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BS Chapter 03 The Macro Environment PDF
BS Chapter 03 The Macro Environment PDF
Contents
Introduction
Examination context
Topic List
1 The business environment
2 Environmental dynamics
3 PESTEL analysis
4 The international business context
5 Limits to globalisation of business
Summary and Self-test
Answers to Self-test
Answers to Interactive questions
Introduction
Practical significance
The wealth of many European countries, and of the businesses within them, can be attributed to their early
industrialisation and imperialism commencing in the 17th century. The USA caught up and overtook Europe
during the early 20th century. From the mid 20th century those gains have been gradually superseded by the
development of emerging economies in Asia and Latin America. These have brought new markets and new
challenges which must be addressed by businesses from the developed economies if they are to survive.
Working context
Many of your clients will be global businesses, or at least have some form of buying and selling relationship
with overseas firms. Your firm may be required to:
Assist in transnational audits alongside professional colleagues from outside of your home country
Assess the extra risks the client runs as a consequence of operating internationally
Advise on taking-on international contracts
Syllabus links
Environmental analysis was covered in your Business and Finance paper under section 6 of the syllabus.
However its coverage was at the level of core knowledge. In the Business Strategy examination you will be
required to apply it.
Examination context
Exam requirements
The scenarios in the majority of exam questions will require you to absorb and understand information
about the external environment in which an organisation operates. You will also need to assess the
implications of the environment and changes in the environment for the strategic positioning and strategic
decisions of an organisation. To do this you will need to apply your knowledge of the tools and ideas
covered in this chapter.
Section overview
Strategy is concerned with matching the organisation to the threats and opportunities in its
environment.
The process of gathering and disseminating the necessary knowledge about a firm's external
environment is a specific example of knowledge management.
To be viable (e.g. able to sustain itself through time) the organisation must achieve an appropriate 'fit' with
this environment. This includes:
Results that meet the expectations of its owners (shareholders, government, members etc)
Products and services that meet its clients' expectations at least as well as rivals'
Ability to remain within the legal and ethical codes of the societies it works in
Attractive as a place to work for its staff
Satisfying the needs of other powerful or influential stakeholders
EXTERNAL INTERNAL
ANALYSIS ANALYSIS
CORPORATE
APPRAISAL
REVIEW AND
GAP
CONTROL
STRATEGIC STRATEGIC
CHOICE CHOICE
STRATEGY STRATEGY
IMPLEMENTATION IMPLEMENTATION
Rational planning approach: Environmental appraisal is a one-off assessment which establishes the
forces acting on the business at present and forecasts how these may develop during the years of the plan.
Strategic management approach: The need for environmental scanning. This is a continuous
awareness by management of environmental issues enabling them to be routinely considered in decision
making.
2 Environmental dynamics
Section overview
The ability of the business to plan, and its requirement for environmental information, will be
influenced by how predictable its environment is.
In Business Strategy the factors affecting this are given very precise meanings.
Definition
Turbulence: How changeable the environment is and how easy it is to predict.
Definition
Scenario planning: The development of pictures of potential futures for the purposes of managerial
learning and the development of strategic responses.
2.2.1 Introduction
Scenario planning is useful where a long-term view of strategy is needed and where there are a few key
factors influencing the success of the strategy, e.g. in the oil industry there may be a need to form a view of
the business environment up to 25 years ahead, and issues such as crude oil availability, price and economic
conditions are critical. For example, Shell was the only major oil company to have prepared its management
for dealing with the shock of the 1970s oil crisis through scenario planning and was able to respond faster
than its competitors. Precision is not possible, but it is important to develop a view of the future against
which to evaluate and evolve strategies.
Scenario building attempts to create possible future situations using the key factors. The aim is to produce a
limited number of scenarios so that strategies can be examined against them in terms of 'what if ...?' and
'what is the effect of ...?' (basically a form of sensitivity analysis).
A car manufacturer could assess the impact of a 'Green Scenario' or a 'High Value Sterling Scenario' on its
business. Financial models of the firm are often used in conjunction with this approach to assess impact on
profit. Although these provide a useful approach, it is important not to become too committed to one
scenario; after all, they are only forecasts which might not in the event be valid.
2.2.2 Steps
Identify key forces, using techniques such as PEST analysis (see later)
Understand the historic trend in respect of the key forces
Build future scenarios, e.g. optimistic, pessimistic and most likely.
The scenarios generated are then 'plots' to be played out making managers consider future possibilities and
encouraging them to think about strategy more flexibly.
3 PESTEL analysis
Section overview
In your Business and Finance paper, you will have encountered PESTEL factors in your studies of the
environment of business.
This section looks in each PESTEL factor in more detail and identifies how each may impact on the
strategy of the organisation.
Later sections extend analysis to the global business environment.
PEST ANALYSIS
Source
The country This covers government stability, international relations, the ideology of the
government in power, the need for contacts, favouritism for local suppliers,
political violence, governments' ability to change the law and operating conditions,
governments' need to appease powerful stakeholders.
The product Consumer/basic products. High-tech components may have national security or
armaments implications. Oil extraction in some countries places the oil companies
near regions of ethnic or political conflict.
The company Size, connections, reputation, influence on the environment.
Business cycle
Growth
rate % Recovery Boom Recession
+ Long-term trend
0 Time
-
Depression
The long-term trend of industrialised economies is one of positive growth. The different phases of the cycle
have the following characteristics:
Recovery phase
Increased business confidence and investment causes growth to increase. Unemployment declines and
consumer confidence/spending rises.
Boom phase
Growth exceeds the long-term trend. Demand is too great, leading to rising prices of goods, balance
of trade deficits (as exports fall, imports rise), labour shortages and wage/factory price increases.
Recession phase
Demand falls, leading to increased unemployment and falling investment and business/consumer
confidence. Recession is often first seen in building and capital goods sectors.
Depression phase
Weak consumer and business spending/confidence. Unemployment in excess of normal levels with
falling (or even negative) inflation and wage cuts.
In setting strategy an organisation needs to consider where the economy is currently and where it is
heading.
Long-term exchange rates' behaviour affect the relative competitiveness of imported and domestically
produced products and exports. A falling domestic exchange rate makes firm's exports more
competitive and imported inputs more expensive. This may be determined by the value of key exports
such as oil, minerals, crops, manufactured goods etc.
Interest rates (long-term and short-term) affect cost of finance and also levels of demand in the
economy.
The economic infrastructure, for example access to payments systems, consumer and trade credit,
access to venture and other capital, the quality of the stock exchanges.
was at the centre of Europe's wealthiest region, and the French government offered inducements. Despite
opposition from French intellectuals, the project went ahead. Disney owned 49 percent of the shares.
The project plans assumed there would be a large number of visitors who would want to stay in the vicinity
of the park.
The park opened on 12 April 1992. However, queues formed for rides that did not work and 'many of the
employees appeared to be struggling with the need to conform to Walt Disney's code of acceptable
behaviour'. (Curwen, 1995)
Curwen (1995) identified a number of difficulties, which we have listed below. Some were bad luck and
some were of Disney's own making.
In 1992, when the park opened, mainland Europe was entering a recession.
The value of the French franc rose, increasing the costs to Italian and British holidaymakers. (The UK
left the exchange rate mechanism in 1992, and Italy was temporarily suspended).
The weather –EuroDisney should have considered this factor. Paris is in northern Europe.
Why should holidaymakers go to a rain-drenched version of a Disney theme park when they could
experience the 'real thing' in sunny Florida (or California)?
A trip to EuroDisney would rarely provide more than a couple of days' outing: hence attendance
figures were optimistic.
Hotel occupancy rates were low (in part because of the excellent transport facilities to Paris).
Admission charges were seen as too high, and visitors 'broke the rules' by smuggling in their own food
and drink. Price resistance was a key issue.
Labour turnover was very high. French employees did not behave like Americans.
Cultural issues
Alcohol, as in the US theme parks, was banned. This impacted on the traditional French Sunday Lunch
which is relaxed, conversational and where wine is served. Thus the full service restaurants saw
reduced trade.
The management team were American, there were no European representatives.
At one point the French media called it a 'Cultural Chernobyl'.
The first year was catastrophic. The Disney corporation reconsidered its plans for further expansion of the
site. However, the French government, the bankers and Disney itself had good reasons for business to
continue, and were able to persuade a wealthy Saudi investor to contribute.
Recovery
After this disastrous start, the company began to turn around, and it reported a profit in 1995. As well as
financial support from a Saudi investor, and Disney's agreement to forego royalties the company began to
change. Pierre Bourguignon, the CEO, also attempted to institute cultural and structural change, and to
change the marketing.
The chain of command with reduced employees were empowered to take decisions. There were 220
small groups with total profit responsibility.
All managers have to work on the front line once a week.
Admission prices were cut by 20 percent and cost of staying in the cheaper hotels was cut.
The catering was improved, with lower prices, more fast food, drinks and so on.
Cultural issues
Reflecting greater sensitivity to national factors, EuroDisney targeted its marketing and promotional
offers more closely to those factors.
The 'low-price' marketing strategy did not conform with the USA's strategy of offering a 'premium' quality
product, but the strategy brought in more people. However, attracting people to the more expensive
hotels has been difficult.
By 1996 EuroDisney, by then renamed Disneyland Resort Paris, had become France's most-visited tourist
attraction. Management embarked on an ambitious expansion scheme opening Walt Disney Studios in 2002.
Hong Kong
In 2005 Disney opened its fifth, and smallest, Disney park on reclaimed land in Hong Kong. Disney owns
43% and the Hong Kong government 57%. Initial cultural adaptation problems included:
Significant overcrowding at Chinese New Year as a an unanticipated wave of visitors arrived from
mainland China
Protests from global environmental groups at the inclusion of shark's fin soup on the wedding menus
at Disneyland HK
Criticisms from guests of wait times and overcrowding which had been endured more quietly at other
Disney resorts
Guests not respecting no-smoking and alcohol-free regulations.
In May 2007 it was reported that declining attendances at Disneyland HK and revenues below targets were
jeopardising Disney's ability to raise finance to continue the planned investments in the resort. Management
was contemplating significant promotional activity to turn it around.
3.5 Technology
Technological differences and change operate at three levels:
1. Apparatus, technique and organisation: How technology is used in the business, e.g. the use of
ICT within the firm .
2. Invention and innovation: These affect the products being offered, e.g. the impact of higher power
handsets on the development from mobile phone handsets to Personal Digital Assistants.
3. Metatechnology: A technology that can have a variety of applications, e.g. lasers are a technology
that have found uses in industry (welding), surgery (corrective eye surgery, key hole surgery),
recorded music and software (CD, CD-ROM and DVD), and visual displays and light shows.
The strategic significance of the technological environment includes:
Technological base, and therefore customer and staff familiarity with it, varies across countries.
Operations will have to take this into account.
Technological change challenges existing industry structure and competitive advantages and so
strategies to harness or evade it are necessary.
Technological change can render existing products obsolete. Therefore continuous R&D and learning
is necessary to remain competitive.
Technological change creates uncertainty which may influence the approach to strategy formulation
that is adopted.
Land grab wars between USA, China and European states over Siberia and Alaska.
Increasing blame heaped on industrialised nations by impoverished states leading to calls for aid or
other countries using and to gain political influence.
Breakdown in civil order as population squabbles over diminishing food and water supplies.
Main government policies are:
Reduce carbon emissions through targets set in cross governmental accords such as Kyoto
agreements.
Penalisation of carbon creating industries through taxes levied on emissions or on fossil fuels used.
Investment in non-carbon creating technologies such as nuclear energy, wind and wave power and
electric or hybrid cars.
Making foreign aid dependent on acceptance of environmental policies by recipient countries.
Other ecological issues
Energy gap as fossil fuels diminish at a time when India and China are growing rapidly and demand
more energy.
Waste recycling issues as developed countries recognise the forecast use of landfill and also realise
that much landfill is hazardous waste (e.g. NiCad batteries, electronic circuitry, oil and solvents in car
engines).
Bio-diversity issues as growing of cash crops and destruction of forests for grazing or building land also
destroys species of plant, insects and animals.
Introduction of genetically modified organisms into the food chain leading to loss of species and
potentially hazardous future effects.
Implications for business strategy
Need to accept 'polluter pays' costs –taxes on emissions and requirements that firms buy certificates
from refuse firms confirming recovery or destruction of materials the firm introduces into the supply
chain
Increased emphasis on businesses acceptance of CSR and of principles of sustainable development;
Potential for economic gain from cleaning-up operations and selling surplus 'permits to pollute' to
firms that have not cleaned up
Potential competitive advantage from development of products that ecologically conscious buyers will
favour
Need to monitor ecology-related geo-political and legislative developments closely
compensate. This 5p rise was unfortunate, since it was implemented a matter of weeks after the reduction
by The Times.
The Independent panicked and contacted the Office of Fair Trading, claiming that the price cut by The Times
amounted to predatory pricing and that this was not allowed. This complaint was not upheld: it would have
to be proved that the cut was aimed solely at The Independent and this would have been difficult to establish.
Furthermore, The Independent was not one of the financially strongest companies, having made a loss
approaching CU500,000 in the previous year. A takeover appeared to be a logical next step as
The Independent did have a small niche in the market. However, whoever bought it would have to overcome
the recent batterings which had left it with an image problem.
If newspapers had been allowed to expand into TV, then the competitive picture would have changed
completely.
Requirement
Discuss the environmental factors that affected the newspaper industry, using the following headings.
(a) Political and Economic
(b) Social
(c) Technological
(d) Ecological
(e) Legal
See Answer at the end of this chapter.
Section overview
Few if any businesses are unaffected by global influences from competition, new markets or, at the
very least, cheaper sources of supply.
The view that certain nations have built-in advantages from low costs or harder-working staff has
given way to a more sophisticated view that home factors may configure to give advantages to a
handful of specific industries.
This is illustrated using the Porter Diamond model.
This leads management to make significant strategic investment decisions that rely on assessments of the
stability and trends of the global business environment:
Development of products for international markets
Advancing credit to clients in international markets or investing in businesses and assets in host
countries
Reliance of international sources for supplies of crucial inputs
Definition
Globalisation: The production and distribution of products and services of a homogenous type and quality
on a worldwide basis.
Levitt (The Globalisation of Markets –1983) described the development of a 'global village' in which
consumers around the world would have the same needs and attitudes and use the same products. A global
corporation would be one that operated as if the entire world was one entity, to be sold the same things
everywhere.
Levitt's focus was on the marketing aspects of globalisation. The global business corporation will also be
characterised by
Extended supply chains: Instead of making the product at home and exporting it, or setting up a
factory in the host country to make it, the global corporation may factor out production so that
different parts of the product (or service) originate in different countries. Womack et al (The Machine
That Changed The World) suggest that the globalisation of the automobile industry led the way for this
model.
Global human resource management: This involves pan-national recruitment and development of
human resources.
The customer Are consumer tastes across the world converging upon similar product
characteristics?
The company itself Selling in a number of markets enables fixed costs to be spread over a larger
sales volume.
Competition The presence of global competitors, who are enjoying the benefits of global
commitment, could encourage a previously local or regional operator to
expand its activities.
Currency volatility Setting up assembly overseas is a way of reducing the exchange rate risks
inherent in exporting and may also help to get around government imposed
trade barriers.
Country Locating business activities overseas may provide cheaper access to labour,
materials and finance, along with the goodwill of host governments.
The continuing political acceptance of free-trade by international economies is essential to the success of
these strategic investments.
Human resources skills, (price, motivation, Basic factors include: Advanced factors
industrial relations) natural resources, include modern digital
climate, semi-skilled and communications, highly
Physical resources (land, minerals, climate, location
unskilled labour. Basic educated personnel,
relative to other nations)
factors are inherited, or research laboratories
Knowledge (scientific and technical know-how, at best their creation and so forth. They are
educational institutions) involves little necessary to achieve
investment. high order competitive
Capital (i.e. amounts available for investment, how
advantages such as
it is deployed?)
differentiated products
Infrastructure (transport, communications, and proprietary
housing) production technology.
The home market determines how firms perceive, There are few cultural impediments to
interpret and respond to buyer needs. This communication in the home market.
information puts pressure on firms to innovate and
The segmentation of the home market shapes a
provides a launch pad for global ambitions.
firm's priorities: companies will generally be
successful globally in segments which are
similar to the home market.
Sophisticated and demanding buyers set
standards.
Anticipatory buyer needs: if consumer needs
are expressed in the home market earlier than
in the world market, the firm benefits from
experience.
The rate of growth: slow growing home
markets do not encourage the adoption of
state of the art technology.
Early saturation of the home market will
encourage a firm to export.
Competitive success in one industry is often linked This facilitates the generation of clusters. These
to success in related industries. Domestic suppliers are concentrations of many companies in the same
are preferable to foreign suppliers, as 'proximity of industry in one area, together with industries to
managerial and technical personnel, along with support them. For example, London in the UK is a
cultural similarity, tends to facilitate free and open global financial services centre, with a
information flow' at an early stage. concentration of banks, legal services, accounting
services and a depth of specialist expertise. Silicon
Valley is a further example.
Two other variables, chance events and the role of government, also play their part in determining the
competitive environment.
4.4.2 Clusters
Related business and industries are geographically clustered. A cluster is a linking of industries through
relationships which are either vertical (buyer-supplier) or horizontal (common customers, technology,
skills). Clusters are supposedly a key factor in the competitive advantage of nations.
research and development in conjunction with Chinese partners to ensure continued access to cutting-edge
engineering skills.
In a market where buyers are unashamedly experimental, brands have little value so far, except in the
luxury segment. For most buyers cost is more important. With average retail process falling by $1,250 a
year producers are racing to cut costs, not improve quality. The number of faults per 100 cars made rose
from 246 in 2005 to 338 in 2006. Reliability is likely to deteriorate further.
Chinese cars exported today mostly go to Africa, south-east Asia and the Middle East where expectations
are lower and price matters more.
Requirements
(a) Identify, using Porter's Diamond, the sources and nature of any competitive advantage enjoyed by
Chinese car manufacturers.
(b) Recommend a strategy for Chinese car makers based on this analysis.
See Answer at the end of this chapter.
Section overview
Despite the forecasts there are many impediments to the development of global businesses such as
protectionism. These are reviewed here.
Pursuing a global strategy is a source of risk to a business, either because the forecast opportunity
doesn't come about or because host governments change their policies towards 'foreign' investment
and render it no-longer valuable.
100 © The Institute of Chartered Accountants in England and Wales, March 2009
THE MACRO ENVIRONMENT 3
Agriculture is a serious issue: campaigners such as Oxfam argue that opening agricultural markets to
developing country producers could significantly alleviate global poverty. Sugar might find another use, as
fuel alcohol.
© The Institute of Chartered Accountants in England and Wales, March 2009 101
Business strategy
North American Free Trade Agreement NAFTA US, Canada and Mexico.
www.nafta-sec-alena.org
European Free Trade Association EFTA Norway, Switzerland, Iceland,
Liechtenstein.
European Union EU Ireland, Britain, France, Germany, Italy,
http://europa.eu.int Spain, Portugal, Finland, Sweden,
Denmark, Luxembourg, Belgium, the
Netherlands, Austria, Greece. In May
2004, Poland, Hungary, the Czech
Republic, Malta, Cyprus, Estonia, Latvia,
Lithuania, Slovakia and Slovenia.
Mercosur Brazil, Argentina, Paraguay and Uruguay
www.mercosur.org (Chile is an associate).
Southern African Development Community SADC Angola, Botswana, Lesotho, Malawi,
www.sadc.int Mozambique, Mauritius, Namibia, South
Africa, Swaziland, Tanzania, Swaziland,
Zimbabwe.
West African Economic and Monetary Union UEMOA Ivory Cost, Burkina Faso, Niger, Togo,
www.uemoa.int Senegal, Benin and Mali.
South Asian Association for Regional SAARC India, Pakistan, Sri Lanka, Bangladesh, the
Co-operation Maldives, Bhutan and Nepal.
www.saarc-sec.org
Andean Community Venezuela, Colombia, Ecuador, Peru and
www.comunidadandina.org Bolivia.
Association of Southeast Asian Nations ASEAN Indonesia, Malaysia, Philippines, Singapore
www.aseansec.org and Thailand.
Regional blocks such as those shown above only extend the benefits of free trade to their members. They
may distort, and certainly do not represent, truly global trading patterns. Triad theory describes the
international business environment as a limited number of 'superblocks'.
102 © The Institute of Chartered Accountants in England and Wales, March 2009
THE MACRO ENVIRONMENT 3
The Triad
Rather than a globalised world or a federalised world of trading blocks some commentators see economic
activity as principally occurring in three main economic blocks: the USA, the EU and Japan. These do the
biggest value of their trade with each other.
Triad theory rejects the idea that homogenous products can be developed and sold throughout the world.
Multinationals have to develop their products for the circumstances of each triad.
The Triad theory may be out of date. Japan was, in effect, in recession for 20 years from the mid 1980s
whilst emerging markets, particularly those of China and India, but also Brazil, are likely to be some of the
world's largest and fastest growing markets. They still have a long way to go before per capita incomes
reach the level of the Triad countries. They may form the fourth and fifth trading blocks, or perhaps the
triad will be superseded by their faster economic growth.
© The Institute of Chartered Accountants in England and Wales, March 2009 103
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Summary
104 © The Institute of Chartered Accountants in England and Wales, March 2009
THE MACRO ENVIRONMENT 3
Self-test
Answer the following questions.
1 PDB Motors Ltd is a major UK car manufacturer with plants in the UK and Europe. It is seeking to
exploit both the buoyant North American and Brazilian markets for car sales.
Suggest two reasons why it would be a logical strategy for PDB Motors Ltd to build an assembly plant
in Mexico.
2 Social and technological factors always need to be assessed when analysing the environment within
which a business operates.
Give two examples of each of these factors which would be relevant to Busline Ltd, a UK operator of
coach tours to Scarborough and Whitby.
Suggest how each of your factors may impact future demand.
3 Dunvegan Ltd
Dunvegan Ltd is a forestry company operating in the UK, mainly in Scotland. In addition to forests at
various stages of maturity, the company also owns many hectares of undeveloped land.
So far Dunvegan Ltd's timber has consisted almost exclusively of spruce trees which produce
softwood used extensively in building work. Spruce sells for the equivalent of about CU200 per cubic
metre. However, genetic engineering has produced a remarkable new tree which has the growth
characteristics of spruce, but which produces hard wood with the appearance and qualities of
mahogany. This species, the Maho spruce, should grow quite happily in Scotland and produce
worthwhile crops after ten years, each Maho spruce tree producing about 2 cubic metres. Currently,
mahogany sells for the equivalent of CU900 per cubic metre.
The company which developed the Maho spruce has ensured that the trees are sterile and has also
successfully applied for world-wide patents on the genetic material. Seedlings are available only from
that company at a cost of CU200 each.
Dunvegan Ltd is considering whether to invest in Maho spruce. Land already owned by the company
would be used and the company's planting and drainage equipment would be assigned temporarily to
the project. Because the seedlings are so expensive, relatively light planting would be used at 1,500
seedlings per hectare. Annual maintenance and security would be CU1,000/hectare for each of the ten
years of the project. Dunvegan Ltd is considering planting 1,000 hectares with Maho spruce.
In the UK Dunvegan Ltd has three main competitors; mahogany is also imported from four countries
in the tropics where it is a valuable export. Some of the wood is from managed plantations, but some
is from natural forest. Recently the price of mahogany has been rising as supplies become short and
plantations have to be renewed. Dunvegan Ltd's accountant has read an article in a recent edition of
Lumber About, the monthly trade paper of the timber business, in which the economic effects of the
Maho spruce were discussed. If around 3,000-4,000 hectares were planted in the UK, then the price of
mahogany would be CU500 per cubic metre at the end of ten years. If around 2,000 hectares only
were planted, then the price would be CU800 per cubic metre.
Requirement
From the viewpoint of an independent consultant, write a memorandum to the directors of Dunvegan
Ltd on the proposed Maho spruce plantation.
Your memorandum should include an environmental analysis. (20 marks)
Now, go back to the Learning Objectives in the Introduction. If you are satisfied that you have achieved
these objectives, please tick them off.
© The Institute of Chartered Accountants in England and Wales, March 2009 105
Business strategy
Answers to Self-test
106 © The Institute of Chartered Accountants in England and Wales, March 2009
THE MACRO ENVIRONMENT 3
Social
If home-owning continues to grow, it is to be expected that demand for high quality materials will also
grow. As mentioned under the political paragraph, using tropical hardwoods could become socially
unacceptable and it would appear that the Maho spruce should provide a politically correct substitute.
However, some people may object to using genetically-engineered material.
Technological
Although Maho spruce has been patented, there is no reason why other manufacturers could not
develop similar products. That would drive down the cost of seedlings (a major cost of the
undertaking) and hence the price that would eventually have to be achieved to make the investment
pay.
Size of investment
The proposed investment is large, especially as there are many important factors which could change
over the project's life: the project is high risk even if not using innovative technology. Risk could be
reduced by planting over several years rather than 1,000 hectares at one time. In that way the
economics of the investment could be monitored and decisions taken about each slice of investment.
Naturally, this approach would delay the maturity of some of the crop. There is a risk that this would
reduce the final income (if mahogany prices were to fall) but prices could also rise (strong reaction
against natural mahogany, economic upturn). Delaying planting could also reduce the initial price of
seedlings as other bioengineering companies launch new products.
Summary
Insofar as environmental factors can be judged it would seem that Maho spruce should be a popular
product. The main risk arises from technological advances which could produce similar cheaper
timber.
However, the economics of the project are very dependent on the future price of Maho spruce
timber, its substitutes and the reactions of rivals.
My advice is as follows:
(i) Attempt to get the suppliers of Maho spruce to regulate sales of the seedlings.
(ii) Consider spreading out the investment instead of committing so much expenditure in the first
year.
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Business strategy
108 © The Institute of Chartered Accountants in England and Wales, March 2009
THE MACRO ENVIRONMENT 3
Development of new energy sources such as clean coal, biomass fuel, wave and wind, and re-
emergence of nuclear power
Discovery of new oil or energy reserves
© The Institute of Chartered Accountants in England and Wales, March 2009 109
Business strategy
colour pictures, resulting in an uncompetitive stance. The technology required to upgrade the
paper to colour printing was very expensive, necessitating an increase in the price of the paper at
a time when a price war was emerging.
Since then the emergence of on-line services such as news websites and 24 hour-news
programming on digital TV have increased the competition to newspapers. As we live in an age
where television is the focal point of many people's lives, the accessibility of news/sport and
television information has rendered it less important for people to have a newspaper on a daily
basis.
Newspaper companies have also encountered further costs due to increased technology in the
typesetting area which is now centrally controlled and downloaded to regional areas where the
printing is done. Once again, to compete on a national basis, this has involved major capital outlay
for most companies, which has to be recouped by increased circulation, increased selling prices
or increased efficiencies.
Given that newspapers are often bought to while away boredom on journeys to and from work
etc the development of compact multimedia devices such as MP3 music and video players will
reduce the casual purchase of newspapers.
(d) Ecological
Newspaper production and distribution has many ecological impacts. The raw material is timber
and the manufacture of paper involves large amounts of water and bleaches. Print ink was solvent
based originally. It is an industry that requires substantial logistics and so leaves a carbon
footprint.
Regulations affecting pollutants, the recycling of paper, and the carbon emissions from a business
would impact sharply on the costs of the newspaper industry.
(e) Legal
During the recession, in order to boost sales, the tabloids in particular tended to search for
more 'popular' stories such as the Royal family and scandals about prominent people. This,
however, resulted in an increase in law suits, as a struggle emerged as to whether the private
lives of prominent individuals were indeed 'private'. The current ruling is that anything that is in
the public interest may be published. However, there remains a grey area as to what is in the
'public interest'.
This was then coupled with the manoeuvring by newspapers on the issue of publishing sensitive
photographs. Some published in order to obtain a short-term boost to their circulation whereas
others decided to publish their 'disgust at those seizing the opportunity' in the hope of a longer-
term increase in circulation.
The legal issues surrounding the competitive nature of the industry also came to the fore,
particularly as to whether the price cuts were an attempt at predatory pricing in order to force a
competitor out of business.
Conclusion
The newspaper industry was in a particularly turbulent phase in the 1990s. This was mainly caused by
the recession and the effect this had on disposable incomes. Moreover, with technology ever-
improving since that time, television and radio have taken increasing shares of the media market away
from newspapers.
110 © The Institute of Chartered Accountants in England and Wales, March 2009
THE MACRO ENVIRONMENT 3
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Business strategy
112 © The Institute of Chartered Accountants in England and Wales, March 2009