LECTURE 2 // THE BUSINESS ENVIRONMENT

Sept 2021 – Sept 2022

An organisation’s environment can be examined in many ways;

• Global/local----some organisations operate world-wide but still have to be sensitive to the local
environments of the countries they operate in or export to.

• General/task environment----is divided into two;

• General (macro) environment----covers all the factors that influence all the organisations
indirectly these include (PEST).

• Task (micro) environment----includes all the areas which have a direct impact on the
organisation such as its customers, competitors, suppliers, employees and management.

• Uncertainty

The environment is a source of uncertainty which may be categorised along two axes;

• Simplicity/complexity;

• The more open an organisation is the greater the variety of influences.

• The interconnectedness of the environmental influences causes complexity

• Checklist of uncertainty

• Simple and stable---low uncertainty.+

• Complex and stable---low to moderate uncertainty.

• Simple and unstable---moderate to high uncertainty.

• Complex and unstable---high uncertainty.

• The changing environment

Changes in the environment may be caused by;

• Globalisation of businesses.

• Science and technological developments.

• Mergers, acquisitions and strategic alliances.

• Changing customer values and behaviours.

 • Increased scrutiny of business decisions by the government and the public.

• Increased liberalisation of trade and deregulation.

• Changes in business practices through downsizing, outsourcing and re-engineering.

• Changes in the social and business relationships between companies and their stakeholders.

• The political / legal environment

Political environment includes:

• the political system and ideology

• the role of the government in the economy

• the risk of political instability

• foreign trade relationships

Political systems operate on a supra-national, national and local levels;

• At local level----influences and directives by local authorities affecting specific geographical

areas.

• At national level ---influence may come through legislation, pricing decisions, taxation, health
and safety regulations.

• At international level---include directives from trading blocs (supra-national bodies) like the EU,
SADC, COMESA, AU, ECOWAS etc.

• International trade----- is governed by an extra layer of legislation contained in treaties and

agreements and is potentially subject to higher levels of political risk e.g. customs duty and
economic policy.

Political factors invalidate strategy and severely damaging businesses.

• Ways in which government can affect the structure of an industry (Michael Porter)
• Capacity expansion----government policy can encourage firms to increase or cut their capacity
e.g. through capital allowances and incentives.

• Demand----as a major customer the government can influence demand.

• Divestment and rationalisation----in all countries the state determines the selling and closure of
businesses.

• Emerging industries----can be promoted by the government or damaged by it.

 • Competition----government’s purchasing decisions have a strong influence on the strength of
different companies.

• Entry barriers----through restricting investments and competition.

• How business influence government (M Porter)

Government policies may be influenced in a number of ways;

• Can employ lobbyists to put their case to individual ministers or civil servants.

• Can give MPs non-executive directorship.

• Can influence public opinion and legislative agenda through advertising

• Legal factors that affect businesses

• Legal factors that affect all companies

• General legal framework

Include contract, tort and agency laws.

These deal with basic ways of doing business including negligence proceedings.

• Criminal laws

Include theft, insider dealing, bribery and deception.

• Company laws

Deal with directors and their duties, reporting requirements, takeover proceedings and shareholders’
rights and insolvency.

• Employment laws

Deal with trade union recognition, social chapter provisions, minimum wages, unfair dismissal,
redundancy, maternity and equal opportunities.

• Health and safety laws

Deal with fire precautions and safety procedures.

 • Data protection laws

Deal with the use of information about employees and customers (Living individuals).

• Marketing and sales laws

Deal with laws to protect consumers, what is or isn’t allowed in advertising.

• Environment laws.

Deal with pollution control and waste disposal.

• Taxation laws

Deal with tax payment, collection of PAYE, EXCISE DUTY and VAT.

• Employment law
The main purpose of the law is to ensure that organisations treat all employees equally.

It does this through the following legislation;

• Retirement

Employees may retire for a variety of reasons.

• Promotion opportunities for younger workers.

• Early retirement as an alternative to redundancy.

• The age structure of the organisation may become unbalanced.

• The cost of providing pension rises with age.

• Resignation

Reasons for resignation vary from personal to occupational reasons.

Personal reasons might include family issues like relocation of the family and occupational reasons
include retirement age regulations.

The period of notice as agreed in the contract of employment must be considered.

An exit interview helps to explain the leaver’s reasons for leaving the organisation.

• Dismissal

Different forms of termination constitute dismissal.

• The termination of an employee’s contract by the employer.

 • The ending of a fixed term contract without renewal on the same terms.

• Resignation by the employee where the employer‘s contact breaches the contract of
employment.

This is known as constructive dismissal.

• Wrongful dismissal

Is dismissal that breaches the contract of employment e.g. failure to give the contractual period
of notice.

• Unfair dismissal

Gives protection to the employees against arbitrary dismissal i.e. dismissal without a good
reason.

A dismissal need not be wrongful to be unfair.

The principle is that any dismissal is potentially unfair.

The onus is on the employer to prove that the dismissal was fair.

• Disciplinary procedures

Are used in certain situations that an employee is to be dismissed as an alternative to dismissal.

• Redundancy

Is dismissal under two circumstances.

• The employer has ceased to carry on business at all in the place the employee was employed.

• The requirements of the business for employees to carry out work of a particular kind have
ceased or diminished or are expected to.

• Compensation

Is a legal entitlement that encourages employees to accept redundancy without damage to industrial
relations.

The employee is not entitled to compensation in three ways;

• The employer has made an offer of suitable alternative employment and the employee has
unreasonably rejected it.

• The employee is of pension-able age or over or less than two years continuous employment.

• The employee’s conduct merits dismissal without notice.

 • Discrimination

Occurs when an employee is judged upon discriminative factors such as gender, race, age, religion, or
even marital status.

The law dictates that an organisation cannot hire a qualified candidate on the basis of discriminative
factors.

The law also prohibits organisations from paying different people different pay packages for the same
work.

• Forms of discrimination

• Sexual harassment—occurs when an employee is negatively treated by other employees

because of gender or race.

• Indirect discrimination—refers to conduct or polices which although do not appear to

discriminate on the surface but have a greater impact on a particular gender or racial group.

• Vicariously liable-if an employee has been discriminated against or harassed or unfairly

terminated the law will hold the organisation vicariously liable.

• Health and safety laws

Deal with the importance of maintaining health and safety at work.

Accidents and illnesses cost the employer money.

The company’s image in the market place and society may suffer.

An employee and the employer have legal obligations under the law.

• Employers’ duties

• All work practices must be safe.

• Environment must be safe.

• Plant/machinery regularly maintained.

• Train employees.

• Communication of policies about health and safety must be there.

• Risk assessments and controls must always be carried out.

• Share health and safety information with subordinates.

• Identifying those employees who are most at risk.

 • Employing a competent health and safety advisor.

• Employees’ duties

• Always take reasonable care of yourself and that of others.

• Allow the employer to carry out his or her duties.

• Not to interfere with running machinery.

• Inform the employer of any imminent dangers.

Accidents are expensive to companies because;

• Time is lost by the injured employee and other staff.

• Direct costs are incurred by disruption to operations at work, damage and repairs and
modification to the equipment.

• Output from the injured on return to work is often reduced.

• Recruiting and training a replacement for the worker will have its own cost.

• Health and safety policy

This policy will have a number of features.

• Statement of principles.

• Details of safety procedures.

• Compliance with the law.

• Detailed instructions on how to use equipment.

Senior managers must set a good example.

• Visibly reaching to breaches of the policy.

• Ensuring that the policy is communicated to all staff members.

• Setting priorities for operations.

• Involving staff in the health and safety processes.

 • Data protection and security
All organisations hold various kinds and levels of data.

This is information on the organisation’s;

• Resources e.g. plant and equipment.

• Strategies e.g. long and short term objectives.

• Operations e.g. day to day activities.

• Customers and suppliers.

• Employees e.g. both official and personal information.

• Terms in the data protection act

• Privacy----is the right of the individual to control the use of information about him or her
including information about financial status, health and safety.

• Personal data----is information about a living individual including expressions of opinion about
him or her.

Data about organisations is not personal data.

• Data users----are organisations and individuals who control personal data and the use of
personal data.

• A data subject----is an individual who is the subject of personal data.

• The data protection act 1998

The Act has two main aims:

• To protect individual privacy.

Previous UK law only applied to computer-based information.

The 1998 Act applies to all personal data, in any form.

• To harmonise data protection legislation so that, in the interests of improving the operation of
the single European market.
It is an attempt to protect the individual.
The terms of the act cover data about individuals not about corporate bodies.

Schedule 1 of the act contains the data protection principles.

• The data protection principles

 The act is guided by the following eight principles;

• Personal data shall be processed fairly and lawfully.

• Obtained only for specified and fair purposes.

• Adequate, relevant and not excessive.

• Accurate and up to date.

• Not kept for longer than necessary.

• Processed in accordance with the rights of data subjects.

• Appropriate measures shall be taken against unauthorised use or disclosure.

• Shall not be transferred to a country where data protection rights are not upheld.

• The rights of data subjects

The act establishes the following four rights for data subjects.

• A data subject may seek compensation through the courts for damages and any associated
distress caused by loss or unauthorised disclosures of data.

• A data subject may apply to the courts for inaccurate data to be put right or even wiped off.

• A data subject may obtain access to personal data of which he or she is subject.

• A data subject can sue a data user for any damage or distress caused to him by personal data
about him.

• Marketing and sales laws

• Contracts
A contract is a legally binding agreement which can be verbal or written.

In all areas of life, we make contracts.

If you buy or sell a house, a contract is made and 'exchanged'.

Under contract law, the money that you give in exchange for the goods is referred to as the
'consideration'.

For a contract to take place, there must be agreement between the parties.

This requires an offer made by one party, acceptance by the other party, an agreement and some
consideration passing between them.
When one party to a contract fails to carry out his part of the agreement, the other party can take legal
action against them for breach of contract.

So if a business has a customer who is failing to pay, they can take them to court.

• Sale of goods and services

An important area of contract law is the law concerning the sale of goods.

UK legislation also covers contracts where the supply of services is the major part of the contract.

For example, contracts of repair, where the supply of goods may be incidental to the provision of a
service.

• Consumer protection
Consumer protection laws are passed to ensure that the products and services purchased by the
consumers are safe to use and meet the expressed or implied standards of consumers against fraud and
unfair practices on the part of salesmen.

It relates to the concept of consumer rights and promotes fair trade and flow of information.

• Principles of consumer protection

Consumer protection is guided by the following nine principles;

• Consumers should be furnished with unambiguous and up to date information.

• Businesses should ensure that they fulfil all expressed and implied performance standards of
the goods or services.

• Consumers should have easy and timely access to methods of redress and procedure.

• Personal information if provided by the consumer at the time of purchases should be securely
held by the business to prevent any abuse of the same.

• Businesses should refrain from sending commercial third party emails to consumers without
their prior consent.

• Consumers should not be subjected to any unreasonable payment liabilities.

• Businesses must take every step to ensure that consumers interpret the terms of the contract in
their true meaning and agree with the same at their own free will.

• As regards to food products consumers should be assured of high quality and safety standards.

• Consumers should be provided with opportunities to compare prices of different brands

offering similar products.
 • The economic environment
Deals with two important policies used by governments in managing the economy which are the fiscal
and the monetary policies.

• Fiscal policy----is government policy on government revenues, government spending and

government borrowing.

• Monetary policy----is government policy on inflation, unemployment, Interest rates, exchange

rates, money supply, credit controls and balance of payments.

These two policies are used by governments to achieve the main objectives of an economy which are;

• To achieve economic growth.

• To achieve full employment.

• To achieve price stability.

• To balance imports and exports.

All the factors above affect all the businesses in an economy.

• The social and cultural environment

Social trends influence the purchase decisions that individuals make.

Just as the character and tastes of individuals change over time so too do those of society.

This in turn will lead to a change in either the type or level of demand that exists for goods and services.

A social example is when organisations are offered tax incentives or breaks to donate to charity or
sponsor welfare organisations and activities.

• Demography

Demography is the study of social and population trends.

Society is also characterised by demographic trends.

These factors include population size, population growth rate, age groups, education levels and
household patterns.

• Population (e.g. birth rate, death rate and growth rate)

• Wealth (e.g. disposable income)

 • Education (e.g. skilled staff thrive in knowledge economy)

• Health (e.g. obesity, HIV, sugar diabetes)

• Cultural trends (social structure, buying patterns, values, attitudes, tastes)

• Environmental issues and sustainability

All these factors are affected by government policy

• Population size----refers to the total amount of people living in the society.

• Population growth rate----refers to speed at which the population is increasing.

• Age groups

The population can be divided into the following categories;

• Pre-school.

• School age children.

• Teenagers.

• Young adults (20-40).

• Middle age adults (41-65).

• Older adults (66 and above).

The most populous age group will shape the nature of demand of a society and the nature of goods and
services demanded.

• Education levels

Can be characterised into the following categories;

• Illiterate.

• School drop outs.

• School levers.

• University level.

• Professional degrees.

• Household patterns
Reflect the status of how people live together.

These include;

• Traditional households i.e. husband, wife and children.

• Non-traditional households i.e. single parents and live in relationships.

Naturally traditional households and non-traditional households demand different combinations of

goods and services.

• Family lifecycle----combines the effects of age, marital status, career status, and the presents or
absence of children.

It is also capable of identifying the various stages through which household’s progress.

Particular products and services can be marketed to people at specific stages of the life cycle.

• Social class----members of a social class share common features such as type of occupation,
income level, educational background and other variables.

• Classes fit into the social structure in which some classes have advantage over others through;

• Access to power.

• Education attainment.

• Income level.

• Inherited wealth,

• Status or esteem.

There are three types of classes;

• The upper class---those with inherited wealth.

• The middle class----the business people.

• The lower class----all workers

• Buying patterns

Two factors influence the buying decisions of individuals and households;

• Behavioural determinants----encourage people to buy a product or service e.g. Personality,

culture, social class and the purchase decision’s importance.

• Inhibitors----are factors that make the person less likely to purchase something e.g. low income
 or religion.

• Cultural trends
The trends that can change organisations are;

• Health and diet issues----people are slowly moving to a healthier diet and there has been an
increase in vegetarianism and green consumerism.

The result is the availability of organic foods in supermarkets.

• Impact of health and diet on business

• Growing market for sports related goods.

• Employee health---ill health affects productivity and so some employers provide gyms.

• New food---some foods have added vitamins.

• Organic foods are now more popular.

• Women at work----social trends estimates that the proportion of women economically

active in labour force has increased.

More than five times as many women as men are part timers.

Therefore organisations should guard against discrimination against women.

Discrimination against women includes;

• Overt discrimination---is where one group is treated less favourably than another.

• Indirect discrimination---makes it harder for someone of a particular group to fulfil

requirements.

• Environmentalism
Businesses have responded to the environment in several ways.

• Supermarkets now stock cleaning products that are kind to the environment.

• Bad publicity has led supermarkets to change practices.

• Companies are reviewing both the finished products and their processes.
 • The technological environment
Impact of technology on;

• organisational structure (e.g. downsizing, delayering, outsourcing)

• products (e.g. sophisticated features)

• production processes (e.g. automation)

• society (e.g. E-commerce, home-working)

Information technology and systems play a significant role in the development of the modern business
environment.

Advances in IT have allowed complex operating processes to be accelerated and made feedback
information available immediately.

• Effects of the technological environment

• Span of control (span of management).

Refers to the number of subordinates responsible to one boss e.g. a manager with six subordinates the
span of control is six.

Technology has widened the span of control.

Organisations have removed layers of middle management there by flattening organisations resulting in
wide spans of control.

The span of control depends on;

• Ability of the manager.

• Ability of the subordinates.

• Nature of the task.

• The geographical dispersion of the subordinates their communication system.

• The availability of good quality information.

• Tall and flat organisations

Firms are gradually moving from tall structures to flat structures as a result of improved information
systems.

This cause the organisation to assume a flatter structure.

A flat organisation has relatively fewer managerial layers and number of managers.

A flatter structure will result in a less bureaucratic and faster moving organisation.

• Delayering----refers to reduction in the number of managerial layers in an organisation to make

it more efficient.

• Downsizing----an organisation might tell its employees that they are no longer required because
the organisation is no longer requiring that particular job to be performed.

It is intended to be a permanent downscaling in which employees may later be retired.

It has occurred mainly because of technological advances like improved automated systems and
improved productivity per worker.

• Reasons for downsizing

• Cost reduction.

• Reduction in layers of management.

• To lay more focus on primary competences of the firm and outsource secondary activities.

• Increased productivity.

• Outsourcing

Occurs when certain activities or functions of an organisation are no longer performed by the
organisation itself.

The work is contracted out to a third party or external organisation.

• Types of outsourcing

• Ad-hoc----the organisation has a short-term requirement for increased IS/IT skills e.g.
outsourcing a programme on a short term contract.

• Project management----the development and installation of particular IS/IT project is

outsourced e.g. a new accounting system.

• Partial---- some IT/IS services are outsourced e.g. hardware maintenance or ongoing website
management.
 • Total----an external supplier provides vast majority of an organisation’s IS/IT services e.g. third
party owns or is responsible for IT equipment, software or staff.

Main reasons for out sourcing are;

• It will result in cost savings.

• It will allow the organisation to concentrate on its core competences.

• The outside party can perform and deliver the function better.

• Information technology (IT) ---deals with the aspect of managing and processing information
for organisations.

• Information system (IS) ----is a method of communicating information in written form,

graphical or via the electronic method.

IS can be a subject or component of IT within an organisation.

• E-Commerce

Refers to paperless commerce or commerce conducted over the internet.

• Business models

• B2B (Business to business) model

Occurs when organisations buy or sell goods and services between themselves over the internet
e.g. the manufacturer and the retailer.

This model offers the following features and benefits.

• Flexibility in pricing as organisations can directly negotiate between themselves.

• Efficiency-as it integrates buyers and sellers.

• Versatility- as an organisation’s supply chain can move from push to pull system.

• Push system---when suppliers and distributors contract buyer organisations pushing the
products of seller organisations.

• Pull system---Buyer organisations directly contact seller organisations and pull the services they
want at a particular time.
 • B2C (Business to customer) model

Involves organisations directly selling their goods and services to customers over the internet.

The model’s advantage is that it reduces the need for physical locations or stores whilst exerting
the customer reach an organisation can have.

It also includes establishing websites where people can buy products and services.

• C2B (consumer to business) model

The consumers purchase goods and services directly from businesses over the internet.

• C2C (consumer to consumer) model

Involves consumers buying and selling goods between themselves over the internet and the
business being an intermediary.

• Homeworking and supervision

Advances in communications technology have, for some tasks, reduced the need for the actual presence
of an individual in the office.
This is particularly true of tasks involving computers.
• The employee can, for example, do tasks involving data entry at home
• The keyed-in data can be sent over a telecommunications link to head office.
• Some firms see benefits in employing the services of a pool of freelance workers, when there is a
demand.
This approach is being adopted in publishing and journalism.
This is sometimes known as homeworking (or, occasionally, telecommuting if it involves IT).
The practice is not new in itself, but it is relatively new to the management of the office.

• Other effects of IT
• Routine processing resulting in bigger volumes and greater speed.

• Digital information and record keeping.

• New skills required and new ways of working

• Too much Reliance on IT.

• New methods of communication and of providing service.

• Encourages collaboration and open systems.

• The view of information as a commodity which can be bought sold or exchanged.

• Quality of management information has also changed e.g. more detailed planning is possible
 through spreadsheets.

• IT has enabled organisations to provide better customer service e.g. customer databases, EDI
and extranets.

• Developments in communications like Email, voicemail systems, computer technology,

integration systems and computer conferencing systems.

• Less need for employees to follow the chain of command.

• Swot analysis
Swot is an acronym for strengths, weaknesses, opportunities and threats.

It summarises the key issues from the business environment and the strategic capabilities of an
organisation that are most likely to impact on strategy development.

It is a technique used in strategic planning to evaluate factors that might affect business strategy.

The aim is to identify the extent to which the current strengths and weaknesses are relevant to and
capable of dealing with the threats or capitalising on the opportunities in the business environment.

Useful for achieving objectives Detrimental for achieving objectives

Internal S W
Attributes Strengths Weaknesses

External O T
Attributes Opportunities Threats

• Strengths
Are internal attributes that are useful to achieving objectives.

They include factors the organisation is doing better than its competitors.

• Availability of resources i.e. physical, human, financial and informational.

• Cost advantages of intellectual property rights e.g. patents or copyrights.

• Innovation.

• Possession of state of the art machinery.

• Goodwill towards the business.

• Weaknesses
Are internal attributes that are detrimental to achieving objectives.

They include those factors an organisation is not doing well as compared with its competitors.

• Ineffective management style.

• Lack of established distribution network.

• Bad reputation.

• Lack of resources.

• Aged technology.

• Opportunities
Are external attributes that are useful to achieving objectives.

Organisations must take advantage of the opportunities in the business environment.

• Downsizing of competitors.

• A bullish secondary market.

• Economic growth.

• Technological advances.

• Government spending.

• Threats
Are external attributes that are detrimental to achieving objectives.

Organisations should minimise the effects of these threats towards the organisation.

• Change in consumer tastes poses a threat.

• Lenders expecting timely repayment.

• A recession.

• A bearish secondary market.

• Expansion of competitors.

A swot analysis may focus on future choices and the extent to which an organisation is capable of
supporting these strategies.

• Dangers associated with swot analysis

 • It lists a long list of apparent strengths, weaknesses, opportunities and threats but is not clear on
what is important.

• There is a danger of overgeneralization.

• Swot analysis is not a substitute for a rigorous insightful analysis

• Competitive Advantage----Michael Porter

Refers to the profit opportunities that an organisation gains over its competitors.

Michael Porter has identified the following sources of competitive advantage also known as generic
strategies which are cost leadership, differentiation and focus.

Broad Cost Leadership Differentiation

Narrow Cost focus Differentiation focus

• Cost Leadership

Is the strategy where a firm tries to become the market leader by becoming the lowest cost producer in
the industry.

By doing this the firm can enjoy higher profits by selling its products at prices which are at par with or
near the industry average.

By selling its products at a lower price the firm sells more units, making more revenues and therefore
more profits.

Cost leadership can be attained by utilising facilities and resources efficiently and adopting tight cost
control.

• Differentiation strategy

An organisation seeks to distinguish its products and services and make them unique in the industry.

If the product becomes the only one on the market the firm charges the highest price or the premium
price than its competitors therefore making more revenues and more profits.

• Focus strategy

A firm chooses a narrow scope of competition within the industry thus concentrating on a specific
regional market or a specific group of buyers or a specific target market.

In that market segment or target market the firm may choose either cost leadership or differentiation
and make more revenues and more profits.

Such firms can enjoy high degree of customer loyalty.

• Competitiveness----Michael Porter
• Competitive forces (The five forces model)

According to Michael Porter there are five forces that influence competition in industry.

In practice every industry has at least one strong force.

The greater the number or strength of these forces the more competitive the industry is or the
more intense the competition is.

• Threat of new entrants

The more firms that enter an industry the more competitive the industry the lower the profit
levels are likely to be.
How high the threat of potential new entrants will depend upon how many barriers to entry
there are.
When these barriers are present the force is weak but when the barriers are absent the force
is strong and competition is intense.
Barriers to entry include;
• Economies of scale---where existing organisations have archived economies of scale e.g.
producing a large quantity of a good at a lower cost per unit.
• High capital cost or start-up cost---an organisation will endure a long time to recoup its
investment.
• Limited access to supply and distribution channels.

• Strong customer loyalty to existing products---it is difficult to get customers to change over
from their existing product or brand.
• Response of existing competitors.

When the above barriers are absent the force is strong and competition is intense
• Threat of substitute products and services

Substitute products refer to products from other industries.

A threat of substitutes exists when product demand is affected by the price change of a
substitute product.
Threat of substitutes depends on all cases where our product is being substituted;
 • Quality of a substitute product.
• Relative performance or durability and price of substitute.
• Costs of switching to a substitute product are absent.
• Buyers’ willingness to buy a substitute product.
• Technological changes.

• Bargaining power of buyers

Is a situation where buyers have high bargaining power than the suppliers.
Buyers are price setters and sellers are price takers.
Situations where the bargaining power of buyers is high are;
• There is a concentration of buyers and the volumes being purchased are high.
• The cost of switching to an alternative supplier is low and involves little risk.
• The buyer has the ability to either buy products from another supplier or produce the
same in house.
• The number of substitute products available.
• Degree of dependency upon the existing channel of distribution.

• Bargaining power of the suppliers

Is a situation where suppliers have high bargaining power than the customers.

Suppliers are price setters and buyers are price takers.

When it is high firms normally end up paying a relatively high cost for the raw materials they
need.
Situations where this force is high are;
• There is a concentration of suppliers and a large number of buyers.
• Switching costs of a customer are high or impractical.
• Degree of differentiation of inputs.
• Presence of substitute products.
• The level of supplier competition
 • Competitive rivalry (rivalry amongst competing firms)

The more competitive rivalry that exists between firms the lower the level of profits that will be
earned by them.
The greater the number of firms the greater the level of competition.
Situations where this force is strong are;
• The competitors are in balance of the same size and capabilities.
• Competing organisations are operating in a mature market i.e. a market that is not
growing.
• There are high fixed costs e.g. rent.
• Absence of the barriers to entry.
• The number of competing organisations.

• Criticism of the five forces

Three dubious assumptions underlie the five forces.

• That buyers, competitors and suppliers are unrelated and do not interact and collude.
• That the source of value is structural advantage i.e. creating barriers to entry.
• That uncertainty is low allowing participants in a market to plan for and respond to
competitive behaviour.
• Sixth force---is the government and the public

• Value chain analysis----Michael Porter

The value chain model is one way of analysing what a firm does and how it organises and
performs its activities in order to add value.
Michael porter was looking at where value was added and how much was being added at each
and every stage of production.

The idea of the value chain is based on the process view of organizations, the idea of seeing a
manufacturing (or service) organization as a system, made up of subsystems each with inputs,
transformation processes and outputs.
Inputs, transformation processes, and outputs involve the acquisition and consumption of
resources - money, labor, materials, equipment, buildings, land, administration and
management.
How value chain activities are carried out determines costs and affects profits

• Primary Activities
Are connected to the product or service being produced.
• In bound logistics----receiving, handling, and storing inputs to the production system,
warehousing, transport and inventory control.

• Operations----covert inputs into a final product.

These include materials and people.

• Outbound logistics----storing the product and its distribution to customers.

It includes packaging, testing, and delivery.

• Marketing and sales----informing the customers about the product, persuading them to buy it,
and enabling them to do so.

It includes advertising, promotion and personal selling.

• Service----this is after sale service and includes installing products, repairing them, upgrading
them, providing spare parts etc.

• Support Activities (secondary activities)

Are there to support the primary activities.
• Procurement----acquiring the resource inputs to the primary activities e.g. materials and
components.

• Technology development----involves product design, improving processes and resource

utilization.

• Human resource management----involves recruiting, training, developing and rewarding people.

• Firm infrastructure----involves planning, finance, and quality control.

Porter believes they are crucially important to an organisation’s strategic capability in all primary
activities.

• Margin---- is added over and above the primary and support activities in order for the firm to
make a profit.
 • Linkages
Connect the activities of the value chain.

• Activities in the value chain affect one another e.g. more costly product design or better quality
production might reduce the need for after sales service.

• Linkages require coordination e.g. just in time requires smooth functioning of operations,
outbound logistics and service activities such as installation.

• The value system

Activities and linkages that add value do not stop at the organisation’s boundaries but extent to
customers and suppliers.

• Impact on environment of economic activities

Environmental footprint is the impact that a business's activities have on the environment, including its
resource environment and pollution emissions.
At an individual firm or business level, environmental impact can be measured in terms of environmental
costs in various areas.

Much business activity takes place at some cost to the environment.

Examples of impacts on the environment include:

· Depletion of natural resources

· Noise and aesthetic impacts
· Residual air and water emissions
· Long-term waste disposal
· Uncompensated health effects
· Change in the local quality of life