new taxi rank being established in the area as it may be a great place for certain businesses to obtain premises, while for other businesses, it may prove disadvantageous to locate themselves there. * If the business is considering locating to a shopping mall, the mall's trading hours would be an important factor to consider. Would it make sense for a business selling swimming pool products to be forced to stay open after normal business hours? Who fixes swimming pools at night? * Consider any surrounding business that may be a direct competitor. Although our first instinct is to say it may not be a good idea to establish a new business close to a competitor, in some instances it is not necessarily a bad idea. Think for example of a food court in a shopping mall. There are often a variety of fast food takeaways in a specific area, because it makes it easier for a family to get takeaways. If one wants pizza and the others want burgers or maybe chicken or ... it is convenient for the consumer to have all these businesses in the same area. * **Patents (know-how)** means a unique product can be offered to the target market. A patent is registered by the business to give it legal exclusivity to produce a product in a certain manner. It is a strength for the business as it limits potential competitors from entering the same market. * Product differentiation creates a competitive advantage for the business. There are few products where the business will not claim to have a "unique feature". Can you think of five products where the manufacturer is not trying to differentiate itself from competitors? * **A skilled workforce** is a big strength for any business. If employees know how to perform their jobs, there will be less wastage and improved productivity. There is a shortage of skilled labourers in South Africa. In order to attract skilled and motivated workers, the business must be prepared to pay a fair salary to workers and treat them in a fair manner. * **Business culture** is the "way things are done in the business". This could be one of the biggest strengths (or weaknesses) of any business. If the business has a culture of meeting deadlines, it will give the customers confidence in the ability and reliability of the business. If there is a corporate culture of life-long learning, employees will stay abreast of changes in working methods. If there is a culture of honesty in the business, employees will think twice about "borrowing" business assets or using business time for personal emails and Facebook. A strong CSR culture will emphasise the importance of caring about others and the environment and help to establish a positive image of the business. * **Good marketing and a strong brand:** Brand equity is the intangible, but positive association that people have with the brand. If consumers have a positive image of the business and brand, it will lead to higher sales, it will help to reduce marketing costs and even allow the business to charge a premium for the products / services. * **Access to financing and other resources:** No business can function without capital and other resources such as raw materials or equipment to manufacture the product. If a business has sufficient capital available it makes it possible and easier to obtain other resources. * **Operational efficiency** and **good quality** are synonymous. The more efficient the business, the less wastage there will be and more profit can be made. Good quality products or services will differentiate the business from its competitors enabling greater profits. ### 2.2 Weaknesses Any and all of the above factors that have been discussed as strengths, will apply as weaknesses if not properly managed. A weakness has the exact opposite effect on the success of the business to strengths. If not addressed the effect/s may prove to be debilitating for the business. A business will need to put the necessary strategies in place to overcome any weakness. ### 2.3 Opportunities and Threats Opportunities are those external factors which present the business with the chance to outperform competitors, especially if the competitor is weak in a particular area. This may include the opportunity to offer a better product, getting the product to the consumer sooner than competitors, or having access to larger markets for the business, etc. Threats are those external factors that could hamper the success or growth of the business and therefore the business has to put contingency plans in place to deal with these factors. It is important that the business assesses the impact that opportunities and/or threats could have on it and to deal with these factors quickly and effectively by putting strategies in place to address them. In order to identify possible opportunities and/or threats, we will use the PESTLE-factors in the macro environment and Porter's Six Forces Model in the Market environment. Refer to the discussions of PESTLE and Porter that follow later in the chapter. **Once the SWOT analysis has been completed, it is important that the business uses this information to look towards the future and evaluates how this information could lead to the success or failure of the business. The value of a SWOT analysis lies in how the business uses the information it has obtained by assessing the interrelationships of the different strengths, weaknesses, opportunities and elements and then converting them into strategy plans through tactical planning.** ## A SWOT matrix to illustrate the inter-connectivity of S. W, O and T elements The SWOT matrix is used by a business to develop business strategies. In this process the business will look to link different elements (as seen in the diagram below) to gain a better understanding of the business. **How to put a SWOT-matrix together:** * Perform a SWOT-analysis by listing: * the specific strengths that add great value to the business or give the business a competitive advantage * the areas where the business is weak and how this hampers the progress / success of the business * the external opportunities for the business * the external threats the business is / might be facing. **Complete a SWOT analysis for Mr Price. Assess how the different elements of the SWOT analysis could lead to the success of Mr Price.** **Once the SWOT-analysis has been done, the business must proceed to examine possible strategies by examining the interplay between the different elements of SWOT. When this is done, it is known as a TOWS. The individual elements of SWOT are used, but Strengths are combined with Opportunities and Threats, while Weaknesses are also examined in the light of possible Opportunities and Threats respectively.** * **SO:** These strategies are created by thinking about how the business could utilise its strengths to take full advantage of the opportunities that have presented themselves. * **Internal Factors and External Factors** * **Strengths (S)** * **Opportunities (O)** * **SO Strategies:** strategies that use strengths to take advantage of opportunities. * **ST:** These strategies are created by assessing how the business's strengths could be used to eliminate threats. * **Internal Factors and External Factors** * **Strengths (S)** * **Threats (T)** * **ST Strategies:** strategies that use strengths to avoid threats. * **WO:** These strategies are created by a business overcoming its weaknesses, so that they are able to take advantage of opportunities. * **Internal Factors and External Factors** * **Weaknesses (W)** * **Opportunities (O)** * **WO Strategies:** strategies that take advantage of opportunities by overcoming weaknesses. * **WT:** These strategies assess how a business could avoid threats by reducing or eliminating its weaknesses. * **Internal Factors and External Factors** * **Weaknesses (W)** * **Threats (T)** * **WT Strategies:** strategies that will minimize weaknesses and will also avoid threats. **The concept of TOWS may be easier to understand if we do a practical example for a well-known fast food franchise like McDonalds together:** | TOWS for McDonalds | | | -------- | -------- | | Strengths | | | Weaknesses | | | Opportunities | | | Threats | | * **Strengths:** * Leader in fast food in South Africa and world wide * Uses economics of scale to reduce costs * Ronald McDonald for kids * One of the most recognised logos in the world * Fast and efficient food preparation * Good locations, e.g. airports, busy corners, tourist attractions * 24 hour service * Drive-through facilities * Fast food deliveries * Use strong brand to make people aware of healthier items on the menu * **Weaknesses:** * Products are not very innovative / differentiated * Unhealthy food * Ethics of advertisements targeting children * High staff turnover * **Opportunities:** * On-the-move lifestyle of people * Can enter more countries as even traditionally communist countries allow access * Trend to live healthier * **Threats:** * Recession makes fast food a luxury * Other fast food businesses offering healthier items * Bad publicity when they get sued for unhealthy food * Lots of competition, e.g. KFC, Wimpy, Nandos, Debonairs etc. | | | | -------- | -------- | | SO Strategies | | | ST Strategies | | | WO Strategies | | | WT Strategies | | * **SO Strategies** * Drive-through facilities * Fast food deliveries * Use strong brand to make people aware of healthier items on the menu * **ST Strategies** * Low-cost food items * Faster serving time than competitors * 24 hour service may make it difficult for new entrants to the market * Can negotiate lower prices with suppliers due to bulk purchases and can therefor keep prices lower than some of the competitors * **WO Strategies** * Increase awareness of healthier foods to decrease the negative brand image of unhealthy food * Do a trends analysis to determine needs and attract new customers by offering these type of products * **WT Strategies** * Correct the brand image of selling only unhealthy food * Introduce new products to combat the threat of new entrants: differentiate the products, sell additional health options * Loyalty program **Using the SWOT analysis in Activity 1. Complete a TOWS analysis for Mr Price. Also keep an eye on the values of Mr Price and ensure that your strategies are in line with these values.** ## 3. Porter's Six Force Analysis A Porter analysis can be used to assess the attractiveness of a market. A market will be attractive if it has the potential of high profits. | Attractiveness | | | -------- | -------- | | Attractive markets: High level of profits | Unattractive markets: Low level of profits | * **Attractive markets: High level of profits** * High barriers to enter * Low levels of competition * Few substitute products / services * Weak supplier bargaining power * Weak buyer bargaining power * **Unattractive markets: Low level of profits** * Low barriers to enter * High levels of competition * Many substitute products / services * Strong supplier bargaining power * Strong buyer bargaining power The six forces that need to be considered in the Market environment are: | Forces in the Market Environment | | | -------- | -------- | | Threat of new competitors | | | Impact of complementary products | | | Power of the buyer | | | Porter's Model: Identifying opportunities and/or threats | | | Current competitors | | | Threat of substitute products | | | Power of suppliers | | ### 3.1 Threat of new entrants to the market This aspect assesses how easy or difficult it is for a new competitor to enter the current market, based on the number of entry barriers to the market. If a particular market is seen to be profitable if only a few entry barriers exist. However, this may lead to a high level of rivalry arising in the market place when other businesses also see the opportunity for profits. It is important to remember that when there are many competitors in the market place and they are all competing for the same market share, profits will decline. It is thus vital that existing businesses look at ways to create high entry-level barriers to the market to deter possible new entrants to the market. * The following are possible barriers that will make it difficult to enter the market: * The capital required to enter the market is high, i.e. expensive research and development, pricey equipment, etc. * Existing businesses have strong trademarks or patents protecting their products / services. * There is strict government legislation that makes it difficult to enter the market. * Customer-switching costs to change to a new type of product are high. * There is a high level of customer loyalty. * Economies of scale are not easily achievable. ### 3.2 Rivalry amongst existing competitors The number of current competitors in the market is an important factor to consider when assessing the competitiveness or profitability of a particular market place. In a competitive market, a business would have to compete aggressively to gain and maintain its market share and this could potentially result in lower profit for the business. * Rivalry amongst competitors is usually high when: * There are many competitors in the market. * Competitors are more or less of equal size. * Exit barriers are high (it is expensive to stop selling a particular product, because a large capital investment was made). * There is limited potential for the market to grow and all competitors have to compete for the same market share. * When the products in the market are not differentiated (homogeneous). * Goods can easily be substituted for another product. * There is low level of customer loyalty. ### 3.3 Threat of substitutes A business may feel threatened when a buyer is easily able to find a substitute product at a better price or better quality. It would be even more threatening for the business if the buyer could switch to these substitute products at little or no expense to the buyer. * **IMPORTANT:** A different trade mark is NOT a substitute product! A different trade mark was discussed under 3.2 where we looked at rivalry in the market. A substitute product is a completely different product that satisfies the same need, e. g. butter and margarine. ### 3.4 Bargaining power of Suppliers When the bargaining power of the supplier is high, it allows the supplier to sell products or raw materials for higher prices or to offer lower quality products / materials to the business. This would have a negative impact on the business, as the business would be paying more for the goods. It would also have a negative impact on the quality of the product or service being offered in the market place and therefore maybe the overall image of the business selling to the consumer. * Suppliers have strong bargaining power when: * There are few suppliers in the market place. * The supplier is large enough to make it difficult to achieve forward integration in the distribution channel. * There are limited options to substitute raw materials. * The cost of switching to a different material is high or it is a complicated process. ### 3.5 Bargaining power of buyers The buyer has the power to demand a lower price, a higher level of quality, longer trading hours, delivery of products, a wider variety of goods, etc. If the buyer demands any of the above (and you can add some more demands to the list), the business will have to decide if it is worthwhile to meet these demands. Satisfying more consumer demands would mean lower profits for the business. Not meeting the demands however, may mean no profits if consumers switch to competitors. Remember the buyer does not have to be an individual consumer. Another business may also buy the products to resell or manufacture something. * Buyers have strong bargaining power when: * The buyer is buying in bulk. * There are many suppliers selling the same or similar products/services. * Only a few buyers exist (seller "has to sell" to this buyer). * It is easy and not expensive for the buyer to switch to another supplier. * When a buyer has the ability to integrate backwards in the distribution channel. ### 3.6 Complementary products Porter originally suggested the above-mentioned five forces, but he later included a sixth force called complements or complementary products. Complements look at the potential within the market place to increase the demand for the original product, by introducing a complementary product. An example of a complementary product is Apple that created iTunes to complement the IPod. This added great value to both products and has created a customer base which is loyal to Apple products. **1. Use the Porters Six Force model to help assess the market environment and develop strategies for Cell C to improve the business.** **2. Now add the sixth force, complimentary products and discuss how Cell C can use this to improve the business.** ## 4. PESTLE analysis The PESTLE analysis is a tool that is used to help a business understand the macro environment. It gives the business an overview of the impact from different elements in the macro environment. * Assessing the environment with the use of PESTLE helps align the business to forces of change (positive and negative) that could affect the business. If the business adapts to these changes and in doing so takes advantage of changes, it would be more likely to succeed, because it would be creating a competitive advantage for itself. * **Strategy to change it into an Opportunity:** * Management develops a relationship (through networking) with important role players in Government (not unethical to do so) with the aim of giving input when important decisions are made in public forums. * The business has to ensure it is aware of these financial initiatives offered by Government to take advantage of them. * In Grade 10 you were introduced to each of the components of the PESTLE analysis. * Below is a table where the different PESTLE elements are given in the middle column. * To the left is a column "Opportunity" and to the right a column "Threat". * In some cases the same factor may be either an Opportunity or a Threat, depending on "if and how" the business addresses the issue. * Some have been completed for you. See if you can do the others. | PESTLE-factor | Opportunity: | Threat: | | -------- | -------- | -------- | | The current and future political ruling party | | A new political direction where Government "threatens" to Nationalise private assets or where a situation (like in Zimbabwe) of land grabs lead to political instability. | | Grants, funding and initiatives supported by the ruling party (government) | | | | Effect of wars or worsening relations with particular countries | | | | Regulation and deregulation trends | | | | Impact of technology transfer between industries and countries | | | | The ways in which consumers make purchases | | | | Intellectual property rights and copyright legislation | | | | Technological advances in the field of communication | | | | The level of research funding for technological innovations | | | | Legislation in areas such as employment, competition and health & safety | | | | Trading policies | | | | Regulatory bodies | | | | The level of pollution created by industries | | | | Recycling considerations | | | | Attitudes of the government, media and consumers towards the environment | | | | Changes in legislation regarding environmental issues | | | * **It is important to remember that a PESTLE analysis does not only give the business an idea of the immediate influence these factors have on the business, but one should also consider what the future would hold in terms of each of these elements.** * **It should also never be forgotten that although we look at each element on its own, the different elements have an impact on each other. Let us use a practical example to illustrate this:** * **Interest rates decrease (Economic factor)** * **The business can now afford better equipment (technology)** * **Production is increased and as a result more people are employed (social)** * **A higher standard of living (social)** * **More money available to spend leads to more profits (economical)** * **Although this example may be over simplified, it is one of the reasons why government may decide to lower interest rates (in order to stimulate the economy).** | PESTLE Factor | | | -------- | -------- | | Environmental | | | Political | | | Legal | | | Economic | | | Technological | | | Social | |