ENVIRONMENTAL FACTORS THAT INFLUENCES THE OPERATIONS OF THE BUSINESS

Socio-Cultural Forces
(c) UNCLE BEN Strategic Management 1

What are Social, Cultural, and
Demographic Forces?
The attitudes, values, standards, beliefs, and tastes held
by people including ethnic minority groups.
Factors that regulate the values, traditions, ethics,
morals, and customs of society
Consist of:
Culture
Demography
Social structure
Social factors affect economic factors

What are Social, Cultural, and
Demographic Forces (2)
Social and cultural changes include:
Changing population characteristics
Changing consumer values and lifestyles
Changing consumer purchasing power
Changing religious beliefs and practices
Demographic changes include:
Shifts in population characteristics such as income,
education, and age levels
Geographic distribution of the population
 Population growth

Social, Cultural, and Demographic Forces
• Child bearing rates
• Number of births
• Number of deaths
• Number of marriages
• Number of divorces
• Immigration and emigration rates
• Life expectancy rates per capita income
• Attitudes towards business
• Lifestyles
• Traffic congestion
• Trust in government
• Attitudes towards government
• Attitudes towards work
• Buying habits
• Ethical concerns
• Attitudes towards savings
• Racial equality
• Attitudes towards investing
• Sex roles
• Attitudes towards product quality
• Attitudes towards customer service
• Attitudes towards foreign people
• Pollution control
• Waste management
• Air pollution
• Water pollution
• Number of churches and church
members

Impact of Social, Cultural, and Demographic
Forces on Business
 Demographic factors (e.g., size of the population, population
growth, age, life expectancy, family size, occupational status,
employment pattern etc.,) demand for goods and
services, working hours
 Consumer behaviour and attitudes different demand
patterns and different marketing strategies
 Mobility of labour availability and price of labour
 Geographic distribution of population demand for
goods/services, availability of labour for work
 Income distribution purchasing power of workers

Technological Forces

What is the Technological Environment?
Factors that affect the way an organisation does its
work and also the products and services it offers
Factors that create problem-solving inventions
The current state of knowledge regarding the
production of products and services

Some technological factors that affect
business activities
• Government expenditure on
technology (i.e. R/D)
• Industry expenditure on technology
(i.e. R/D)
• Patent protection
• Technological advancements
• Lifecycle of technology available
• The role of internet and the changes
to it (if any)
• Availability of new products and
srevices
• New developments in technology
transfer from the labs to the
marketplace
• Improvements in productivity
through automation
• Availability of internet facilities
• Telecommunication infrastructure
• Computer hacking activities
• Biotechnology and new industries
• Information technology, computing
and associated implications for
production
• Transportation and distribution
• Production processes

Impact of Technological Forces on Business
1. Type of products or services that are made and
sold
2. The way in which products are made
3. The way in which services are provided
4. The way in which markets are identified
5. The way in which employees are recruited and
trained

Impact of Technological Forces on Business (2)
– Creation of new markets
– Proliferation of new and improved products
– Changing the relative competitive cost
positions in an industry
– Rendering existing products and services
obsolete

Impact of the Internet on Business Activities
– altering the life cycles of products,
– increasing the speed of distribution,
– creating new products and services,
– erasing limitations of traditional geographic
markets,
– changing the historical trade-off between
production standardisation and flexibility.

Impact of the Internet on Business Activities (2)
– altering economies of scale (i.e., reduction in
input cost with an increase in output as the
business grows)
– changing entry barriers,
– redefining the relationship between industries
and:
various suppliers,
creditors,
customers, and
competitors

Environmental or Ecological Forces

Environmental or Ecological Forces
All the factors that influence or are determined by the
surrounding environment.
Vital for certain industries such as tourism, crop
farming, horticulture, fisheries, forestry, and livestock
farming
Examples include:
– Climate
– Weather
– Geographical location
– Global changes in climate
– Environmental offsets, etc.

Example of PEST Analysis
Political
• Government has passed legislation
which requires further reductions of
CO2 , HC and NC emissions for
vehicles until 2020
• New political forces, which are
against tax reductions, may be
elected in the next years’ elections
• Import restrictions will increase in
2016
• Government is increasing its funding
to ‘priority’ industries
• Government is easing regulations for
employment
• Increasing tensions between our
government and our major export
partner’s government
Economic
• GDP will grow by 3% in 2015
• Availability of credit for businesses
will slightly grow or remain
unchanged in 2015. The same applies
for the cost of credit in the last
quarter of increase to 15%
• Inflation will rise to 15% or 16% in
2015
• Corporate tax rate will decrease by
2% next year to 23%
• Dollar exchange rates are expected to
decrease compared to euro
• Disposable income level will decrease
• Oil prices will increase by 5% and 6%
respectively in 2016

Example of PEST Analysis (2)
Socio-cultural
• Positive attitude towards “green”
vehicles
• Number of individuals and
companies buying through the
Internet is 10% and 4% respectively
and is expected to grow
• Immigration is increasing
• Increasing attitude toward jobs with
shorter work hours
• Increasing attitude toward “blue-
collar” jobs
• People tend to buy more foreign
rather than domestic products
• People change their eating habits and
now tend to eat unhealthier food
Technological
• New machinery that could reduce
production costs by 20% is in
development
• Country’s major telecom company
announced its plans to expand its
internet infrastructure and install
new optic fibre cables
• Driverless cars may be introduced
in the near future
• “New” type of chair will be
introduced into the market next
year

Advantages and Disadvantages of PEST Analysis
Advantages
• The tool is simple and easy to
understand and use.
• The tool helps understand the
business environment better.
• The tool encourages the
development of strategic
thinking.
• The tool helps reduce the
effect of future business
threats.
• The tool enables projects to
spot new opportunities and
exploit them effectively.
Disadvantages
• The tool allows users to over-simplify
the data that is used. It is easily
possible to miss important data.
• The tool needs to be updated
regularly to be effective.
• The tool is most effective when users
come from different perspectives and
departments.
• The tool requires users to have access
to data sources which could be time
consuming and expensive.
• Much of the data used by the tool is
on an assumption basis.
• The business environment is changing
drastically. Thus, it is becoming
increasingly difficult for projects to
anticipate developments

What is the Task Environment?
A. k. a. Micro environment or Industry environment
Those specific outside elements or groups with
which the business interacts when conducting its
activities.
Has immediate impact on the business and, in turn,
is affected by the business.
Management has no control over it in the short
term; instead management has control over it in the
long term
UNCLE BEN (c) STRATEGIC
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Elements of the Task Environment
 government,
 local communities,
 suppliers,
 competitors,
 customers,
 creditors,
 employees/labour unions,
 business owners
 special-interest groups, and
 trade associations.
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Industry Analysis
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Industry Analysis
A. k. a. Competitive Analysis
The in-depth examination of key factors within
the task environment of business.
Assists managers to:
– Identify rival firms
– Determine the strengths, weaknesses,
capabilities, opportunities, threats, objectives, and
strategies of rival firms
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Industry Analysis
Determines the intensity of competition
using the Competitive Forces Model
 Rivalry among existing firms
 Threat of new entrants
 Threat of substitute products
 Bargaining power of buyers
 Bargaining power of suppliers
 Relative power of other stakeholders
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Existing Firm Rivalry
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Rivalry Among Existing Firms
Competitive pressures arising from the efforts of rivals to get
better market position, market share, higher prices, and
competitive advantage
Rivalry is stronger when:
Competing sellers are active in making fresh moves to
improve their market standing and business performance
Slow rate of growth of industry -- Buyer demand is
growing slowly
Extra capacity-- Buyer demand falls off and sellers find
themselves with excess capacity and/or inventory
Large number of competitors -- The number of rivals
increases and rivals are roughly of equal size and
competitive capability
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Rivalry Among Existing Firms (2)
Little opportunity to practice product differentiation -- The
products of rival sellers are commodities or else weakly
differentiated
 Buyer costs to switch brands are low
 One or more rivals are dissatisfied with their current position and
market share and make aggressive moves to attract more
customers
 Diversity of rivals -- Rivals have diverse strategies and objectives
and are located in different countries
 Outsiders have recently acquired weak competitors and are trying
to turn them into major contenders
 No industry leader -- One or two rivals have powerful strategies
and other rivals are struggling to stay in the business
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Rivalry is generally weak when:
Industry members move only infrequently and are in a
non-aggressive manner to draw sales and market share
away from rivals
Buyer demand is growing more rapidly
Product or service characteristics -- The products of
rivals are strongly differentiated and customer loyalty is
high
High exit barriers -- Buyer costs to switch brands are
high
There are fewer than 5 sellers or else so many rivals that
one company’s actions have little direct impact on rival’s
business
High fixed costs

Typical weapons for fighting rivals and attracting buyers
include:
1. Lower prices
2. More or different features
3. Better product performance
4. Higher quality
5. Stronger brand image and appeal
6. Wider selection of models and styles
7. Better/bigger dealer network
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8. Low interest rate financing
9. Higher levels of advertising
10. Stronger product innovation capabilities
11. Better customer service capabilities
12. Stronger capabilities to provide customers with
custom-made products

New Entrants
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Threat of New Entrants
Competitive pressures arising from the threat of new entrants
to an industry who bring new capacity including the desire to
gain market share and substantial resources
Entry threats are stronger when:
The pool of new entrants is large and some of the new
entrants have resources that would make them
formidable market contenders
Entry barriers are low or can be readily hurdled by the
likely new entrants
New entrants can expect to earn attractive profits
Buyer demand is growing fast
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Industry members are unwilling or unable to contest
the entry of new entrants
Access to distribution channels -- When existing
industry members are looking to expand their market
reach by entering product segments or geographic
areas where they currently do not have a presence
Favourable government policy/action such as
legislation
Product differentiation
Low switching costs
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Entry threats are weaker when:
The pool of new entrants is small
Capital requirements of entry are high
Existing competitors are struggling to earn healthy
profits
The industry’s outlook is uncertain or risky
Lack of access to distribution channels
Buyer demand is growing slowly or is stagnant
Unfavourable government policy/action such as
legislation
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Expected retaliation -- Industry members will strongly
contest the efforts of new members to gain a foothold
in the market
High switching costs
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Substitute Products or Services
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Threat of Substitute Products or Services
Competitive pressures arising from the attempts of
companies outside the industry to win customers over to
their products that appear different but can satisfy the
same need as another product
Forms of substitution are:
 Product- for- product substitution
 Substitution of need
 Generic substitution
 Product not a necessity
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Competitive pressures from substitutes are stronger
when:
Good substitutes are readily available or new ones are
emerging
 Substitutes are attractively priced
Substitutes have comparable or better performance
features
End-users have low costs in switching to substitutes
End-users grow more comfortable in using substitutes
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Indicators that competition from substitutes is strong:
Faster growth in sales of substitutes than sales of the
industry being analysed. This shows that sellers of
substitutes are drawing customers away from the
industry in question.
Producers of substitutes are moving to add new
capacity
Increasing profits of producers of substitutes
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Competitive pressures from substitutes are weaker when:
Good substitutes are not readily available or do not
exist
Substitutes are higher priced in relation to their
performance
End-users have higher switching costs to substitutes
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Power of Buyers
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Bargaining Power of Buyers
Competitive pressures arising from ability of buyers to force
prices down, bargain for higher quality, and play competitors
against each other including buyer-seller collaboration
Bargaining power of buyer is stronger when:
The identity of a buyer adds prestige to the sellers list of
customers
Improvement in the quantity and quality of information to
buyers
Buyers can postpone their purchases to later periods if
they do not like the offer of the suppliers
There is threat of backward integration by the buyer into
the seller’s business so that the buyer becomes a
competitor
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Bargaining Power of Buyers (2)
Switching costs of buyers to competing brands or
substitute products (i.e., change to new suppliers) are low
Buyers are many and can demand concessions when
buying large quantities
Large-volume purchases by buyers are important to
suppliers
Buyer demand is weak or declining
There are only a few buyers so each buyer’s business is
very important to sellers
 There is concentration of buyers
 There are alternative sources of suppliers
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Bargaining power of buyer is weaker when:
 Product represents a high percentage of buyer’s
cost
 Buyer earns low profits
 Product is unimportant to buyer
 Buyers buy the items infrequently or in small
amounts
 The switching costs of buyers to competing
products are high
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 The brand reputation of a seller is important to the
buyer
 A surge in demand by buyers creates a “seller’s
market”
 The quality or performance of a product is very
important to buyers but it is not matched by other
products
 A partnership or cooperation of buyers with sellers
provides attractive win-win opportunities
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Power of Suppliers
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Bargaining Power of Suppliers
Competitive pressures arising from the ability of
suppliers to raise prices or reduce quality of raw
materials, parts, components, and other resource
inputs including supplier-seller collaboration
Bargaining power of supplier is stronger when:
There are only a few suppliers of a particular input
Supplier offers unique product or service
Substitutes are not readily available
Unimportance of product or service to the supplier
Cost of switching to another supplier is high
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Bargaining Power of Suppliers
 There is a threat of forward integration by supplier into
the business of industry members thereby making it
possible of the supplier to become a rival
 The supplier’s customers are highly fragmented so they
have low bargaining power
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Bargaining Power of Suppliers (2)
Bargaining power of supplier is weaker when:
Switching costs to other suppliers are low
Good substitute inputs exist or new ones are
coming onto the market
The collaboration or partnership of sellers with
selected suppliers provides attractive win-win
opportunities
Items supplied are commodities that are readily
available from many suppliers at the existing
market prices
There is a surge in the availability of supplies, thus
greatly weakening the pricing power of suppliers
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Bargaining Power of Suppliers (2)
 Industry members account for a large proportion of
a sellers’ total sales and a continued volume high
purchases are important to the well-being of
suppliers
 Industry members are a threat to integrate
backwards into suppliers’ businesses and to self-
manufacture their own requirements
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Other Stakeholders
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Relative Power of Other Stakeholders
Competitive pressure stemming from attempts by other
stakeholders to influence business activities
Government
Local communities
Creditors
Trade associations
Special interest groups
Unions
Shareholders
Complementors- products that work well with a firm’s
product
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