Environmental analysis

Worlds largest solar plant operational in Spain but worried ET January 3, 2012
Andasol, the worlds largest solar power station became operational in Spain in December 2011 at a cost of Euro 350 Bn. This power station contain 600,000 parabolic mirrors which gyrate simultaneously to follow path of sun through sky. All Europeon Governments encourage renewable energy generation and provide liberal subsidies for prolonged periods based on power produced. In December, 2011 UK slashed subsidy on renewable power to half due to gloomy economic conditions. Andasol is worried after action by British Govt. Why?

Concept of environment- everything

and anyone outside organisation
Environment literally means the surroundings, external objects, influences or circumstances under which someone or something exists. Micro- customers, competitors, suppliers & Macro- government, social institutions, financial institutions etc

Concept of environment- why to study

Environment keep changing. Environment affect strategy by Providing opportunities and threats Shaping the rules of competition in given industry Influencing availability of resources- work force, RM Affecting likely returns from alternate investments

To understand essence of successful business one must consider related environment of firm and alignment of firms strategy to that environment Firm need to adjust on continuous basis

Environment is not controllable

Firm need to adjust on continuous basis Some changes are predictable and some not Sunami forced Japanese car makers to slow down production globally

Global changes impact every country specially bigger ones and having international involvements Euro area banks are withdrawing affecting rupee exchange, Indian stocks, exports.

Domestic changes impact more.

Happenings out side too affect

2008 melt down Present euro crisis Tunisia started the change
Egypt is still unstable Syria is burning

Conflict monitor- ET dated 29/12/2011

Ongoing- Syria, Pakistan, Sudan, Afghanistan Potential large scale conflicts- Pakistan, Iran, Syria, Sudan, Somalia Not now but possible- Saudi Arabia, Jordan, Algeria, Sudan, Israel-Palestine

All events do not affect all, same way

So analysis of company specific events is must.

Identifying External Environmental Variables

Natural environmentVery long term

Physical resources Wildlife Climate

Task environment- directly affect a corporation and are affected by the corporation
Government Local communities Suppliers Competitors Customers Creditors Unions, Special interest groups / trade bodies

Societal environmentinfluence long-term decisions

Economic forces Technological forces Political-legal forces Sociocultural forces

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Basic stages in environmental analysis

Socio natural- analysis of general environmentPESTEL or STEEP Political Economic Social Technological Environmental Legal

Important- develop a shortlist of more important factors- not a long list under every heading

Pestel- economic
Trends in Economic Forces GDP rates PCI Interest rates Inflation FDI long term/short term Oil prices Import bills Disposable income, Consumption index Unemployment Power- availability, cost Emerging markets BRICS countries Eastern Europe South east Asia

PESTEL
Trends in Technological Forces: New products, adoption of new technologies, R&D- spending by Govt, industry and academia Patent protection Communication and internet Portable information devices and electronic networking Alternative energy sources Precision farming Virtual personal assistants Genetically altered organisms Smart, mobile robots

PESTEL
legal Forces: New regulators and
laws Taxation labor laws laws of Employment, health, safety, competition, etc.

Political
Government, bureaucracy Philosophy of ruling and main opposition parties World Trade Organization

PESTEL-Trends in Socio-cultural Forces

Demographics Growing health consciousness Expanding seniors market Changing pace and location of life Changing household composition Increasing diversity of workforce and markets changes in attitudes or fashions values, tastes, etc. environmental awareness Impact of Gen Y Declining mass market

pestel
Environmental
Green issues, types of energy consumption (renewable, solar) etc. Natural resources Natural raw material Pollution laws- thermal power

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Identifying External Strategic Factors: Issues priority matrix- used to identify and analyze
developments in the external environment

External strategic factors- key environmental trends

that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation

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Industry- a group of firms that produces a similar product or service Porters 5 forces:
Threat of new entrants Rivalry among existing firms Threat of substitute products Bargaining power of buyers Bargaining power of suppliers Relative power of other stakeholders (added)

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Threat of new entrants- new entrants to an

industry bring new capacity, a desire to gain market share and substantial resources

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Entry barrier- an obstruction that makes it difficult for

a company to enter an industry
Access to distribution Economies of scale Product differentiation channels Capital requirements Cost disadvantages due to size Switching costs Government policies

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Rivalry Among Existing Firms- new entrants to an

industry bring new capacity, a desire to gain market share and substantial resources
Number of competitors Rate of industry growth Product or service characteristics Amount of fixed costs Capacity Height of exit barriers Diversity of rivals
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Threat of Substitute Products or Services-

products that appear different but can satisfy the same need as another product- steel, aluminum, plastic

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Bargaining Power of Buyers

ability of buyers to bargain forlower price, higher quality, play competitors against each other

Large purchases Backward integration Alternative suppliers, Low cost to change suppliers Product represents a high percentage of buyers cost Buyer earns low profits Product is unimportant to buyer

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Bargaining Power of Suppliers- ability of suppliers

to raise prices or reduce quality Industry is dominated by a few companies Unique product or service Substitutes are not readily available Ability to forward integrate Importance of product or service to the industry

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Relative Power of Other Stakeholders

Government Local communities Creditors Trade associations Special interest groups Unions Shareholders Complementors- products that work well with a firms product

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Demerits of five forces model

Analytical framework is static while environment is constantly changing. Assumes all aspects of micro-environment have the same importance to the company. The model views the environment as a threat and could therefore, discourage cooperation Ignores Human Resource aspect

Key drivers of change

Pestel analysis lists the influencers All influencers or components do not have similar influence- some do not influence at all Some influencers act crucial Influencers do not act alone. Many act in combination- Globalisation

Industry analysis
Industry evolution and life cycle. like product. Declining industry should be avoided- bulb industry. Mature is very competitive. This familiar concept explores the strategic decisions that arise from the stage that an industry has reached in its evolutionary development.

Environmental scanning give hard data on present position and trends No data for future. Need forecasting

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forecasting
Forecasting is based on a set of assumptions Faulty underlying assumptions are the most frequent cause of forecasting errors Forecasting techniques Extrapolation Delphi technique Statistical modeling Prediction markets Cross impact analysis Brainstorming

Expert opinion Focus groups Industry Scenario

demographic environment- higher population and their locations important

worlds population- 6.1 billion in 2000 and will exceed 7.9 billion by 2025. explosion has been a major concern. Strategists need to watch places- regions and patterns of growth

Dynamics of Population Trends

Most important deterrent to population control is cultural attitudes to large families Most growth is in poor areas. Less developed countries account for 76% of world population and grow @2%. 58% of worlds population is in Asia developed countries house 24% and grow @ 0.6% Areas which could afford population growth have negative growth- Career in woman big reason

Dynamics of Population TrendsPopulation decline and aging

Population growth in developed countries is below the rate needed to maintain present levels fertility rate of about 2.1 children per household.

No developed country has sufficient internal population growth to maintain itself

Birth rate per 1000 women

World Population and Life Expectancy at Birth by Region, (millions)

Insert Exhibit 3.4

Dynamics of Population Trends

Rural/urban/suburban shifts- cities in spite of dense populations attracting migrations desire for greater access to education, health care, and improved job opportunities Affordable living- sub-urban

South Asia is 3.8% of world by area but house about 25% of world population India is 2.4% of world by area but house about 16.7% of world population US is about 3.5 times to India in area but house about 28% of Indian population

Rural and Urban Population, 20052030 (millions)

Insert Exhibit 3.5

Dynamics of Population Trends (continued)

Worker Shortage and Immigration
The free flow of immigration will help to ameliorate the dual problems of explosive population expansion in less-developed countries and worker shortage in industrialized regions. Europe will need 1.4 billion immigrants over the next 50 years. Japan and the U.S. will need 600 million immigrants between now and 2050.

Migrations and population shifts

Expansion of Europe in 2004- caused huge immigrations from eastern Europe to UK On August 27th Eurostat, the European Unions statistical service, predicted that by 2060 Britain would be the EUs largest country, with a population of 77m compared with around 61m today Germany, the current top dog, will see its 82m citizens dwindle to 71m over the same period. Britains boom will be fuelled by a mix of
immigration and a comparatively high birth rate mainly a consequence of the higher birth rates in immigrants

Demographics- hard to predictChange in British demography

Average overall population densitypeople per kilometer square is 251 in western Europe 392 in UK secondhighest density in Europe 395 in tiny Netherlands

Renewed immigrant pressure may persuade Britishers to consider demography in their planning, In 1940s projections showed just 35m people living in Britain by 2000. no one could assume baby boompost war.

Demographics- hard to predictChange in British demography

In 2001 British women were having an average of 1.6 children each, a record low. Rose to 1.9 in 2008, all time high in 25 years. reasons not known- may be high birth rate in immigrants

immigration flows depend heavily on economic circumstances, political conditions and migration law. could change any time. So demography is hard to predict. 2008 meltdown have caused change in immigrations

Asia will become most populous and potent market by 2050

Population estimates by UN for India By 2025 in M By 2050 in M

1395

1593

china

1441

1392

Shift in US Demographic structure(Economist 08/2008)

Shift in US Demographic structure(Economist 08/2008)

US Census Bureau have revised its estimates AMERICA'S minorities will be the new majority in 2042, Earlier it was projected to happen in 2050

Non-Hispanic whites now represent nearly two-thirds of America's population of 305m. By 2042- Non-Hispanic whites will represent less than half of the 440m total. The Asian and Hispanic populations will rise to 9% and 30%, America will look like present-day Texas, Hawaii, New Mexico and California

Most of developed countries are facing negative population growth

After 2015, deaths are expected to out number births in Europe- EU report released on 27th August 2008. So population growth shall depend upon immigrants Singapore is fighting with negative growth have schemes to stimulate population growth specially for working women Population growth is dependent on immigrants

China is the main source of immigrants to rich countries- AP

AROUND 4m people moved to OECD countries in 2006, 5% more than 2005- (OECD's annual migration report.) Reasons for immigrations 44% - Joining family members and 14%- seeking employment

America is most popular destination, taking 1.3m migrants out of total 4m China provides the biggest share of legal immigrants to OECD countries (Britain and Ireland do not monitor nationalities of immigrants). Chinese migrants made up the biggest group in South Korea, Japan and Canada, and the second largest in America after Mexicans.

Source of immigration to OECD

.

Organisation for Economic Cooperation and Development

Twenty countries originally signed the Convention on 14 December 1960. Ten countries joined latter: NETHERLANDS: 13 November 1961 AUSTRIA: 29 September 1961 BELGIUM: 13 September 1961 CANADA: 10 April 1961 SPAIN: 3 August 1961 SWEDEN: 28 September 1961 SWITZERLAND: 28 September 1961 TURKEY: 2 August 1961 UNITED KINGDOM: 2 May 1961 UNITED STATES: 12 April 1961 PORTUGAL: 4 August 1961 DENMARK: 30 May 1961 NORWAY: 4 July 1961 FRANCE: 7 August 1961 LUXEMBOURG: 7 December 1961 GERMANY: 27 September 1961 GREECE: 27 September 1961 ICELAND: 5 June 1961 IRELAND: 17 August 1961 ITALY: 29 March 1962 JAPAN: 28 April 1964 FINLAND: 28 January 1969 AUSTRALIA: 7 June 1971 NEW ZEALAND: 29 May 1973 MEXICO: 18 May 1994 CZECH REPUBLIC: 21 Dec. 1995 POLAND: 22 November 1996 HUNGARY: 7 May 1996 KOREA: 12 December 1996 SLOVAK REPUBLIC: 14 Dec. 2000