Business Environment
Assessment of the Environment
(Internal and External)
Ms. Faith Moono Simwami
[email protected]
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So what is THE
BUSINESS ENVIRONMENT?
• Environment refers to all external forces, which have a bearing on the
functioning of business. Environment factors “are largely if not totally,
external and beyond the control of individual industrial enterprises and
their managements. The business environment poses threats to a firm or
offers immense opportunities for potential market exploitation.
IMPORTANCE OF ENVIRONMENTAL
STUDY
Development of broad strategies and long-term policies
of the firm.
Development of action plans to deal with technological
advancements.
To foresee the impact of socio-economic changes at the
national and international levels on the firm’s stability.
Analysis of competitor’s strategies and formulation of
effective counter-measures.
To keep oneself dynamic.
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Assessment of the Environment
(Internal and External)
• The analysis of strengths and weaknesses of organizations should
follow the formation of objectives.
• The task involves more than just identifying and evaluating an
organization’s strengths and weaknesses.
• It requires capturing a sense of how those strengths and weaknesses
combine to help an organization position itself in the market.
• This process of matching possibilities with capabilities is basic to the
development of strategies for achieving objectives.
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Standard Techniques
• The following techniques are used to assess the internal and external
environment:
1. PEST / STEP Analysis - used to analyze the external environment
2. SWOT Analysis - used to analyze both the internal and external
environment
3. Porter's Five Forces Model - used to analyze an industry in which an
organization operates.
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THE MEANINING OF THE EXTERNAL BUSINESS
ENVIRONMENT
The external environment is everything outside an organization that might
affect it. An organization's external environment consists of two layers:
1. The general environment - refers to those nonspecific dimensions and
forces in an organization's surroundings that might affect its activities. It
includes all PEST factors.
2. The task environment - refers to those specific organizations or groups
that are likely to influence an organization. It consists of competitors,
customers, suppliers, regulators, unions and owners.
THE EXTERNAL
ENVIRONMENT
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GENERAL ENVIRONMENT
 POLITCAL
 ECONOMIC
 SOCIAL/CULTURAL
 TECHNOLOGICAL
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Business Analysis Models
-PEST Analysis What is PEST Analysis?
• PEST analysis is an analysis model examining the external environment and the global
factors that may affect a business.
• It can provide a quick understanding of the external pressures facing a business and their
possible constraints on its strategy.
• It is usually divided into four external influences on a business – Political, Economic,
Social and Technological.
• Created by Harvard professor Francis Aguilar in 1967, PEST can work alone or be used in
combination with other tools, such as Porter's Five Forces and SWOT analysis, to
determine an organization's overall outlook.
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POLITICAL
• The political/legal environment consists of the law and interpretation
of laws that require firms to operate under competitive conditions and
to protect consumer rights.
• Ignorance or noncompliance with the laws, could result in fines.
• Operating within the legal framework is both socially responsible and
ethical.
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Issues That Must Be Considered Include:
• Tax guidelines
• Copyright and Property Law
Enforcement
• Political stability
• Trade Regulations
• Social and Environmental Policy
• Employment laws
• Safety regulations.
• Companies should also consider
their local and federal power
structure, and discuss how
anticipated shifts in power could
affect their business.
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The Political/Legal
Environment Cont’d
• Organizations can attempt to influence the legal structure
through:
• Lobby groups / Trade Associations
• Campaign Contributions
• The central and local government have established regulatory
agencies to enforce laws i.e. CCPC, ZRA, NAPSA etc…
Business Analysis Models
-Illustrations for PEST Analysis Models

Political

1.
2.
3.
© PhotoDisc
Purposes:
To find how political development,
locally, nationally, internationally
affect the strategy of a business.
Areas to be considered:
Consumer laws and regulation
Political pressures,
Government views on certain
business activities, including local,
national and international
government political issues
affecting a business
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ECONOMIC
• The economic and competitive forces in the marketing
environment influence both marketers and customers'
decision and activities. The overall state of the economy
fluctuates in all countries. The health of the economy
influences how much consumers spend and what they
buy. These changes in general economic conditions affect
(and are affected by) the forces of supply and demand,
buying power, willingness to buy, expenditure levels and
the intensity of competitive behaviour.
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Economic Environment
• The economic and competitive forces in the general environment influence business
organizations and customers' decision and activities.
• The overall state of the economy fluctuates in all countries.
• The health of the economy influences how much consumers spend and what they buy.
• Therefore, present-day economic conditions and changes in economy have a broad
impact on the success of organization
The Consumption Patterns of their Potential Customers are
Affected by Economic Forces such as:
•
•
•
•
Economic growth
Exchange rates
Economic stability
Anticipated shifts in commodity
and resource costs
• The rate of inflation
• Interest rates
• The availability of credit for
consumer purchases or
investment purposes
• The rate/policies of
unemployment
• The size of disposable personal
income.
Business Analysis Models
-Illustrations for PEST Analysis Models

Economic

1.
2.
3.
4.
© PhotoDisc
Purposes:
To find how economic factors may affect
on the business.
Areas to be considered:
Consumer activities, such as spending
patterns
Economic conditions, such as inflation,
unemployment, growth, etc.
Government policies, such as fiscal,
monetary, exchange rates, etc.
The changes in production and labor
market …
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SOCIAL
• As businesses broaden their operations both locally and internationally,
the need to be aware of social/cultural factors becomes more and more
important.
• This issue analyzes the demographic and cultural aspects of the
company's market. These factors help businesses examine consumer
needs and determine what pushes them to make purchases.
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Among the items that should be examined
are:
•
•
•
•
•
Demographics
Population Growth Rates
Age Distribution
Attitudes Toward Work
Job Market Trends
•
•
•
•
Religious
Ethical Beliefs
Lifestyle Changes
Educational and Environmental
issues
• Health consciousness
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Business Analysis Models
-Illustrations for PEST Analysis Models

Social

1.
2.
3.
4.
© PhotoDisc
Purposes:
To find what competitive advantage a business
may gain by social changes.
Areas to be considered:
Aging population trend, which may increase
services for old people
Birth rate increase, which may affect baby
product markets
Security condition, e.g. increase in crime may
cause a business to increase insurance costs
Pressure groups, such as environmental
groups, local community groups, etc. which
may prevent a business from polluting a
river…
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TECHNOLOGICAL
• The technological environment represents the application of knowledge
based on discoveries in science, inventory and innovations.
• New technology results in new products and services for consumers,
improved existing products and often lower prices through the
development of more cost-efficient production and distribution
methods.
• Technology can quickly make products obsolete
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Among the Specific Items That Need to
be Considered Are:
•
•
•
•
•
Technological advancements
Government spending on technological research
The role of the Internet and how any changes to it may play out
Speed of service delivery
Product innovation – phone-watch, virtual education
• Eg. Barcodes, emails, packaging & delivery,
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Business Analysis Models
-Illustrations for PEST Analysis Models
 Purposes:
To find how new technologies might affect
the business activities.
Technological
 Areas to be considered:
1.
2.
3.
4.
The rate of technological change
The development of IT
The wide use of Internet
The creation of new materials for production …
 Impacts:
All these technological changes will lead to some
effects on the business, such as the product of
the business may be replaced by new products or
its production methods may have become out of
date.
© PhotoDisc
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Example
• Political factors: Government regulations regarding employee hygiene, health and
food regulations, food standards, etc. Government policies regarding the restaurant
industry and managing eateries. These may include licenses, inspections by health and
food departments, etc.
• Economic factors: Interest rates would affect the cost of capital, the rate of interest
being directly proportionate to the cost of capital. Rate of inflation determines the
rate of remuneration for employees and directly affects the price of the restaurant's
products. Again, the proportion between the inflation rate and wages/prices is direct.
Economic trends act as an indicator of the sustainability and profitability of your
business in the chosen region and help you in deciding your marketing strategy.
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Example
• Social factors: Eating habits of the people in your chosen business
environment may, and certainly will, affect your marketing decisions.
Ratio of people preferring to eat out regularly.
• Technological factors: A good technical infrastructure would lead to
better production, procurement and distribution logistics, resulting in
reduced wastage and lower costs. Effective technology may be a decisive
factor for food technology innovation, better presentation, more
effective business marketing, etc.
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Monitoring the Technological
environment
Reasons for monitoring the technological environment include;
 Adopting technology may be the means by which a firm remains competitive.
• Applying new technology also gives organizations the opportunity to improve customer
service e.g. 24 hours banking due to ATMs.
• New technology can lead to increased productivity and operating efficiency e.g. CAD and
CAM speed up the production process in manufacturing companies.
International Forces
Environment forces within the international business include:
• Language differences
• Changing currency exchange rates
• Different national laws affecting economic activity, political risks
and stability,
• Tax laws of different nations, and
• Social/cultural differences between nations.
INTERNAL &
EXTERNAL
ENVIRONMENT
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Business Analysis Models
-SWOT Analysis
 What is SWOT analysis?
SWOT analysis involves looking at the internal strengths and
weaknesses of a business and external opportunities and threats.
It is used to analyze the possible internal advantages and
problems that a business has, and helps determine the external
factors of the business which may affect its strategy.
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Business Analysis Models
-SWOT Analysis• The method was created in the 1960s by business gurus Edmund P.
Learned, C. Roland Christensen, Kenneth Andrews and William D.
Book in their book "Business Policy, Text and Cases" (R.D. Irwin, 1969).
• A SWOT analysis helps to conduct a quick analysis of a business’s
current position so that it can help the business to develop or plan a
direction of development or a proper strategy in future.
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Internal Factors
• The first two letters in the acronym, S (strengths) and W (weaknesses),
refer to internal factors, which means the resources and experience
readily available to you.
• Examples of areas typically considered include:
• Financial resources, such as funding, sources of income and investment
opportunities
• Physical resources, such as your company's location, facilities and equipment
• Human resources, such as employees, volunteers and target audiences
• Access to natural resources, trademarks, patents and copyrights
• Current processes, such as employee programs, department hierarchies and
software systems
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External Factors
• External forces influence and affect every company, organization and
individual. Whether or not these factors are connected directly or indirectly to
an opportunity or threat, it is important to take note of and document each
one.
• External factors typically reference things you or your company do not control,
such as:
• Market trends, like new products and technology or shifts in audience needs
• Economic trends, such as local, national and international financial trends
• Funding, such as donations, legislature and other sources
• Demographics, such as a target audience's age, race, gender and culture
• Relationships with suppliers and partners
• Political, environmental and economic regulations
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Elements of SWOT Analysis
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Business Analysis Models
-Examples or Illustrations for SWOT Analysis
Models
Strengths
 Good brand image
 Well-known name
 Good reputation
 Cost advantage in production
 High market share
 Confidence in the market
 Customer loyalty or repeat business
 More advanced technology and R & D
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© PhotoDisc
Business Analysis Models
-Examples or Illustrations for SWOT Analysis
Models
Weaknesses
 Ineffective in production
 Falling profit
 Falling sales of the product
 Declining age of the life cycle of a product
 Poor reputation
 Lack of innovation and change
 Lack of adequate capital or having some financial
problems
 Customers’ losing confidence or increasing
complaints on the business
 Poor management or inefficient organizational
structure
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© PhotoDisc
Business Analysis Models
-Examples or Illustrations for SWOT Analysis
Models
Opportunities
 Possible development of new products
 Expansion into new markets
 Development of a global brand
 Joint –development with other
companies
 Possible growing demand for a product
in the market
 Possible government policies
encouraging the growth of the business
and its certain products
 New sources of profit or income
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© PhotoDisc
Business Analysis Models
-Examples or Illustrations for SWOT Analysis
Models
Changes in law or regulations.
Growing competition from local
Threats
companies
Increasing competition from foreign
competitors
New products developed by other
companies which may replace the
product of the business
Marketing activities or strategies which
will be implemented by competitors 37
© PhotoDisc
Business Analysis Models
-SWOT Analysis
Question for your critical thinking:
Based on the Analysis Model discussed, in 10
minutes, Conduct a brief SWOT analysis on
yourself.
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Business Analysis Models
-SWOT and PEST
Question for your critical thinking:
What are the key differences between
SWOT and PEST models.
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In-Class Activity
Zambeef
Shoprite Unilus
Bata Protea Hotel
O’Hagans
Trade Kings
Lafarge Cement
South African Airways
Autoworld
KFC
InterContinental Hotel
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Industry Analysis
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Porter Competitive Model
Potential
New Entrants
Bargaining
Power
of Suppliers
Intra-Industry
Rivalry
Strategic Business Unit
Bargaining
Power
of Buyers
Substitute
Products
and Services
Source: Michael E. Porter
“Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979
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Figure 3-1
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New Entrant
An existing company or a startup that has not previously competed with the SBU in
its geographic market. It can also be an existing company that through a shift in
business strategy begins to compete with the SBU.
Threat of New Entry: Power is also affected by the ability of people to enter your
market. If:
• It costs little in time or money to enter your market and compete effectively
• There are few economies of scale in place
• You have little protection for your key technologies..
…then new competitors can quickly enter your market and weaken your position.
If you have strong and durable barriers to entry, then you can preserve a favorable44
position and take fair advantage of it.
Questions Asked In Analysis
 How easy is it for another company to do what I am doing?
 How hard or costly is it for another company to setup a company like
mine?
 How easy is it for my potential rival to gain economies of scale – cost
of machinery, supplier relationships etc…?
 Am I able to protect my brand either through patents, copyrights or
trademarks? Or is what I do too general?
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Substitute Product or Service
An alternative to doing business with the SBU. This depends on the willingness of
the buyers to substitute, the relative price/performance of the substitute and/or
the level of the switching cost.
Threat of Substitution: This is affected by the ability of your customers to find a
different way of doing what you do – for example:
• If you supply a unique software product that automates an important process,
people may substitute by doing the process manually or by outsourcing it. If
substitution is easy and substitution is viable, then this weakens your power.
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Questions Asked In Analysis
 Are there alternative options to my product? Original vs Chinese?
 Who are my competitors? Direct & Indirect?
 What would make my customers opt for the alternative? Cheaper?
Same performance?
 What does it cost my customers to swap from my product to the next?
Location? Convenience? Marketing/press?
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• Profit margins.
Industry Rivalry
Likelihood?
Competitive Rivalry: What is important here is
the number and capability of your competitors.
If you have many competitors, and they offer
equally attractive products and services, then
you'll most likely have little power in the
situation, because suppliers and buyers will go
elsewhere if they don't get a good deal from
you. On the other hand, if no-one else can do
what you do, then you can often have
tremendous strength.
• Industry growth rate and potential.
• A lack of capacity to satisfy the
market.
• Competitor concentration and
balance.
• Diversity of competitors.
• Existing brand identity.
• Switching costs.
• Exit barriers.
• Fixed costs.
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Questions Asked In Analysis
Who are my competitors?
How many people are doing the same thing I am?
Is my product/service different enough from others?
How well am I meeting the demand on the market & is there need
for more companies?
Are all other businesses who are in my SBU in the same
geographic region?
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Power of the Buyer
Buyer Power: Here you ask yourself how easy it is for buyers to drive
prices down. Again, this is driven by the number of buyers, the
importance of each individual buyer to your business, the cost to them
of switching from your products and services to those of someone else,
and so on. If you deal with few, powerful buyers, then they are often able
to dictate terms to you.
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Questions Asked In Analysis
 Is there a large, concentrated buying power that enables buyers to gain volume
discounts and/or special terms or services?
 Is the product being bought standard or undifferentiated and are there multiple
alternative sources?
 Is there strong potential to backward integrate? i.e. acquire ownership over one’s
supply chain, reducing supplier power and reducing input costs?
 Is the quality of the product unimportant to the buyers’ options?
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Power of the Supplier
• Supplier Power: Here you assess how easy it is for suppliers
to drive up prices. This is driven by the number of suppliers
of each key input, the uniqueness of their product or service,
their strength and control over you, the cost of switching
from one to another, and so on. The fewer the supplier
choices you have, and the more you need suppliers' help, the
more powerful your suppliers are.
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Questions Asked In Analysis
 Are there only a few domination suppliers?
 Is the product unique or differentiated?
 How low or high are the built up switching costs?
 Are benefits gained through geographic proximity to its customers?
 How easy is it for a supplier to forward integrate?
 Have suppliers maintained a long lasting relationship with its buyers?
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Example
Martin Johnson is deciding whether to switch
career and become a farmer – he's always loved
the countryside, and wants to switch to a career
where he's his own boss. He creates the following
Five Forces Analysis as he thinks the situation
through:
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This worries him:
• The threat of new entry is quite high: if
anyone looks as if they're making a
sustained profit, new competitors can come
into the industry easily, reducing profits.
• Competitive rivalry is extremely high: if
someone raises prices, they'll be quickly
undercut. Intense competition puts strong
downward pressure on prices.
• There is some threat of substitution.
• Unless he is able to find some way of
changing this situation, this looks like a
very tough industry to survive in. Maybe
he'll need to specialize in a sector of the
market that's protected from some of
these forces, or find a related business
that's in a stronger position.
• Buyer Power is strong, again implying
strong downward pressure on prices.
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Questions?
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