Micro and Macro Environmental Factor Analysis
|✅ Paper Type: Free Essay||✅ Subject: Business|
|✅ Wordcount: 4022 words||✅ Published: 7th Apr 2021|
Business strategy involves seeking a position within an environment or industry that generates a sustainable competitive advantage (implying that a diversified company should have as many business strategies as it has businesses)
Analysing Macro – Environmental Factors:
There are many factors that will effect the strategies and decisions of managers of any organisation. Tax changes, new laws, trade barriers, demographic change, etc are some of the examples. To help analyse these factors, we can categorise these micro – environmental factors using PESTEL model. PESTEL abbreviates Political, economical, social, technological, environmental and legal factors.
Political Factors: These refer to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? Etc
Economical Factors: These include interest rates, taxation changes, economic growth, inflation and exchange rates etc.
Social Factors: Changes in social trends can impact on the demand for a firm’s products and the availability and willingness of individuals to work. For example, in UK, the population has been ageing. This has increased the costs for firms who are committed to pension payments for their employees because their staff are living longer.
Technological factors: Technology is growing very fast nowadays. New and fast machineries are introduced every now and then. New technologies create new products and new processes. Technology can reduce costs, improve quality and lead to innovation. These developments can benefit consumers as well as the organisations providing the products.
Environmental factors: Environmental factors include weather and climate change in macro factors. Change in climate, temperature can impact on many industries. These can benefit one industry and can make other industry down at the same time. For example in hot sunny days, people love to go out and visit beaches instead of going to restaurants and places like them. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider.
Legal Factors: These are related to the legal environment in which firms operate. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organisation’s actions.
LIFE CYCLE ANALYSIS:
Generally, the model assumes that industry growth follows an ‘S’ shaped curve. The flat introductory phase reflects the problems of establishing the new product. Once proven, growth becomes explosive until market saturation is reached. Sales now are limited by the rate of replacement sales and the rate of growth of the population in the market. Eventually the industry will come under pressure from newer technologies and substitute products with superior price performance.
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There are four stages in this model. i.e. introduction stage, growth stage, maturity stage and decline stage. In introduction stage, Pioneering firms often after considerable investment and repeated failures, introduce products based on a new technology. Costs tend to be high, and quality tends to be low because of lack of economies of scale or manufacturing experience and the product itself will be very basic. In growth stage, a dominant technology begins to emerge, and competitors standardise around it. There is likelihood of capacity shortages although costs and prices fall as standardisation and the adoption of large scale manufacturing makes possible economies of scale. At maturity stage, Overcapacity begins to emerge in the industry, products differentiation declines as technological know-how becomes widely shared, and price competition intensifies. Consolidation occurs within the industry as weaker firms are acquired by stronger ones. Sales to less developed markets, and the transfer of production to lower labour cost economies accelerates. In decline stage, The industry comes under pressure from new technologies offering superior performance, although this may be reduced by factors such as high price and switching costs associated with the new technology. Price wars erupt as the surviving firms fight for market share in a declining market, and exits from the industry, as well as consolidation within the industry, becomes more likely.
Analysing Micro – Environmental Factors:
The micro – environment consists of stakeholders who are directly or indirectly linked with any business. For example customers, consumers, suppliers, shareholders etc.
Suppliers: Suppliers are major pillars or any business as they provide all the materials essential for any business. Big deal with suppliers is that can they provide high quality products at low price. Can they do this reliably? Have they got the flexibility to respond to a firm’s demands? What is the bargaining power of these suppliers? How dependent is the firm on them? Does their approach to their staff and resources fit with your ethics? Firms must decide on issues such as who to use to supply them, on the responsibility it takes for these suppliers and on the terms and conditions it adopts. Some firms take quite an aggressive attitude towards their suppliers by trying to push down the prices and delay payments. Others view the relationship more as a partnership in which they are working together with suppliers and that by helping each other both can benefit. The importance of suppliers can be seen if things go wrong.
Distributors: Distributor’s job is to deliver your product to market place where it can be sell easily. Imagine you sell shampoo – what you need to sell this is to get it on the shelves in the leading chemists and supermarkets but this means moving someone else’s products off the shelves! So the challenge is to get stores to stock your products; this may be achieved by good negotiating skills and offering appropriate incentives. The distributors used will determine the final price of the product and how it is presented to the end customer. When selling via retailers, for example, the retailer has control over where the products are displayed, how they are priced and how much they are promoted in-store.
Customers: Customers are key to sales. Managers must keep the needs of customers in their mind and try to anticipate how these will develop so that they can meet these requirements effectively now and in the future. To help understand their customers firms are increasingly trying to gather information on them through mechanisms such as loyalty cards. By gathering data on shopping patterns and matching this to data on the individual shoppers firms can build up detailed pictures of their buyers and then offer them appropriate deals.
Competition: The success and behaviour of any business will depend on the degree of competition in its market. In some markets one firm is dominant. This is called a monopoly. If you are in a monopoly position this may allow you to exploit the consumer with relatively high prices (assuming your position is protected in some way) and you may be able to offer an inferior service if customers have no other choices. In other markets a few firms dominate; this type of market structure is called an oligopoly. In oligopolistic markets there is a high degree of interdependence and so firms will think carefully how their rivals might react to any actions they take.
Key Stakeholders, Their Needs & Expectations:
Key stakeholders of a business are:
- Customers, suppliers and contractors
Employees: are the major stakeholders of a business as they are strongly linked with the business. They want to work in a place where they can meet their personal needs and wants. Leaders who create job assignments, work environments, and visions help employees be both competent and committed to their work.
Customers: want leaders to build compelling products and services so that they can trust and when they do, customers will give share of wallet. Customers are key to sales. Especially in fast food industries like Burger King, we ( employees ) have been instructed to focus on quality service and food. Customers should be satisfied at any cost because without them, business is nothing. Suppliers and contractors want their loyal concern with payment of goods and profit respectively.
Shareholders and Investors: are those who bought company’s share and are part of ownership in the company. They are concern with maximum outcome in terms of cash from profit. Investors are those who invest their money into the business as capital to earn their share from the profit. Investors want leaders to keep their promises, develop a compelling growth strategy, align core competencies to the strategy and then to ensure that people are committed to delivering on these premises.
Communities and Government: Communities want leaders to build organizations that are socially responsible, through how they treat the environment and how they serve the larger community. Government are linked with business as to start a business, licence is required and government issue licence. And from the profit gained by a company, a percentage of profit goes to government in terms of tax which is used to build infrastructures etc.
The Burger King Corporation (BKC) was founded in 1954 in Miami by James Mc Lamore and David Edgerton. Following this, the famous Whopper sandwich was introduced in 1957 and it quickly became one of the best-known sandwiches in the world. Today, with the corporation’s brand promise: ‘Have it your way’, there are 221,184 possible ways to order a Whopper sandwich around the world. Burger King now operates more than 11,300 restaurants in approximately 70 countries. Food is necessary for humans to survive, but the wastes, chemical by-products, and inefficiencies in its production can have an immense impact on the environment. People demand perfect inexpensive year round food, which increases the use of pesticides, herbicides, and preservatives depleting the precious ozone, contributing to global warming, and polluting our lakes and streams. To help protecting all the dangerous fumes and chemicals, Burger King is doing it’s best. To help prevent contamination and other dangerous things, there are separate containers for different things. Strategy is affected by major changes taking place in the environment and for those changes, strategy has to be change accordingly in order to stay in business stream. Some change in micro – environmental factors will affect strategy in different ways. If business is losing customers then many strategies can be applied depending on the level of business loss. Prices of product can be decreased, or distribution of vouchers etc. One of Burger King’s most important tasks is to ensure that the business is continually meeting its customers’ needs. In order to achieve this, the organisation has a research and development team dedicated to product improvement. It’s mono is ‘ HAVE IT YOUR WAY’. It means that customers can have their food the way they want, with or without, more or less of anything in their food.
THREE TOOLS TO ANALYSE, SUMMARISE AND EVALUATE
- EFFECTS OF CURRENT BUSINESS PLAN
- POSITION OF THE ORGANISATION IN CURRENT MARKET
- COMPETITIVE STRENGTHS AND WEAKNESSES OF ORGANISATION
PORTER’S FIVE FORCES ANALYSIS
The competitive structure of a company can be analysed by Porter’s five forces analysis. It analyse the attractiveness of a company within the market. Porter’s five forces model is:
Likelihood of new entry: it means that the extents to which barriers to entry exist. The likelihood of entering a market would be lower if:
- The entry cost are high
- There are major advantages for those firms which are already operating in market because of experience
- Government policies prevent entry or makes it more difficult
- Existing brands have high level of loyalty
Power of buyers: The stronger the power of buyers in an industry the more likely it is that they will be able to force down prices and reduce the profits of firms that provide the product. Buyer power will be higher if
- There are few or many buyer of the product
- The buyers can easily switch to other products provided high quality in low price
Power of suppliers: The stronger the power of suppliers in an industry the more difficult it is for firms within that sector to make a profit because suppliers can determine the terms and conditions on which business is conducted. Suppliers will be more powerful if they are less in number and the supplier can threaten to buy the firm so it is a stronger negotiation position.
Degree of rivalry: This measures the degree of competition between existing firms. The higher the degree of rivalry the more difficult it is for existing firms to generate high profits. Rivalry will be higher if there are large numbers of similar sized firm, the costs of leaving the industry are high, and there is little brand loyalty so customer are likely to switch easily between products.
Substitute threat: This measures the ease with which buyers can switch to another product that does the same thing e.g. aluminium cans rather than glass or plastic bottles. The ease of switching depends on what costs would be involved. Using Porter’s model, firms can generate high profit if the industry is:
- Difficult to enter
- There is limited rivalry
- Buyers are relatively weak
- Suppliers are relatively weak
- There are few substitutes
The Boston Matrix model is a tool for assessing existing and development products in terms of their market potential, and thereby implying strategic action for products and services in each category.
Cash Cow: The rather crude metaphor is based on the idea of ‘milking’ the returns from previous investments which established good distribution and market share for the product. Products in this quadrant need maintenance and protection activity, together with good cost management, not growth effort, because there is little or no additional growth available.
Dog: this is that product or service of a company which has low presence in market. There is no point of developing goods and services in this quadrant. Most of the companies discontinue their product which they think fall under this quadrant. Businesses that have been starved or denied development find themselves with a high or entire proportion of their products or services in this quadrant, which is obviously not very funny at all, except to the competitors.
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Problem Child: These are products which have a big and growing market potential, but existing low market share, normally because they are new products, or the application has not been spotted and acted upon yet. New business development and project management principle are required here to ensure that these products’ potential can be realised and disasters avoided. This is likely to be an area of business that is quite competitive, where the pioneers take the risks in the hope of securing good early distribution arrangements, image, reputation and market share.
Rising Star: ‘star’ products, are those which have good market share in a strong and growing market. As a product moves into this category it is commonly known as a ‘rising star’. When a market is strong and still growing, competition is not yet fully established. Demand is strong; saturation or over-supply do not exists, and so pricing is relatively unhindered.
To determine what a company’s strategy should be, the managers must consider the internal strength and weaknesses of their company and compare them with external opportunities and threat. This process is known as SWOT analysis.
Strengths: are internal factors which a firm may build on to develop a strategy. They may include:
- Marketing strengths
- Financial strengths
- Operation strengths
- HRM strengths
Weaknesses: are internal factors which a firm may need to protect itself such as:
- Marketing weaknesses such as limited distribution
- Financial weaknesses such as high levels of borrowing and low rates of return
- Operational weaknesses such as old or poor quality equipments
- HRM weaknesses such as high rate of labour turn over and industrial disputes
TASK 2 – STRATEGY EVALUATION
To achieve an objective, managers must develop a suitable strategy. A strategy is a long term plan setting out how an objective will be reached. For example, if the objective is to reduce costs, the strategy could involve relocating or reducing the labour force. If the objective is to boost revenue, the strategy may be to launch new products or to invest in a big promotional campaign. A strategy may be developed by using a firm’s strengths to exploit the opportunities that exist. For example, a strong brand name may be used to extend a firm’s products into new markets. It may also use these strengths to protect itself against threats; for example, a retailer may use its finance to acquire key locations to prevent a competitor buying them. Strategies can be evaluated by many ways. One of the way is by using Porter’s Five Forces model. In this model there are five different sources which are strongly connected with the business and they must be kept in mind while making strategies. While making strategy for a business includes keeping those things in mind which will ruin the business. For example in case of a retail business, if a new retail business entered in, then strategy in this will be change accordingly in this case. Secondly if buyer’s power is strong in retail business, then it could be a negative or a positive impact on business. If they are strong then they can force down the prices of the product which will lower the profit, so in this case strategy will be evaluated very carefully as every step can change the course of business. Suppliers are the major part of any business so keeping them in mind is a necessary part in strategy evaluation. A firm may also want to protect itself against its weaknesses. For example, it may try to find alternative suppliers to reduce an over-reliance on a particular one; it may invest in a rebranding exercise to reposition itself. Fourth part is degree of rivalry. This measures the degree of competition between existing firms. The higher the degree of rivalry the more difficult it is for existing firms to generate high profits. Fifth and last part is threat of substitute. This measures the ease with which buyers can switch to another product that does the same thing. Keeping following things in mind will help effecting business in loss. If the second industry is easy to enter in market, if there is a high degree of rivalry between firms within industry, buyers are strong, suppliers are strong etc. The implication of Porter’s analysis for managers is that they should examine these five factors before choosing an industry to move into. They should also consider ways of changing the five factors to make them more favourable.
TASK 3 – IMPLEMENTATION
Evaluating strategies is a difficult task but implementing them in a regular and smooth manner is more complicated. The importance of strategy should not be underestimated. Changing the price of an item, changing the distribution strategy and investing in new equipment are all important decisions but if you are fighting in the wrong market with the wrong products then the details are almost irrelevant. The strategy sets out where and how the battles will be fought and a good strategy is essential to business success. This involves an understanding not only of what happens within the firm but also the ability to forecast changes in the external environment and their significance successfully.
This implementation is in fact a landmark where various organizations tend to falter. The extensive research and resources used up for the drafting of strategic plans often make organizations believe that whatever they have understood and devised is the optimum and therefore requires no second thoughts. However, what has been ignored is the fact that plans can be tested only if they meet actual usage. Only planning or theoretical application cannot be guarantee complete success. Actual implementation yields the true picture. A business plan is the textual version of a strategy, as it includes pertinent information regarding the company, including: vision and mission statements, measurable objectives supporting the vision, actionable tactics meeting the objective, resources, milestones and timeframes, accountability and role designations, as well as internal and external risks. The business strategy is not evergreen and should be evaluated routinely to ensure the company still has the competitive edge.
A business plan includes the primary and secondary objectives of your organization, an analysis of current policies and procedures, and the development of new policies or procedures to correct weaknesses within the organization.
Strategy is firstly introduced to lower managers and supervisors so they can act on it and tell to lower staff in order to work on it. If launching a new product or reducing the price of another product because of substitute available in market, all the staff must be aware of that, after that the new promotion or product or discounted product will be advertise in an attractive way in Television, radio and by distributing leaflets to let people aware of it. Focussing on excellent customer service will definitely help improve the business because the service given to customer will bring him back again.
Quality assurance of the product will increase the demand of product and will increase revenue. Introducing new and latest technology in the company will save a lot of time and give result much faster and effective. Giving training to all new and old staff about new technology, new products, and everything related to business and plan will help staff delivering a better quality service required.
For implementation of plan, money is the major and important resource required. So in order to get money there are many ways, selling shares of the company, retained profit, profit in terms of capital can be reinvested and by taking loans from banks etc. After implementing the plan, wait for the result and do surveys. Drop or put small questionnaire that will help letting you know how good is the strategy going. Taking customer’s feedback and evaluate the strategy. If it is going the way we wanted, then there is no need to change and if it’s not, then re evaluate and check where there is a mistake and sort it out.
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