The External EnvironmentEnterprise Strategy/AW/01c

Arj Wignaraja

CIMA Official Terminology: ENVIRONMENTAL IMPACT ASSESSMENT

A study which considers potential environmental effects during the planning phase before an investment is made or an operation started.

Why Care About the Environment?

all the factors outside of management control outside the organisation which can affect the performance of the business and the success of its strategies.

ENVIRONMENT:

is concerned with the ability of the organisation to fit with, or cope with, its environment.

STRATEGY:

When entering a new market

• Is this a sensible market for us to enter?

• Is this market a source of superior profits?

Competing in an existing market

• How can we make sure that we perform better than our competitors?

Divesting/Exiting a market

• How are the future prospects of the industry likely to be affected and how does that affect my decision to sell?

Environmental Analysis/Impact Assessment Helps Determine a Firm’s Course of Action…

…by helping to answer critical questions

3 Key Models Help Managers Make Sense of the External Environment

2. Porter’s Five Forces: Micro

3. Porter’s Diamond:National

1. PEST/PESTEL Analysis: Macro

These models separate the mass of factors that have an impact on the firm into groups, or segments, to aid closer analysis.

PEST

• Political/Legal• Economic• Social• Technological

PESTEL

• Political• Economic• Social• Technological• Ecological/

Ethical• Legal

DEEPLIST

• Demographic• Economic• Environment• Political• Legal• Informational• Social• Technological

PEST/PESTEL ANALYSISUseful way of summarizing the external influences on the environment in which a business operates.

Must be followed up by consideration of how a business should respond to these influences.

Porter’s Five [Competitive] Forces

Competitors

The firm

Substitutes

BuyersSellers

Potential Entrants

Threat of New Entrants

Threat of Substitute Product or Service

Bargaining

Power of Buyers

Bargaining

Power of Sellers

Rivalry amongExisting firms

The collective strength of these forces determines the profit potential (long run return on invested capital) of the industry.

Downes’ Three New Forces to Consider

1. Digitalization

2. Globalization

3. Deregulation

Today’s markets are highly influenced by technological progress, especially in information technology. Therefore, it is not advisable – if not to say impossible – to develop a strategy solely on the basis of Porter’s models.

Source: Larry Downes: Beyond Porter, 1997

Define the industry

Linkages

Government

Environmental Assessment Models Must be Handled with Care!

Source: Financial Management, Feb 2005

Ambiguity

Complexity

Lifecycle

Don’t Apply Models Mechanically without Understanding the Context

Source: Financial Management, Feb 2005

Strategy in Practice: New Volkswagen Plant in The U.S.