CRIC Business Strategy – Lecture 2 – The Business Environment

A business does not function in a vacuum. It has to act and react to what happens outside the factory and office walls. These factors that happen outside the business are known as external factors or influences. These will affect the main internal functions of the business and possibly the objectives of the business and its strategies.

The broader environment

Hard for the firm to influence

Changes can be far-reaching

The media: rich source of both information and speculation

PESTLE analysis: a classic strategy tool

The Deep List

Demographic

Economic

Environmental (Ecological)

Political

Legal

Informational (Knowledge-based)

Social

Technological

FINLAY, P. (2000) Strategic management: an introduction to business and corporate strategy. Harlow: Pearson Education/Prentice Hall, pp. 204-217.

A brief look at Competitive Analysis – more later

Porter (1996, 1998) the leading theorist

Know your industry, know your competitors, know yourself

Then find a way of competing that will make the most of your strengths and exploit your rivals’ weaknesses

Deliver distinctive value to your customers

Achieve competitive advantage

Translate this into profits by keeping a good balance between costs and prices

Other ways of analysing the environment within which your business will operate

Industry Analysis

Porter’s Five Forces Model

Life-cycle analysis

Can help identify whether an industry is attractive

Stay or go? Decisions

Can help identify key success factors for competitors

Cannot provide a mission in life

Let’s return to the external environment within which business operates

Main Factors

The main factor that affects most business is the degree of competition – how fiercely other businesses compete with the products that another business makes.

The other factors that can affect the business are:

  • Social – how consumers, households and communities behave and their beliefs. For instance, changes in attitude towards health, or a greater number of pensioners in a population.
  • Legal – the way in which legislation in society affects the business. E.g. changes in employment laws on working hours.
  • Economic – how the economy affects a business in terms of taxation, government spending, general demand, interest rates, exchange rates and European and global economic factors.
  • Political – how changes in government policy might affect the business e.g. a decision to subsidise building new houses in an area could be good for a local brick works.
  • Technological – how the rapid pace of change in production processes and product innovation affect a business.
  • Ethical – what is regarded as morally right or wrong for a business to do For instance should it trade with countries which have a poor record on human rights

The legal and political environment - introduction

Governments want to encourage business activity, but they also need to pass laws and put in place rules and regulations to control business activity and avoid undesirable outcomes. These may be regulations concerning employment of people, environmental impact or perhaps constraints to ensure that all advertising is legal, decent and truthful. The legal environment is therefore an important one for businesses to consider and can usually be split into a number of different areas:

  • Employment legislation - rules, regulations and laws concerning the employment or people.
  • Environmental legislation - laws, rules and regulations concerning the environmental impact that firms have.
  • Consumer law - businesses sell to consumers and it is important that consumers have protection to ensure they are not misled or treated unfairly by firms.
  • Competition law - competition is a healthy way to ensure that prices are kept down and that businesses innovate. Without competition firms may be in a position to exploit consumers and so governments often legislate to try to ensure competition or control the activities of firms where there may not be much competition.
  • Information /reporting law - governments often legislate to ensure that the information that firms provide is accurate and reflects the true state ('a true and fair view') of the business. These types of rules and regulations may include accounting regulations/standards to ensure firms represent their financial position accurately or perhaps legislation to protect consumers and ensure that the firms do not keep information on consumers that they are not entitled to retain.

The legal environment

All business is subject to laws as we have seen above. In Europe firms have to be aware of both national legislation and also that of the EU.

When looking at this area of the external environment you should be aware of:

(a) The reasons why certain laws have been passed and

(b) What business has to do to comply with certain laws and what impact the laws are likely to have on its operations.

Let's start off by looking at some areas where governments tend to legislate. This is not an exhaustive list and you should be prepared to research the legal environment for the country you are in as countries differ significantly in their regulation of business activity.

Health and Safety legislation

Let's look first at Health and Safety. Health and Safety legislation is usually an important part of government regulation. Business is generally responsible for providing a safe working environment, a written safety policy and a recognised training programme for health and safety. Ultimate responsibility for personal health and safety rests with the individual, but the company must provide the environment where both are legally met.

The European Union (EU), for instance, now issues 'directives' (all EU countries must accept these) on working hours (minimum), the lifting of heavy weights, the use of computer screens and the rights of pregnant women.

Like all laws imposed by any government they involve costs for those applying them. These can be quite straightforward in that it costs money to apply safety requirements, but it is also important to be seen as safety conscious, else one's reputation can suffer. Likewise, employees respond to better and safer working conditions and this might improve efficiency and productivity.

Employment law

This is another important area of law and business. The law relating to employment can be either applicable to the individual or collectively to the company. Laws relating to individual rights may cover areas like:

  • Equal pay - the right to equal pay for equal work.
  • Sex discrimination - the right to a working environment free from sex discrimination. Despite this pay rates still differ significantly between the sexes in most developed countries.
  • Race discrimination - the right to a working environment free from race discrimination.
  • Disability discrimination - the right to a working environment free from discrimination on the grounds of disability.

So how successful have countries been at reducing sex discrimination? In 2005 there was an attempt by the World Economic Forum to assess the current size of the gender gap by measuring the extent to which women in 58 countries have achieved equality with men in five critical areas: economic participation, economic opportunity, political empowerment, educational attainment, and health and well-being. Countries that do not capitalize on the full potential of one half of their societies are misallocating their human resources and undermining their competitive potential. So how did the various countries fare? Follow the link below to see the rankings of the various countries.

When revising collective laws remember to cover:

  • Dismissal procedure - and the formality of written and oral warnings prior to dismissal which staff are generally entitled to.
  • Notice of dismissal - this refers to the length of notice an individual has to be given. After 4 weeks continual employment an employee is often entitled to 1 week's notice and this will increase by perhaps 1 week for every year employed to a maximum of 12 weeks.
  • Contracts of employment - all employees are entitled to receive, within a certain time of commencing employment, an official contract of employment.
  • Trade union recognition and involvement. It is a right in most countries of any employee to seek membership of a trades union but they do not have to belong if they do not wish to.

Consumer protection

This area of the law aims to protect consumers from unfair practices relating to product quality and especially financial terms. This are of legislation will differ significantly between countries but may include:

  • Laws dictating how goods should perform in relation to the quality and functions described by the producer.
  • Laws, which prescribe how quantities should be accurate (weights and measures etc.).
  • Laws, which cover accurate and truthful description of goods and services offered for sale.
  • Laws relating to the amount of credit that can be given by recognised credit agents.
  • Consumer protection laws, which make companies responsible for reasonable damage caused by one of their products.
  • Food safety laws which control food display and safety. This is an area of law that is fast changing and you are advised to research changes that have taken place in your area recently.

Competition policy

This area of policy is where government keeps a watchful eye on corporate behaviour. It is basically looking for abuses of power by firms. These are normally: monopoly behaviour, control of markets via mergers and takeovers and restrictive practices. Most now agree that competition leads to greater choice, quality and lower prices and so government is charged with monitoring business to make certain it lives up to these expectations.

It is also argued that modern, global capitalism helps control business and makes them act in the interest of consumers. They are open to greater competition and so must be able to attract custom by offering quality at affordable prices.

As mentioned earlier ALL legal obligations have to be viewed against their cost-effectiveness. Obviously, no one is saying don't keep to the law, However, it is important to remember that, say competition law, needs to result in lower prices, but with a consistency of quality. Likewise, if it forces companies to look for competitive advantage, then that should benefit consumers.

Political stability and instability

Political change can have a significant impact on business. This may simply be because government changes the legal framework, which as we have seen in the previous section is wide-ranging, but it could also be that a change of government changes the political attitudes towards business. This may result in less 'business-friendly' policies, changes in business taxation and regulations or, perhaps, political changes that affect the firm's marketing.

Governments can also change the social agenda and this may impact on firms. For example, a government may introduce a minimum wage. Many businesses may be opposed to this as they feel it will increase their costs and damage flexibility. This would affect their international competitiveness. Governments may also sign up to additional agreements. For example, in the late 1990s the UK government agreed (where the previous government had refused) to be a signatory to the EU Social Chapter, which gave workers many additional rights including:

  • Paternity rights - father are entitled to paid paternity leave on the birth of a child
  • Additional employment protection
  • Equal employment status for part-time workers
  • Maximum working hours - under the EU working time directive there are maximum levels of working hours during the working week

Changes of this nature will affect firms significantly and may raise their costs. However, additional rights could also result in improved motivation and this may help compensate for higher costs. Businesses will look carefully at all political changes to assess the impact that they will have on them and their competitors.

Political instability

Political instability can have an even greater impact on business and it may even make them reluctant to enter a particular market or relocate their activity to a more stable and predictable area. Business owners hate risk! Political instability in an area where a firm operates will mean that the firm has to be very flexible and adaptable - ready to change their operations at very short notice to reflect changes in the political environment.

The social and cultural environment - introduction

Businesses affect the societies in which they operate and are in turn affected by social and cultural change in those societies. In this section we look at both these areas. Social change may affect businesses through many aspects of their activity. These may include:

  • Human resources - expectations within society about patterns of employment and working conditions will affect the way the firm operates. Increasingly, trends towards teleworking, more flexible employment patterns and a portfolio approach to a career are affecting firms and the way they operate. These types of social changes will continue to impact on firms and they need to plan to account for it.
  • Marketing - firms need to ensure that their product portfolios reflect the pattern of demand in society. Changes in society lead to changes in the pattern of demand and firms need to be aware of changes taking place in their market. Market research will be an important element of this.
  • Production - with the growth in multinational enterprises, production has become increasingly globalised and ready to shift anywhere. However, firms are also under increasing pressure to ensure that their production does not impact negatively on the countries and societies where they operate.

Social responsibility

As well as being affected by society, business also has a responsibility to the society in which it operates. Members of society are stakeholders (have an interest in how the business operates) and need to be treated accordingly. Let's look at the range of major stakeholders and think of how a business has a social responsibility towards them.

  • Employees - well they look for job security and adequate rates of pay.
  • Customers - want to buy with trust and a belief that adequate quality will be a norm. They also assume safety has been a primary objective of the business and that the price they pay is a fair reflection of costs + a reasonable amount of profit.
  • Suppliers - expect some security of orders at a fair price and regular payment of bills.
  • Owners - look for dividends, increasing profits and they are beginning to look at how the image of the business is viewed by the wider public e.g. environmental responsibility.
  • Government - hope that business uses resources efficiently and effectively and makes decisions with the best and widest interests of society in mind.
  • Local community - again look for jobs within a secure environment and a lack of social costs.

By being socially responsible firms hope to be seen as:

  • Good employers
  • Responsible capitalists
  • Having a good image, which should allow them to build sales
  • Being capable of being trusted and therefore have a brand that people can show loyalty towards

However, like so much of what we have been covering this may cost money. It may also take time for employees to adjust to what for some will be radical changes. Returning to costs, it may be that what seems to be a good idea to one set of stakeholders is not fully appreciated by another. The cutting of dividends to restore confidence in the business may not be popular with shareholders.

So, when looking at this growing area of importance we are really into an 'it all depends' section of business. Think carefully about the following:

  1. Employment - maintaining this will help build good connections with the local community and reduce national economic problems, but will the individual cost to the business be too great and cause profits to fall? It's a case of balancing the costs and benefits and deciding on a compromise.
  2. Society - they could gain from socially responsible decisions by management but again this could be at the cost of higher costs and these may lead to higher prices. Also, in an internationally competitive world the standards and costs agreed by one country may be significantly different from those of another. This may give the latter a distinct cost advantage over the former.
  3. Morality - yes, we would all like this to be top of the list of corporate objectives but again does every nation have the same set of values? If they do not, can you afford to be less cost competitive?
  4. Targets/goals - business is often more concerned with the immediate future, whilst society looks to decision-makers to look further into the future. Just look at the environmental lobby, or global warming, or transport congestion. We all want something done about them but firms are concerned that we won't pay for the extra cost of resolving these problems.

Demographic trends

Population

A key stakeholder that we have identified above is the local population, but increasingly businesses need to think on a larger, even global scale. They need to look carefully at population changes in the various countries they operate in as the number of people in the UK, Europe and increasingly the whole world will affect your:

  • Market as your customer base continues to widen
  • The workforce available to you
  • The availability of the resources needed for production

Pressure groups

Pressure groups are groups without political power, but who aim to influence the political, or decision-making, process. They have specific interests and attempt to influence businesses, people and government to help achieve their objectives. They may a very specific narrow focus (e.g. a local group trying to prevent the building of a road), or they may have broader focus (e.g. environmental groups like Greenpeace). These groups are often referred to as single-cause or multi-cause groups.

Pressure groups can be split in all sorts of ways. These could include: