The business environment

Syllabus Guide Detailed Outcomes

Having studied this chapter you will be able to: Appreciate factors outside the organisation, but which impact on it, using PEST analysis. Understand the necessity for legislation around areas such as data protection and health and safety procedures. Understand what the Value Chain is and appreciate how it enhances competitive advantage. Think through the impact of technology on organisations.

Exam Context
The topics covered in this chapter are heavily tested in the pilot paper- there are 5 questions. They cover population trends, environmental factors and scanning, data protection regulation and employment legislation.

Business Context
Organisations need to understand and appreciate the environment in which they operate in order to maximise their potential competitive advantage.

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Overview

The business environment

PESTEL

Political

Social

Environmental

Economic

Technology

Legal

Porter's 5 forces

Value chain

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1
1.1 1.2 1.3

Analysing the environment

The environment can be described as everything which is beyond the organisational boundary. Management cannot control the environment, however it influences all aspects of organisational activity and so must be viewed strategically. The environment comprises a number of different elements, illustrated by the rings in the diagram below:

P O L IT IC S C O M P E T IT IV E E N V IR O N M E N T M A T E R IA L S S U P P L IE R S LABO U R C A P IT A L

TEC H N O LO G Y

G OODS TO CUSTOM ERS O R G A N IS A T IO N W AGE TO LABO U R P R O F IT T O IN V E S T O R S P O L L U T IO N

ECONOMY

S O C IE T Y (& C U L T U R E )

M A C R O E N V IR O N M E N T GENERAL E N V IR O N M E N T P H Y S IC A L E N V IR O N M E N T

1.4

The general environment covers all the political/legal, economic, social/cultural and technological influences in the countries in which an organisation operates.

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Lecture example 1
Required

Class discussion

Consider a company specialising in building houses in the UK, generate as many ideas as you can as to why they should analyse their environment?

Solution

Models to asses the environment

1.6 It would be a good idea, from the above example, if we had a structure or framework within which to analyse a businesses environment, In this chapter we look at 3 models which can we used to assess a companies environment: (1) PESTEL analysis is used as a framework for generating ideas for the factors that are influencing the environment: P E S T E L (2) (3) Political/Legal/Regulation (sections 2, 3,4 and 5 below) Economic (chapter 3&4) Social/Cultural/Fashion (6 below) Technology (section 7 below) Environmental Legal

Competitive Forces and The Value Chain

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2
2.1

Political and legal environment (P and L in PESTEL)

The political factors impacting on the environment include: (a) Degree of government intervention (b) Policy direction (c) Political risk / stability The legal framework in which organisations operate derives from: (a) Parliamentary legislation (b) Government regulations (c) Treaty obligations (d) Official regulations (e) International bodies Lobby groups put forward their case to influence ministers and civil servants in government. Key legislation for organisations may include:

2.2

2.3 2.4

Employment law (see 3 below) Health and Safety (see 3 below)

Data Protection (see 4 below) Sale of Goods Act (see 5 below)

3
3.1

Legal framework for employees

Employees in many countries are protected by a range of laws including the following areas:

Termination of employment (see below) Health and safety in the workplace. (see below) Plus be aware there a laws around other areas eg recruitment, equal opportunities

3.2 3.3

Termination of employment There are two types of dismissal which you should be aware of for this syllabus, these are

Wrongful dismissal Unfair dismissal

3.4

Wrongful dismissal Where the employer has dismissed an employee however they have breached the terms of the contract.

3.5

Unfair dismissal Where the employee has been dismissed for an arbitrary reason the onus is on the employer to prove that it was a fair dismissal

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Health and safety

3.6 Both employers and employees have a duty to maintain health and safety standards at work for the following reasons:

To meet legal obligations To minimise the risk of accidents To minimise the risk of litigation
Class discussion

Lecture example 2
Required (i) (ii)

What are costs of accidents to an organisation? Which areas of Health and Safety would fall under the responsibility of the employer?

Solution

3.7

Employees' duties over health and safety include: (a) (b) (c) (d) Take care of themselves and others Do not interfere with machinery Use all equipment properly Inform employer of any potentially dangerous situation Statement of principles Detail of safety procedures Compliance with the law Instruction on equipment use Training requirements
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3.8

Many employers have a health and safety policy which details: (a) (b) (c) (d) (e)

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Lecture example 3
A scene from everyday office life is shown below Required

Class discussion

Note down anything that strikes you as being dangerous and allocate responsibilities between employer and employee.

Solution

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Stress
3.9 Stress in employees can arise for a variety of reasons, connected with the job or the employee's private life. Symptoms of stress in the work environment include: (a) (b) (c) (d) Nervous tension Withdrawal Low morale Denial of the problem

3.10 Causes or aggravators of stress in the work place: (a) (b) (c) (d) (e) Clash of personality of employee Ambiguity/conflict in employee's roles Change, insecurity, risk Management style Job related factors (eg environment, work load)

4
4.1 4.2

Data protection and security

In recent years, there has been a growing popular fear that information about individuals which was stored on computer files and processed by computer could be misused. In particular, it was felt that an individual could easily be harmed by the existence of computerised data about him or her which was inaccurate or misleading and which could be transferred to unauthorised third parties at high speed and little cost. In the UK legislation is included in various Data Protection Acts. The key risks affecting data are: (a) (b) (c) (d) Human error Technical malfunction Deliberate/malicious action Hacking

4.3 4.4

4.5

Using the Internet brings numerous security dangers: (a) (b) (c) (d) (e) (f) (a) (b) (c) (d) Viruses Deliberate damage caused by disaffected employees Damage caused by outside people (hackers) Downloading of inaccurate information and/or virus ridden software Internal information may be intercepted, but this can be avoided by encryption Communications link could break down Information regarding the business's standing and competitive advantage Personal and private information Information regarding the business's security Information integral to the outcome of deadlines (eg tenders)

4.6 Data stored electronically is at risk of a security breach. At particular risk is:

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2: THE BUSINESS ENVIRONMENT 4.7 When data is transmitted over a network or telecommunications link (especially the Internet) there are numerous security dangers: (a) (b) Corruptions such as viruses on a single computer can spread through the network to all of the organisation's computers. Disaffected employees have much greater potential to do deliberate damage to valuable corporate data or systems because the network could give them access to parts of the system that they are not really authorised to use.

Data protection principles

4.8 To illustrate some of the issues in data protection we can consider some of the details relating to UK legislation. Note that you will not be tested on specific UK legislation or requirements. However, some useful definitions to be happy with include: (a) Personal data is information about a living individual, including expressions of opinion about him or her. Data about other organisations (eg supplier or customer companies) is not personal data, unless it contains data about individuals who belong to those other organisations. Data users are organisations or individuals who control the contents of files of personal data and the use of personal data which is processed (or intended to be processed) automatically ie who use personal data which is covered by the terms of the Act. A data subject is an individual who is the subject of personal data.

(b)

(c) 4.9

The principles of data protection include that personal data should be: (a) (b) (c) (d) (e) (f) processed fairly and lawfully. obtained only for one or more specified and lawful purposes. adequate, relevant and not excessive. accurate and, where necessary, kept up to date. not be kept for longer than is necessary for that purpose or those purposes. not be transferred to a countries where data protection is less strictly applied or protected

4.10 Therefore the key points of the Act in the UK can be summarised as follows: (a) (b) (c) With certain exceptions, all data users and all computer bureaux have had to register under the Act with the Data Protection Registrar. Individuals (data subjects) are awarded certain legal rights. Data holders must adhere to the data protection principles.

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5
5.1

Contract law and the Sale of Goods Act

A contract must have three elements for it to be legally enforceable: a) Consideration normally money offered, as in a contract of employment but equally as in the c ase of bartering, it could a cow, a bag of rice or even the promise of a service. Offer & Acceptance There must be an offer and an acceptance by the two parties. Intention to enter into a legally binding contract this could be written or verbal.

b) c) 5.2

The most common contract which we all enter into would be a simple transaction in a high street store.
Gro up exercise

Lecture example 4

Consider walking down the high street and coming across a bed side table in the window of a furniture store, costing 30. What are the three elements of forming a contract which take place during the transaction

Solution
Consideration Offer Acceptance Intention -

5.3

So the Sale of Goods Act 1979 is concerned very much with the forming of a contract between the buyer and the seller and some of the key principles of this law are set out below: Sellers right to sell the goods must have legal title to sell goods Description of the goods goods correspond to description Satisfactory quality for the purpose intended of such a good, free from minor defects and safe

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6
6.1

Social and demographic trends (S of PESTEL)

Organisations are impacted by social and demographic factors in two ways: (a) (b) Managing HR Successfully marketing products

6.2

Managing HR Organisations must take account of a range of factors when managing its labour force: (a) (b) What skills do we need? recruitment, retention, motivation What skills are available (c) internally? externally?

How does the education system contribute to our labour supply?

6.3 6.4

Cultural trends As cultural trends develop they change the demand for goods and services, and so opportunities open up or close down. For example, there have been significant changes in attitudes to diet and health in some countries in areas such as: (a) (b) (c) Smoking Diet (eg organic food) Obesity

6.5

The impact on business of these trends in health and diet include: (a) (b) (c) (d) (e) (f) Growing market (for sports-related goods) Employee health (and its impact on employers' productivity) New foods (with added vitamins) New convenience foods (time poor culture) Organic foods Smokers demand for outdoor heating equipment

7
7.1

Impact of technology on organisations (T of PESTEL)

Information technology has played a significant role in the development of the modern business environment.

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Lecture example 5
Required

Class discussion

Suggests ways in which IT has improved the working environment since 1990 also consider how you have benefited from IT.

Solution

7.2

Structure and IT New structures through

Downsizing

Delayering

Outsourcing

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Lecture example 6
Required (i) (ii)

Class discussion

State what outsourcing is Identify the benefits and risks of outsourcing an organisations IT department.

Solution

7.3

When finalising arrangements for outsourcing IT the following factors need to be considered: (a) (b) (c) Is the system of strategic importance? Yes, tend towards keeping it in house Can the system be relatively isolated? Yes, tend towards outsourcing Do we understand the systems enough to manage the service agreement?

8
8.1 8.2

Converting resources: the value chain

Michael Porter says that competitive advantage is achieved by the way a firm organises and performs activities. Example A restaurant BUYING COOKING SERVING

A restaurant's activities can be divided into buying food, cooking it, and serving it. The ultimate value a firm creates is measured by the amount customers are willing to pay for its products or services above the cost of carrying out value activities. A firm is profitable if the realised value to customers exceeds the collective cost of performing the activities.
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Growing Packing Distribution Buying Cooking Serving

8.4

Activities that add value do not stop at the organisation's boundaries. For example in 9.3, when a restaurant serves a meal, the quality of the ingredients although they are chosen by the cook is determined by the grower. The Value Chain: Porter analysed the various activities of an organisation into this model. The Value Chain can be used to focus on how the business processes inputs into outputs to meet customer needs. Activities in each area should always Add Value to the company and thus increase MARGIN. This is our third model for assessing a company Value Chain is used to identify the following: (a) (b) (b) (c) Internal strengths and weaknesses Benefits from internal linkages Benefits from external linkages How the value chain supports the generic strategy

8.5

8.6

FIRMINFRASTRUCTURE SUPPORT ACTIVITIES TECHNOLOGYDEVELOPM ENT HUM ANRESOURCEM ANAGEM ENT PROCUREM ENT
MA RG IN

INBOUND LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

M ARKETING &SALES

SERVICE

PRIM ARYACTIVITIES

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2: THE BUSINESS ENVIRONMENT 8.7 Primary activities are those directly related to production, sales, marketing, delivery and services: (a) (b) (c) (d) Inbound logistics eg raw material warehousing, transport, stock control. Operations are those activities that convert resource inputs into a final product. Outbound logistics are those activities relating to storing the product and its distribution to customers. Marketing and sales are those activities that relate to informing customers about the product, persuading them to buy it, and enabling them to do so. This includes advertising, promotion etc. After sales service. For many companies, there are activities such as installing products, repairing them, upgrading them, providing spare parts etc.

(e) 8.8

Support activities are those which provide purchased inputs to support the primary activities, eg human resources, technology and infrastructural functions: (a) (b) Procurement refers to those activities which buy the resource inputs for the primary activities (eg purchase of materials, subcomponents and equipment). Technology development (in the sense of apparatus, techniques and work organisation). These activities are related to both product design and to improving processes and/or resource utilisation. Human resource management is the activities of recruiting, training, developing and rewarding people. Firm infrastructure. The systems of planning, finance and quality control are activities which Porter believes are crucially important to an organisation's strategic capability in all primary activities.

(c) (d)

Lecture example 7
Required

Preparation question

Draw two Value Chain diagrams and in each section make notes on what you would expect to see within the value chain for a) McDonalds b) A Celebrity Chefs Restaurant

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Solution

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9
9.1

Competitive forces
Michael Porter argues that the pressures of five competitive forces, specific to the industry or organisation, will determine long-term shareholder returns (1980). This is our second model for analysing a business. This model may be used in two ways: (a) (b) To understand the inherent attractiveness of an industry. By understanding the impact of each individual force on an organisation, actions may be taken to mitigate that force.

9.2

9.3

Porter's 5 forces model

Potential Entrants

Threat of New Entrants

Bargaining Pow er of Su ppliers Sup pliers

Industry Co m petitors Rivalry Am ong Existing Firm s

Bargaining Power of Buyers Buyers

Threat of Substitute Products or Services

Substitute Industries

(a)

Substitutes. The threat that alternative products or services will equally satisfy customer needs, eg substitutes for travelling to France, ferry, plane, train or even swimming! Potential entrants. The threat posed by an outside organisation that may try to penetrate the market place. Examples of barriers include economies of scale, product differentiation, capital costs, distribution channels. Buyer power. The power customers have to reduce prices and increase quality or to simply shop around. This depends on switching costs to change provider, customers relative size, and number of buyers.

(b)

(c)

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2: THE BUSINESS ENVIRONMENT (d) Supplier power. The power suppliers have to increase prices and reduce quality. This depends on, for example, monopoly power and switching costs and relative size of supplier. Competition and rivalry. The inherent level of rivalry and competition in the industry between existing firms.

(e) 9.4

IT can be used to support an organisation's competitive strategy and can be used in a collaborative venture (eg linking systems with trading partners).

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10 Chapter summary
Section 1 Topic The general environment Summary The environment is anything outside of the organisations boundaries. It can be assessed for opportunities and threats by using the PESTEL framework. Organisations need to be aware of government stability and policy, both present and in the future, organisations can lobby governments to affect change in policy and legislation a range of areas of legislation including employment, health and safety, data protection and sale of goods. Failure to comply with legislation could lead to legal and reputational consequences. Basic knowledge of a contract is required, understanding that you need an offer and acceptance, consideration and intention by both parties to enter into a contract.

Political framework

Legal factors

Social and environmental

Social trends impact on employment and demand for our products. Technological change impacts on products and processes. Both may create opportunities and threats for an organisation. Michael Porter developed a range of models for assessing an organisations strategy. His five forces model shows the industrial forces that impact on particular businesses and determine their profitability and attractiveness. The value chain allows the business to consider internal and external linkages between activities to assess how best to get competitive advantage.

Porters models value chain and five forces

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Overview
The business environment

PESTEL

Political

Social

Environmental

Economic

Technology

Legal

Data Protection Act Health and Safety in the Workplace Act Employment Law Sales of Goods Act (Formation of a contract)

Value chain

FIRMINFRASTRUCTURE

Porter's 5 forces

SUPPORT ACTIVITIES

TECHNOLOGYDEVELOPM ENT HUM ANRESOURCEM ANAGEM ENT PROCUREM ENT

MA RG IN

INBOUND LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

M ARKETING &SALES

SERVICE

PRIM ARYACTIVITIES

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Substitutes Potential entrants Buyer power Supplier power Competition and rivalry