External environmental analysis 1.

aims of this session outline the main environmental influences on the organisation; the PESTEL framework as a means to understand the general influences of macro environmental factors on the organisation understand the importance of building scenarios understand the five forces framework as a means to understand the microenvironment understand the importance of strategic group analysis when analysing an industry 2. the business environment macro environment: political, economic, technological, socio-cultural Microenvironment: buyers, suppliers, competitors, new entrants, and substitutes the company internal resources and competences 3. MACROENVIRONMENT consists of the forces at work in the general business e nvironment which will shape the industries and markets in which the organisation competesis the part of the environment over which the business can rarely exert any direct influence but to w hich it must respond MICROENVIRONMENT is the competitive environment facing a business and it consists of the industries and markets in which the organisation conducts its business PESTEL analysis Political Economic Socio-cultural Technological Ecological Legal PESTEL analysis political Government stability Taxation, employment and safety law Social welfare polices Foreign trade regulations Relations between government and the organisation Government ownership of industry and attitude to monopolies and competition policy Green issues that affect the environment level and type of energy consumed renewable energy? Rubbish, waste and its disposal PESTEL analysis economic Total GDP and GDP per head growth rates (trends) Inflation Consumer expenditure and disposable income Interest rates Currency fluctuations and Exchange rates Investment, by the state, private Enterprise and foreign companies Business cycles Unemployment Energy costs, transport costs, communications costs, raw materials costs PESTEL Analysis socio-cultural Shifts in values and culture Change in lifestyle Consumerism Attitudes to work and leisure Green environmental issues education and health demographic changes distribution of income social mobility

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PESTEL analysis technological Government and EU investment policy on research Government and industry focus on technological effort New patents and products Speed of change and adoption of new technology Rates of obsolescence The impact of the internet

10. dynamics of the environment changeability the degree to which the environment is likely to change changeability has two main elements: complexity: degree to which the organisations environment is affected by such factors as internationalisation and technological, social, economic and political issues novelty: the degree to which the environment presents the organisation with new situations 11. dynamics of the environment predictability the degree to which such changes can be predicted: rate of change of the environment from slow to fast visibility of the future in terms of availability and usefulness of information used to predict the future 12. scenarios are detailed and plausible view of how the business environment of an organisation might develop in the future base don groupings of key environmental influences and drivers of change about which there is high level of uncertainty is a detailed, internally consistent description of what the future may look like and is base don a set of assumptions that are critical for the economys, industrys, or technologys evolution 13. building scenarios does not attempt to predict the unpredictable, but just considers multiple futures Develop a qualitative description of a group of possible events or a narrative that shows how events will unfold. It is unlikely that this will involve a quantitative projection. Explore the outcomes of this description or narrative of events by building two or three scenarios of what might happen. More than three scenarios is usually difficult to handle. Two scenarios often lend th emselves to a most optimistic outcome and a worst-possible outcome. Include the inevitable uncertainty in each scenario and explore the consequences of this uncertainty to the organisation concerned for example, What would happen if the most optimistic outcome was achieved? The PESTEL factors may provide some clues here. Test the usefulness of the scenario by the extent to which it leads to new strategic thinking rather than merely the continuance of existing strategy. 14.

14. five forces framework threat of new entrants economies of scale differentiation Brand loyalty Start-up capital requirements Switching costs

Access to supply and distribution channels Legislation or government action Retaliation Entry deterring Price

15. five forces framework 1. product-for-product substitution 2. substitution of need 3. generic substitution relative Price/performance of substitutes switching costs effectiveness in meeting specific customer needs willingness of buyers to substitute product differentiation Brand loyalty

16. five forces framework determinants of supplier power concentration (number and size of the firms) importance of suppliers sales that an industry represents importance of the buyers in the industry as customers of the suppliers differentiation of the product/service and alternative sources switching costs the threat of backward integration by the buyer (the company in analysis) the threat of forward integration by the supplier 15. strategic group analysis strategic groups are organisations within an industry with similar strategic characteristics, following similar strategies or competing similar bases

DECISION AND MOTIVES TO INTERNATIONALIZE Internationalization stimuli can be defined as those internal and external factors that influence a firms decision to initiate, develop, and sustain international business activities. Two sets of factors lead firms to consider the possibility of operating outside their home market: organizational factors arising from within the firm and environmental factors, which are outside the firms control. Organizational factors 1. Decision-maker characteristics: management characteristics such as perceptions of risk in foreign operations have a strong influence on management perceptions. Some of these are: Foreign travel and experience abroad: managers who travel abroad extensively are more open-minded and interested in foreign affairs. They also have more opportunities to observe first-hand the advantages that foreign partnerships. Foreign language proficiency: the number of languages spoken by the top manager is a good indication of his or her interest in international activities. Managers who speak several languages tend to travel more to foreign countries and thus are more able to establish social and business contacts, understand foreign business practices better, are better placed to negotiate a good deal for the company and communicate not only with top managers of foreign affiliates who could speak the home countrys language but with line managers and employees as well. The decision-maker background: having been born abroad, lived abroad, or worked abroad could influence ones view of risks and opportunities in foreign markets. For example, international work experience exposes managers to foreign opportunities, and therefore makes it easier for them to take the first step into foreign markets. Personal characteristics: natural risk-takers are more likely to engage in an international activity than risk-averse managers. Similarly; managers with high ambitions tend to internationalize more than managers with low personal ambitions. 2. Firm specific factor: there are two firm-specific factors, which are: firm size and international appeal Firm size: as will be discussed later, size matters and bigger firms tend to internationalize more than smaller ones. This is because large firms possess more managerial and financial resources also; have greater production capacity, attain higher levels of economies of scale and tend to be associated whit lower levels of perceived risk in international operation. International appeal: Production of a unique product or service with an international appeal could act as a stimulus for international expansion. This is often demonstrated by the speed with which international sales are first obtained after start-up. The source of appeal could be the product or service offered by the company on the basis of their unique features and quality or promotion through heavy advertising, sales promotion, and public relations. Products like Nike, Levis jeans, Pepsi, McDonalds have all crossed global borders because of their international appeal.

ENVIRONMENTAL FACTORS The external business environment has a major impact on the strategic direction of a firm. Many external driving forces stimulate a firm to internationalize. Some of these are: Unsolicited proposals: Some unsolicited proposals from foreign governments, distributors or clients are hard to resist and may stimulate a firm to go international; for example: Volkswagen decided to enter the Chinese auto market after a Chinese delegation visited Volkswagens headquarters and proposed a joint venture that had the support of the Chinese government. The bandwagon effect: Competing firms tend to observe, benchmark, evaluate and imitate each others strategic moves, especially in industries with only a few big domestic players. International expansion can provide a firm with competitive advantages vis--vis its competitors in the home market; for instance, by obtaining cheaper materials, new knowledge or larger economies of scale. Attractiveness of the host country: Multinational firms may be attracted because of the host countrys market size. Market size is attractive to foreign firms because it offers greater potential for growth, profit and stability of operations. Also, per capital income is a good measure of a countrys attractiveness for market seeking multinationals. Customers in c ountries with high per capital income have high purchasing power and high demand of goods. Other factors that attract foreign firms are cheap labour, availability of skills and proximity to the market.

THE INTERNATIONALIZATION PROCESS 1. Timing of market entry: The environmental factors in the previous section explain why many firms enter a market at a particular time: when a firm is approached by a customer; when competing firms enter an important market or when a market is growing very fast. For instance, Carrefour decided to expand in emerging markets such as Poland and China at the time when the economies of these countries were quickly expanding and consumers had increasingly more money to spend on shopping.

Early entry into a foreign market can have five generic advantages: Cost advantages: allowing the firm to have larger economies of scale and accumulating experience about the foreign market before the entry of competitor. Pre-emption of geographic space: pre-empting competitors by securing a specific geographic space or marketing channel. Technological advantages: adapting products and processes to the local market and implementing new innovations before competitors enter the market. Differentiation advantages: Higher switching costs for buyers or reputational advantages of established brands. Political advantages: The support of foreign government in raising barriers to entry for late movers.

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Obstacles to internationalization: Many companies have discovered that it can be very difficult to expand internationally, even if you offer a superior and cheaper product or service compared with your competitors. For instance, Carrefour faced government restrictions on opening hypermarkets in different countries, problems of adapting its organization to different national contexts, and logistical problems in countries with underdeveloped transport infrastructure.

The difficulties of internationalizing firms can be the consequence of at least four different types of liabilities: Liability of foreignness: The difficulties as a result of the different norms and rules that constrain human behaviour, including culture, language, religion, and politic. Liability of expansion: The difficulties as a result of an increase in the scale of a firms activities; domes tic companies may also face problems of increased transportation, communication. Liability of smallness: The difficulties as a result of small company size; in particular, small and medium-sized enterprises (SMEs) may have fewer financial resources for foreign investments, limited information about the characteristics of foreign markets, a lack of human resource among others. Liability of newness: The difficulties as a result of being new to a market; new domestic market entrants also suffer disadvantages compared with established firms. Perceptions of manager: How was explained above the managers perspective may influence in the development of any organization. Psychic distance and internationalization: First, firms start expanding to neighbouring countries or countries with small psychic distance. A firms international expansion depends on its experiential knowledge of foreign markets.

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They identified four successive stages in the firms international expansion: 1. 2. 3. 4. No regular export activities Export activities via independent representatives or agents. The establishment of an overseas subsidiary. Overseas production and manufacturing units.