Chapter 3

1. Environmental influences PEST(EL)

Environmental influences that businesses may suffer:
The PESTEL model looks at the environmental influences which are very large: macro-
environmental. PESTEL stands for Political, Economic, Social, Technological, and relatively
recently, Ecological and Legal.
Political-For example joining the EU, political tensions, war, alliances can all influence
many businesses.
Economic-effects such as interest rates, exchange rates, tax rates, and whether the
world economy seems to be doing well or is in decline.
Social-known as demographic changes, that is, changes in the population. And in
many Western countries, this is characterized by relatively few young people and more
and more old people in the population. This can have serious implications when it
comes to recruitment or in calculating the pension or medical liabilities of businesses.
Technological-You only have to consider what the Internet has done to many
businesses. Banks, for example, need fewer branches, as more and more people opt to
deal with their accounts online. Many bookshops and music shops have been affected
by Amazon which makes sales online through a sophisticated website.
Ecological-Airlines for example are coming under increasing pressure because it is
claimed that jet travel makes damaging emissions high in the atmosphere. More and
more businesses are paying attention to packaging and to waste disposal.
Legal-new laws, such as consumer protection, safety laws, employment protection can
have profound effects on how businesses operate.

2. Competitive forces
Porters 5 Forces model is a popular and useful framework with which to analyze industry
attractiveness. -how easy a business will find it to make reasonable profits (profits large enough
to compensate investors for their risk, and also to make enough money to reinvest to keep the
company successful).

 Competition or Rivalry-This can range (extreme) from perfect competition where sellers
have no choice as to the selling price that is charged (they are governed by the market
price). The other extreme is monopoly which gives sellers much more choice as to what
price can be charged, though the price will normally alter demand. Just because you
have a monopoly doesnt mean you will make profits - you might be the monopoly
supplier of something nobody wants. Generally the more competitors the tougher time
is for your profits.
Competitive actions could be:
o Price competition
o Advertising battles
o Sales promotion campaigns
o Introducing new products
o Improving sales aftercare
o Providing guarantees or warrants

Buyer pressure- If buyers are very powerful, then they can exert pressure on prices,
quality and delivery times. The more buyers you have and the harder it is for them to
switch between different suppliers, the better. What pressure can customer put on you,
so if you are selling most of your output to one large customer and that customer says I
want you to drop your prices by 20% you probably have to comply because you could
not risk losing sales. If however you have maybe 100 customers you say about 1% of
your output goes to each customer, any one customer is not very powerful so you have
less pressure on you and you will have a better time.
Supplier pressure- It is like buyer pressure. If you maybe have 10 people who could
supply your raw materials they will be competing against each other to get their
business keeping their prices down. If you have a monopoly supplier like single supplier
or unique component and which you have to buy then they have a lot of power on you
as they put their price up by 25% where you have to still buy it. What you can do with
the buyers and suppliers is to try to get into a long term contract with them so they
cant be shifting their prices up.
Threat of new entrants- Potential entrants may be attracted into an industry if they can
see that good profits can be made. Anything which keeps out potential entrants is
known as a barrier to entry. Sometimes regulations make it hard for potential entrants
to get into a business. For example, setting up as a bank is relatively difficult because of
the various regulatory authorities that have to give their permission. The need for high
capital expenditure and for know-how are two other impediments to potential
entrants. Low fragmentation in the market implies only a few, powerful competitors
in the market who can mount strong retaliation (making profits). For example as a
bank youd to go through all sorts of licensing procedures.
Substitutes - Substitute products arise usually by the advance of technology. For
example, landline telephone companies thought that they were almost in a monopoly
 position because the cost of digging up roads and laying landlines into houses,
apartments and businesses, would have been a considerable barrier to entry. However,
then mobile telephones, cell phone technology, was invented, and good telephone
coverage can be achieved with much less expense. Most old industries have to join the
new industries as well.

3. Porters value chain

Primary activities- More or less these activities will equate to direct costs.
Support activities- By and large they equate to indirect costs (fixed costs)
All sorts of activities which the organization does is mapped into this diagram.
Inbound logistics- is how you get your raw materials-physical movement of goods
(transportation of the goods).
Operations- Is basically production in the factory.
Outbound logistics- is getting stuff form the end of the production line to customers. So
this can be storage + delivery. How the goods are being delivered by post office, stored
in a warehouse, or delivered by transport.
Marketing and sales- is how we find new customers, how to research what they want,
how to encourage them to buy the goods.
Service- is what happens after the main sale is being made and things that could come
into service ex training, maintenance, consumables (ink of an inject printer which is
changed every now and then), proving people with help (help desk and assistance),
installations.

Firm infrastructure- looks at accounting department, personnel departments

Technology Development- research and development more efficiently
Human Resource Management- there would be recruitment of people, training of
people, motivating people with reward- appraising
Procurement- basically ordering goods, purchasing of goods and physical movement of
goods

So all the activities are mapped onto the value chain because each activities is going to
have a cost associated with it-no activity can be done for free. So you have the cost of
all activities is represented in the value chain. Rent, for example could be apportioned
over the operations that is the factory, the warehouse, head office, and the marketing
and sales department. Similarly with depreciation, heating costs, wages and salaries.
The organization must understand what it is that adds value, as this is the reason it
can make profits. It is the secret of their competitive advantage.

The organization must also understand how the different sections of the value chain
are linked. It could be, for example, that if more were spent on human resource
management perhaps less would need to be spent on operations because employees
are better trained. If more were spent on technology development perhaps less could
be spend on after sales service because the quality of the finish goods was higher.
Understanding the value chain is essential for organizations so that they know how
their profit is generated.

Sometimes organizations make mistakes identifying what it is about their activities

that adds, value for the customer and they make changes which reduce their ability to
make profits.

SWOT analysis
An organizations Strengths, Weaknesses, Opportunities and Threats can be summarized using a
SWOT analysis.
1) Strengths and weaknesses are internal. For example, the organization might have strong
finance but a weak portfolio of products. (strengths can also be Brand name, good service)
2) Opportunities and threats are external. For example, there might be a threat (e.g. a new
entrant) from a large overseas competitor coming into the country, but there could be
opportunities to take over an ailing competitor (a weak rival).
3) Organizations should seek to match strengths to opportunities or should try to make good
the weakness to defend themselves. For example, strong finance would allow the
takeover of a weak competitor. They should avoid relying on areas where they are weak.