GLOBAL BUSINESS ENVIRONMENT

The External Macro Environment

Objectives
Understand the significance of the external environment for the strategies of multinational firms SWOT Understand the influence of the political, economic, social, and technological business environment on global and international strategy Conduct a PEST analysis Apply Michael Porters Diamond Model to an Industry

Introduction

The analysis of the different part of the business environment allows the firm to understand the context within which strategy needs to be developed and implemented.

Crafting Strategy
Thinking strategically about a companys external environment Form a strategic vision of where the company needs to head Thinking strategically about a companys internal environment

Identify promising strategic options for the company

Select the best strategy for the company

External Business Environment

Multinational companies have little influence and control over external business environment thus firms need to adapt the organization to the external environment An organization must achieve strategic fit among the firms resources, its industry environment and macro environment.

Elements of Environmental Analysis

Political Factors Buyers Shareholders Firm Resources
Macro Level Industry Level Firm Level

Economic Factors Suppliers

Firm Capabilities Competitors Intermediaries

Social Factors

Technological Factors

External Business Environment

External business environment opportunities and threats to firms. can provide both

It is difficult to analyze the macro environments because: It is highly complex Changes over time Difficult to analyze host countrys environment Information overload Difficult and expensive to monitor

SWOT Analysis
A SWOT analysis summarizes the key issues from the external business environment and strategic capability of the organization that are most likely to impact on strategy development. SWOT is an acronym for Strengths, Weaknesses, Opportunities, Threats

SWOT Analysis
Strengths Positive tangible and intangible attributes, internal to an organization. They are within the organizations control. Weakness Factors that are within an organizations control that detracts from its ability to attain the desired goal. Which areas might the organization improve? Opportunities External attractive factors that represent the reason for an organization to exist and develop. What opportunities exist in the environment, which will propel the organization? Threats External factors, beyond an organizations control, which could place the organization mission or operation at risk. Classify them by their seriousness and probability of occurrence.

SWOT Analysis
Aim of a SWOT Analysis Reveal your competitive advantages Analyze your prospects for sales and profitability Prepare your company for problems Allow for the development of contingency plans SWOT analysis is really useful if it is comparative.

SWOT Analysis
Use of SWOTs: Generating Strategies When the desired objective has been deemed attainable, the SWOTs are used as inputs to the creative generation of possible strategies, by asking and answering each of the following four questions, many times: How can we Use each Strength? How can we Stop each Weakness? How can we Exploit each Opportunity? How can we Defend against each Threat?

SWOT Analysis
SWOT is not an analysis It is a summary of a set of previous analyses. The SWOT is a great tool that can be used in association with PESTLE.

PEST Analysis
A common way of studying the macro environment is through the analysis of PEST/ PESTLE. PEST analysis is not a rigorous management tool- it can be used as checklist to quick analysis of different influences. It provides a broad framework to help managers understand the macro environment. It helps to answer key questions likeWhat environmental factors are affecting the organization? Which of these are the most important at the present time ? In the next few years?

PEST Analysis
Political Factors Global political institutions Regional integration Government legislation Political risk Economic Factors Cost of Production Currency exchange rate Cost of capital Business cycle Interest rate Inflation Unemployment Disposable income Technological Factors Global technology scanning and technology clusters The knowledge based economy The spread of internet

Social Factors Social changes Global convergence

PESTLE Analysis

Macro Environment
Macro environment should only be considered if its likely to affect the specific industry. E.g.- Political factors can be crucial for success in industries where governments play an important role , such as defense industry, which depends on government contracts Technological factors can be crucial for success in industries where the rate of technological innovations is fast, for instance electronics industry. Therefore every industry and firm needs to focus more attention on those factors which are most relevant to it.

National Environment Influences &The Diamond model

PEST analysis is useful tool for understanding the external environment . This understanding can also help to explain why some firms and industries in some countries are more competitive than others. Porters diamond model helps to explain why a particular nation is successful is some industries and not in others. E.g.- Japanese firms are particularly strong in industries such as cars, consumer electronics and video games

The Competitive Advantage of Nations

The home nation acts a catalyst in creating the right business competitive environment A strong home base of a company provides the basis for innovation- which is now a key to global economic success Michael Porter The home nation plays a major role in the achieving and sustaining competitive advantage among companies. E.g.-Japan has high priced land and so its factory space is at a premium. This lead to just-in-time inventory techniques

Determinants of National Advantage

SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage of Nations, by Michael E. Porter, p. 72. Copyright 1990, 1998 by Michael E. Porter.

Diamond Model
Factors of production: the inputs necessary to compete in any industry
Labor Capital Land Natural resources Infrastructure

Basic factors include natural and labor resources

Advanced factors include digital communication systems and an educated workforce. Basic factors can provide an initial advantage, however, they must be supported by advanced factors to maintain success

Diamond Model
Demand conditions: characterized by the nature and size of buyers needs in the home market for the industrys goods or services Size of the market segment can lead to scale-efficient facilities Efficiency can lead to domination of the industry in other countries Specialized demand may create opportunities beyond national boundaries

Diamond Model
Related and supporting industries: supporting services, facilities, suppliers and so on Support in design Support in distribution

Related industries as suppliers and buyers

Diamond Model
Firm strategy, structure and rivalry: the pattern of strategy, structure, and rivalry among firms Common technical training Methodological product and process improvement

Cooperative and competitive systems

Diamond Model
Porter stated two additional variables that indirectly influence the diamond: CHANCE Disruptive developments outside the control of firms and governments that allow in new players who exploit opportunities arising from a reshaped industry structure. For example, radical innovations, unexpected oil price rises, revolutions, wars, etc. GOVERNMENT The role of government in the Diamond Model of Porter is to act as a catalyst and challenger. Government choice of policies can influence each of the four determinants.

Criticisms of the Diamond Model

The Diamond Model has come under criticism:

Small Countries: Firms from small countries do not rely on a single home base for their success. Firms from small nations often depend on a large neighbouring nation to the extent that the distinction between the home base and host nation as a source of economic success becomes blurred.
Globalization: Global companies can locate research centres where latest cutting-edge research is pursued such as Silicon Valley, while local rivalry is becoming less important in the global market.

Response to Criticisms
Michael Porter does not deny the importance of international and global strategies. The existence of technology clusters shows that, despite globalization and the spread of the internet, the close physical proximity between firms in the same sector helps to create new ideas and technical innovations. Firms from different countries continue to differ in their internal governance and long-term financing structures, in their approaches to research and development as well as in the location of core research facilities, and in their foreign investment and intra-firm trading strategies.