CONTENT PAGE
1. Question Paper 2
2. Introduction 3
3. PEST Analysis 4
(3.1) Political Legal Environment 4
(3.2) Economic Environment 4
(3.3) Social Environment 5
(3.4) Technological Environment 5
4. Industry Analysis 5
5. The Michael Porter Five Forces 6
(5.1) Threat Of New Entrants 7
(5.2) Rivalry of existing firms 7
(5.3) Threats of substitutes 7
(5.4) Bargaining power of buyer 8
(5.5) Bargaining power of suppliers 9
6. Conclusion 9
7. Bibliography 10
8. References 10
EXECUTIVE DIPLOMA IN BUSINESS ADMINISTRATION
STRATEGIC MANAGEMENT (BA423)
APRIL 2004
STRATEGIC MANAGEMENT
QUESTION
The study of the external environment is a crucial step in the mapping of business strategy
for an organization.
Discuss how the assessment of external forces can be performed with business examples to
support your analysis.
[Total 100 marks]
– END OF PAPER –
Introduction
Business environment is an element that will affect all the activities of an organization.
Beside, it will bring firms both opportunities and threats because of its uncertainties.
Business environment is uncertain, complex & dynamics; organization should apply more
flexibility & discontinuity ways to manage them. A firm cannot control the environment
because it is unpredictable in its direction and speed of change, such as interest rates, rate
of inflation and exchange rate.
Business environment can classifies in two categories that are internal environment and
external environment. Internal factors close to the company that have a direct impact on
the organizations strategy, these factors include employee, customer, suppliers,
shareholder, banker etc. External environment comprises those factors and trends outside
the organisation that might have an influence upon an organisation and its future. Many
external factors can have an effect upon an organisation – from changes in government
legislation to the entry of new competition into a market.
All businesses and organizations operate in a changing world and are subject to forces that
are more powerful than they are, and which are beyond their control. Any business strategy
needs to take account of all these forces so that opportunities and threats can be identified
and the organization can navigate its way to success by matching its internal strengths to
external opportunities.
There are many ways and techniques that a firm can adopt to assess the external
environmental forces. The most common and popular techniques are the PEST analysis
and Industry Analysis, and these are illustrated below in figure 1.
Figure 1: External environment analysis
Pest Analysis
It is useful to consider as a starting point, what environmental influences have been
particularly important in the past, and the extent to which there are changes occurring,
which may make any of these more or less significant in the future, for the organization
and its competitors.
PEST analysis (a mnemonic for Political, Economic, Social and Technological factors) is
the most frequently used tool to consider the impact of the general environment. It
provides a broad framework for considering a wide range of potential factors in order to
summarise the most important influences of the general environment. Beside, it can
evaluate the potential impact of these influences, while the opportunities and threats to be
faced. Is positive or negative.
Each of the four headings can be broken down further to suggest more detailed
consideration of particular factors and changes that might influence the organisation both
currently and in the future. Whilst varying dependent upon the particular context, the list
of factors and changes may include:
1.) Political Legal Environment:
Political environment include factors that affect the confidence and sentiment of foreign
investment and trade relation. Political and legal developments can expand a companys
freedom of action; it will make the environment to be more supportive of its activities.
Political factors can have a direct impact on the way business operates. Decisions made by
government affect our every day lives and can come in the form of policy or legislation
such as competition policy, trading standards, financial regulation, planning policies. The
governments Organization today among will more consider to this factors such as greater
deregulation, more lenient interpretation of antitrust laws, greater environmental protection
legislation, growing power etc.
An example: Nikes international operations are subject to the usual risks of doing business
abroad, such as possible revaluation of currencies, export duties, quotas, restrictions on the
transfer of funds and, in certain parts of the world, political instability. Nikes products
manufactured overseas and imported into the United States and other countries are subject
to customs duties collected by customs authorities. Customs information submitted by
Nike is routinely subject to review by customs authorities. Nike is unable to predict
whether additional customs duties, quotas or other restrictions may be imposed on the
importation of our products in the future. The enactment of any such duties, quotas or
restrictions could result in increases in the cost of our products generally and might
adversely affect the sales or profitability of NIKE and the imported footwear and apparel
industry as a whole.
2.) Economic Environment :
Economic environment has its patterns and trends in overall economic activity and world
trade; movements in exchange rates, interest rates and taxation both within particular
countries and internationally; fluctuations in capital markets; broad changes in market
demand; industrial trends like increasing industry concentration and increased mergers and
acquisitions activity. All businesses are affected by economical factors nationally and
globally. Whether an economy is in a boom, recession or recovery will also affect
consumer confidence and behavior. A truly global player has to be aware of economic
conditions across all borders and ensure they employ strategies and tactics that their
protects their business
An example: In the early 1990s when the UK economy was in a slump, and businesses
were folding repeatedly, a security company called ‘Dreadlocks security?to combat falling
