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EXTERNAL ENVIRONMET
The world beyond the boundary of our organization. How environments affects the organization in term of policies, structure and operations. How organizations responds to changes in environment. Ranges of services available to businesses in its environment

The business environment

Organization has to be aware of what is changing? Does it affect what we are doing now? Might it affect our business in future? Things in the outside world, that actually affects the organization. Before making any decisions about the future, an organization needs to understand the environment in which it operates.

AIM
The aim is to provide information to assist those responsible for strategy development and decision making. PEST analysis may be used in the context of overall organizational strategy or more specifically to evaluate the feasibility of a new product or service, or expansion into a new market.

We will focus on:

Political and legal factors Macro economic factors (chapter 3) Micro economic factors (chapter 4) Social factors Technological factors Competitive factors

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POLITICAL AND LEGAL

This may impact the organization at a number of levels:
Globally (supra-national organizations) Nationally Locally

The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses.

How stable is the political environment? Will government policy influence laws that regulate or tax your business? What is the government's policy on the economy? Does the government have a view on culture and religion? Is the government involved in trading agreements such as EU, NAFTA, ASEAN, or others?

Influence of government
Laws and regulations Taxation Economic policies Incentives Trade policies Infrastructure Education, training and development

How does Political factors influence business?

Government impose regulations that businesses has to adhere Increase the cost Governments also influence business through the tax system Other influences include items such as decisions of government spending, incentives for location or the promotion of exports.

Sources of legal authority

Statute law: Acts created by national parliament Case law: Some interpretation of law by courts where the law is silent on certain issues, those become case law and is as important as statue law Delegated legislation: Parliament may delegate the creation of detailed regulations to civil servants but maintains the power to veto. Supra-national: Laws by international bodies

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Employment law
Usually covers the following areas:
contracts of employment basic remuneration working hours, working environment and conditions, holiday entitlement, maternity and sickness leave termination of employment, including unfair dismissal, constructive dismissal and redundancy equal opportunities and discrimination on the basis of gender, race, religion or age part-time and full time employment trade unions appeals procedures and tribunals

Employment protection
Dismissal:
The termination of an employee's contract by the employer The ending of a fixed-term contract without renewal on the same terms Constructive dismissal: Resignation by the employee where the employer's conduct breaches the contract of employment

Unfair dismissal
The legal concept of unfair dismissal gives protection to the employee against arbitrary dismissal; that is dismissal without good reason Under employment protection legislation, the employee has to prove that he has been dismissed The obligation is then on the employer to prove that the dismissal was fair

Wrongful dismissal is dismissal that breaches the contract of employment

Data protection and security

Data protection is concerned with protecting individuals against the misuse of information about them held by organization.

Risks to data security

Physical damage: fire and flood Human damage: hacking, virus infection and fraud Operational problems Data corruption

Data security is concerned with protecting the integrity of the data held such that it cannot be damaged or destroyed.

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Data protection principles

Personal data shall be processed fairly and lawfully Personal data shall be obtained only for one or more specified and lawful purposes Personal data shall be adequate, relevant and not excessive in relation to the purpose Personal data shall be accurate and, where necessary, kept up to date

Personal data should not be kept for longer than is necessary Appropriate technical and organizational measures shall be taken against unauthorized or unlawful processing of personal data Personal data shall not be transferred to a country or territory outside the European Economic Area (EEA) without adequate protection

Health and Safety

Typical hazards might include
Desks/chairs too near to doors Unsafe electric plugs Trailing wires and cables Torn carpets Unlit or poorly lit corridors and stairs Top-heavy filing cabinets Untrained operators using machineries Unmarked plate glass doors Wet floors

Health & safety: employer

Provide safe access in and out of a safe working environment Provide safe and appropriate equipment and machinery Arrange for the safe use, handling, storage and transport of hazardous substances Provide sanitation, washing facilities and fresh drinking water Maintins a suitable temprature

Provide regular information, instruction, training and supervision to all employees on health and safety procedures. Continually assess the risks to health and safety and to adequately investigate accidents, implementing necessary changes. Promote health and safety practices via:
a formal health and safety policy/manual job descriptions design of work systems

Health & safety: employee

Take reasonable care of himself and others Cooperate with anyone (including employer) carrying out their duties Not deliberately or carelessly operate or alter any equipment Inform the employer of any dangerous situation Consider the health and safety of others

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Importance
Ethics Motivation Reputation Financial issues e.g. damages Loss of business

Consumer protection

Principles of consumer protection

Consumers should be furnished with unambiguous and up-to-date information Businesses should ensure that they fulfill all expressed and implied performance standards Consumers should not be subjected to any unreasonable payment liabilities As regards to food products, consumers should be assured high quality and safety standards

Law of contract
What is a Contract? Contract is a legally binding agreement. What is an agreement?
All agreements are not contracts although all contracts are agreements.

Elements of a Valid Contract

- Offer and acceptance - Consideration - Intention to create legal relation - The purpose of the contract should be legal and enforceable by law. - Certainty - Capacity - Formalities

Offer and Acceptance

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

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Certainty
Agreements, the meaning of which is not certain, or capable of being made certain, are void. Example: A agrees to sell to B 50 crates of toys, but the kind and type of the toys are not specifically mentioned. Here the contract is uncertain and vague and therefore void.

the money given in exchange for the goods is referred as considerations.

Case: Karuppan Chetty v. Suah Thian

Fact: The parties agreed for a lease at $ 35.00 per month for as long as the leasee likes. Held: The contract is void since the term as long as the leasee like is vague.

Capacity
Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.

Exclusion Clauses
Standard contracts include exclusion clauses. Exclusion clauses exclude the liabilities of a contracting party. (that say that one party to the contract will not be responsible for certain happenings) Bus, train and air travel companies, banking and insurance companies usually include exclusion clauses in their contract with the customers. For example, if you join a gym, it is common for the contract to say that the gym owner will not be responsible if you are injured while exercising. If you arrange to park your car in a public car park for a fee, the owner will often seek to include in the contract a provision that they will not be responsible for damage to your vehicle, or theft of goods from it, while it is in the car park. Exclusion clauses are normally held valid and operative by the court unless there is no fundamental breach of obligation in the contract.

Case: Port Swettenham Authority v. T.W. Wu and Company

Fact: Ninety-three cases of pharmaceutical goods were unloaded at Port Klang and kept in the custody of the Port Authority. Sixty-four cases of pharmaceutical goods were stolen due to the negligence of the Port Authority. By-law 91(1) of the Port Sweetenham Authority By-laws 1965 excluded the liability of the Port authority for any loss or damage of the goods. Held: The exclusion clause was invalid as it excluded the fundamental obligation of the port authority.

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Misrepresentation
- To be a valid contract the consent in the contract
must be given freely. If the consent is caused by misrepresentation, mistake, fraud, undue influence or coercion then the contract is voidable at the option of the affected party. - A misrepresentation is a false statement made by one party which induces the other to enter into a contract.

Illegality
A contract is illegal if its object or consideration is unlawful. Every agreement of which the object or consideration is unlawful is void.

Sale of goods and services

Sale of goods and services

Is subjected to following provisions: The effect of delay in performance Title, or the sellers right to sell the goods Description of the goods Quality of the goods Fitness of the goods for the purpose it is supplied

SOCIO CULTURAL
Factors that might affect demand and workforce. E.g. McDonald The social and cultural influences on business vary from country to country. It is very important that such factors are considered. Factors include:
Religion Attitude to globalization Language Work/life balance Distribution of wealth Population distribution Health

What is the dominant religion? What are attitudes to foreign products and services? How much time do consumers have for leisure? What are the roles of men and women within society? E.g.: Who take finally the last decision about buy a new car? The promotion tools can't ignore this fact

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Women are increasing their participation in the labor force:

More part time jobs Rising male unemployment as many industries which employed men have declined The growth of the service sector An increase in the average age at which women have children

Social structures
Family life cycle Population Social class and structure Buying patterns Social values

Family Life Cycle

Age

Population
Birthrate, Death rate, mortality rate, immigration and emigration Life expectancy and ageing population Growing population would results in growing markets

Marital Status

Children

Social class
Type of occupation, income level, education background Access to power Status and esteem

Gender and household composition

Typically men and women have different buying patterns Number of people living under same roof will influence buying pattern. For example, single person household are less likely to buy large -economy packs of products

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Social Values
An increasing concern about green house gases and the ozone layer, testing of products of on animals and greater social awareness could result a disaster for firms who are unwilling to embrace this cultural shift. Many women are choosing to pursue careers first before having children, so the average age of a mother of the birth of their first child has risen in many countries. Such older mothers are often wealthier and more demanding of the baby products they buy resulting an increase in demand for better quality clothing, prams etc.

Demography and demographics

Demography is the study of the human population, its structure and change. Demographics refers to the selected characteristics of a population under study (and are frequently used in economic and marketing research) e.g.
population, location, mobility age, gender, race health, disabilities disposable income education

Impacts
Population birth rates across the world, supply of labor, HR policies, marketing, products and services. Age young, old, experience, marketing Gender women Health workforce, marketing Environment

Government measures
Tax advantage and financial incentives to encourage families to have more children. (e.g. Singapore) and opposite in China one child policy Housing Immigration: E.g. Canada and Australia Education Retirement options and pensions Health programmes: Banning ads on tobacco Emissions

Technological factors
Technology can influence many aspects of the organization
Production methods Marketing and distribution Structure Communication Product development Purchasing.

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Technology and Organizational structure

Downsizing: occurs when organizations reduces its workforce by significant number of employees
Automated production IT skills at higher levels Computerized administration Enterprise wide systems Greater spans of control

Outsourcing: contracting out certain activities to a third party

Non-core activities

Advantages
Cost control Focus on core activities Planning and risk management

Disadvantages
Key resource? Loss of learning and development experience Opposing objectives Long term disruption

Delayering
Reduced levels of management Increased span of control, decreased scalar chain MIS, work collaborative systems

Technology and the consumer

Technology has changed the way we live:
Home-working On-line shopping On-line banking Distance learning Home entertainment.

Technology is vital for competitive advantage, and is a major driver of globalization. Consider the following points:
Does technology allow for products and services to be made more cheaply and to a better standard of quality? Do the technologies offer consumers and businesses more innovative products and services such as Internet banking, new generation mobile telephones, etc? How is distribution changed by new technologies e.g. books via the Internet, flight tickets, auctions, etc? Does technology offer companies a new way to communicate with consumers

COMPETITIVE FACTORS
If the competition increase, consumers will have more choice of products Firm will have to work harder to retain existing customers and to attract new ones There are various methods to analyze the competitiveness of the business environment

Porter
5 forces of competition Generic model Value chain

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Direct, indirect, monetary

Potential development of substitute products

Ability to resist cost increases

Substitutes
Ability to raise prices

Bargaining power of suppliers

Rivalry among competing firms

Bargaining power of consumers

Influenced by barriers to exit

Potential entry of new competitors

Reduced by existence of barriers to entry

Depend up on the ease at which customer can switch to an alternative product To what extent is there a danger? Can it be minimized by differentiation or low costs?

Customers
POWERS GREATEST WHERE

Suppliers
POWERS GREATEST WHERE Few suppliers Few substitutes Switching costs are high Supplier concentration Suppliers product differentiated

Concentration of buyers Alternative sources of supply exist Cost of purchase is high proportion of total cost Low switching costs Buyers have low profits Buyer has full information

Existing Rivals
GREATEST WHERE Rivals are of similar size Slow growth in market High fixed costs Price wars to maintain turnover Lack of differentiation High exit barriers

New entrants
BARRIERS TO ENTRY Economies of scale Other cost advantages Higher capital requirements Limited access to distribution/supply chains Patents Government policy Strong customer loyalty for existing products

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Generic Strategy
Porter stated that a firm wishing to obtain a competitive advantage over its competitors is faced with TWO choices

Choice 1 (Cost leadership vs. Differentiation)

Cost leadership: is the company seeking to compete by achieving lower costs than its rivals for similar products or services? The business can charge a lower price and enjoy superior margin. Differentiation: is the company wishing to differentiate itself by offering a better product than competitors? The customers will be prepared to pay premium price for added value hence increasing the margin

Choice 2 (Focus)
What is the scope of the area in which the company wishes to obtain competitive advantage? Is it industry-wide or specific niche?

This leads to 3 generic strategies:

Cost leadership Differentiation Focus

A company trying to be both a cost leader and differentiator usually results in the company being stuck in the middle with no clear competitive advantage a recipe for disaster

Cost leadership
Being the lowest cost producer in the industry . E.g. Nissan, Ford, Honda

Differentiation
Establishing the product as being different or unique in comparison to competitors and offering a real or perceived advantage over competitors products. E.g. BMW, Jaguar, Mercedes

Focus or niche
Concentrating on a select few target markets. E.g. Ferrari, Rolls Royce

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Generic Strategies/Industry Forces

These generic strategies each have attributes that can serve to defend against competitive forces.
Generic Strategies Industry Force

Porters value chain

Developed to determine whether and how a firms activities contribute towards its competitive advantage This approach involves breaking the firm in to nine activities and then looking at each to see if they give a cost advantage or quality advantage

Cost Leadership
Ability to cut price in retaliation deters potential entrants. Ability to offer lower price to powerful buyers.

Differentiation
Customer loyalty can discourage potential entrants. Large buyers have less power to negotiate -few close alternatives.

Focus
Focusing develops core competencies that can act as an entry barrier. Large buyers have less power to negotiate because of few alternatives. Suppliers have power because of low volumes, but a differentiationfocused firm is better able to pass on supplier price increases. Specialized products & core competency protect against substitutes. Rivals cannot meet differentiation-focused customer needs.

Entry Barriers Buyer Power Supplier Power

Better insulated from powerful suppliers.

Better able to pass on supplier price increases to customers.

Threat of Substitutes Rivalry

Use low price to defend against substitutes.

Customers become attached to differentiating attributes, reducing threat of substitutes. Brand loyalty to keep customers from rivals.

Better able to compete on price.

Primary activities
Primary activities are those directly related to production, sales, marketing, delivery and services: (a) Inbound logistics (b) Operations (c) Outbound logistics (d) Marketing and sales (e) After sales service

Activity Inbound logistics Operations Outbound logistics Marketing and sales After sales service

Description
Receiving, storing and handling raw materials inputs Transformation of raw materials to finished goods and services

Example
A just in time stock system could give a cost advantage Using skilled workforce could give a quality advantage

Support activities
Support activities are those which provide purchased inputs to support the primary activities, e.g. human resources, technology and infrastructural functions: (a) Procurement (b) Technology development (c) Human resource development (d) Firm infrastructure

Storing, distributing and Outsourcing deliveries delivering finished goods could give a cost to consumers advantage Market research + 4Ps Endorsement with celebrities could enhance the image of the product A good policy of handling in returned products could give quality advantage

All activities that occur after the point of sale such as installation, training and repairing

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Activity

Description
Purchasing, but not just limited to raw materials

Example
Buying a building out of town could give a cost advantage over a High street competitor The latest computer controlled machineries gives greater flexibility to tailor products to individual customer specifications

Primary activities
Primary activities are those directly related to production, sales, marketing, delivery and services: (a) Inbound logistics: Receiving, storing and handling raw material inputs. E.g. warehousing, transport, stock control. (b) Operations are those activities that convert resource inputs into a final product. (c) Outbound logistics are those activities relating to storing the product and its distribution to customers.

Procurement Technology development Human resource development Firm infrastructure

How the firm uses technology

How people contribute to Employing expert and the competitive skilled staffs would advantage increase the productivity

How the firm is organized

Centralized buying could result in cost savings due to bulk discounts

(d) Marketing and sales are those activities that relate to informing customers about the product, persuading them to buy it, and enabling them to do so. This includes advertising, promotion etc. (e) After sales service. For many companies, there are activities such as installing products, repairing them, upgrading them, providing spare parts etc.

Support activities
Support activities are those which provide purchased inputs to support the primary activities, e.g. human resources, technology and infrastructural functions: (a) Procurement refers to those activities which acquire the resource inputs to the primary activities (e.g. purchase of materials, subcomponents and equipment). (b) Technology development (in the sense of apparatus, techniques and work organisation). These activities are related to both product design and to improving processes and/or resource utilization.

(c) Human resource management is the activities of recruiting, training, developing and rewarding people. (d) Firm infrastructure. The systems of planning, finance and quality control are activities which Porter believes are crucially important to an organization's strategic capability in all primary activities.

Value Chain is used to identify the following:

(a) Internal strengths and weaknesses (b) Benefits from internal linkages (b) Benefits from external linkages (c) How the value chain supports the generic strategy

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Competitive advantage
In order to get competitive edge the following departments should work together:
Purchasing Production Marketing service

Ecological/Environmental
Considers ways in which the organization can produce its goods or services with the minimum environmental damage Measures to reduce global warming Taxes on fuels and other negative externalities Recycling Consumer boycotts and pressure groups If handled carefully, could lead to reduction in cost and pleased customers

Effects of Environmental Awareness

A company must acknowledge the opinions of its customers or risk losing their support. Business must ensure that its practices are not contrary to current public opinion. Issuing written environmental policy to address issues involving the firm
E.g. paper manufacturer might advertise its tree planting program or its use of recycled paper in its products. Other firms such as cosmetic manufacturers could advertise the fact that they have stopped certain practices such as experiments involving animals or the use of toxic chemicals

Firm could use its environmentally friendly approach to win new customers by advertising the positive points. Highlight the lack of damage to the planet in its production process, its products and in its exploitation of resources. Furniture manufacturers might stress the use of entirely renewable resources in its range of products.

A business producing in a developing country might emphasize its contribution to the local economy, its training of the work force or the building of social infrastructure such as schools and hospitals. Rather than damage limitation this is a positive approach to convince the market about the firms attitude to the environment. The firm could seize the opportunity to create new environmentally friendly products for the market. E.g. Body Shop

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