The Business Environment

A – The Business Environment
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We are going to study:
1. How to analyse an organisation’s competitive position
2. The PESTEL framework
3. Identify key drivers and use these to construct alternative
4. Porter’s five forces analysis (diamond framework)
5. Identify successful strategic groups, valuable market segments
and attractive “Blue Oceans” within industries
6. Use these various concepts and techniques in order to
recognise threats and opportunities in the marketplace
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Layers of the business environment
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The PESTEL framework
The PESTEL framework categorises environmental influences into six main types:
1. Political
2. Economic
3. Social
4. Technological
5. Environmental
6. Legal
• Thus PESTEL provides a comprehensive list of influences on the possible success or failure of
particular strategies.
• The PESTEL analysis provides the broad data from which to identify key drivers of change.
These drivers can then be used to construct scenarios of alternative possible futures.
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The PESTEL framework
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• For example, Government policies, taxation changes,
foreign trade regulations, political risk in foreign markets,
changes in trade blocks (EU).
Political Factors
• For example, business cycles, interest rates, personal
disposable income, exchange rates, unemployment rates,
GDP trends.
Economic Factors
• For example, population changes, income distribution,
lifestyle changes, consumerism, changes in culture and
Socio-cultural Factors
• For example, new discoveries and technology
developments, ICT innovations, rates of obsolescence,
increased spending on R&D.
Technological Factors
• For example, environmental protection regulations,
energy consumption, global warming, waste disposal and
(“Green”) Factors
• For example, competition laws, health and safety laws,
Legal Factors employment laws, licensing laws, IPR laws.


You should also
use algebraic
signs and scores!
Example of a PESTEL analysis
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• Government support for national
carriers (+2)
• Security controls (+3)
• Bilateral agreements (+3)
• National growth rates (+2)
• Fuel prices (-3)
• Rise in travel by elderly (+1)
• Student international study
exchanges (+1)
• Fuel-efficient engines (+2)
• Security check technologies (+3)
• Working from home (-1)
• Noise pollution controls (-2)
• Energy consumption controls (-1)
• Land for airports expansion (-2)
• Restrictions on mergers (-1)
• Preferential airport rights for some
carriers (+3)
Airline Industry
1. What additional
influences would you
add to this list for the
airline industry?
2. Which of these factors
would you highlight as
likely to be the “key
drivers for change” for
airlines in the coming
five years?
Key drivers of change
Key drivers for change
• The COVID-19 pandemic is likely to have a high impact on the
success or failure of strategy of airlines
• For example, the travel restrictions and the new health/safety
measures caused by the COVID-19 will change the way airlines
• Typically, key drivers vary by industry or sector
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Using the PESTEL framework
• Apply selectively – identify specific factors which
impact on the industry, market and organisation in
• Identify factors which are important currently but
also consider which will become more important in
the next few years.
• Use data to support the points and analyse trends
using up to date information
• Identify opportunities and threats – the main point
of the exercise!
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PESTLE analysis
Scenarios are detailed and plausible views of how the
environment of an organisation might develop in the
future based on key drivers of change about which there
is a high level of uncertainty
• Build on PESTEL analysis
• Do not offer a single forecast of how the business will change
• An organisation should develop a few alternative scenarios (2 –
4) to analyse future strategic options
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Carrying out scenario analysis
• Identify the most relevant scope of the study – the relevant
product/market and time span.
• Identify key drivers of change – PESTEL factors that have the most
impact in the future but have uncertain outcomes.
• For each key driver select opposing outcomes where each leads to
very different consequences.
• Develop scenario “stories” – That is, coherent and plausible
descriptions of the environment that result from opposing
• Identify the impact of each scenario on the organisation and
evaluate future strategies in the light of the anticipated scenarios.
• Scenario analysis is used in industries with long planning horizons
for example, the oil industry or airlines.
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Industries, markets and sectors
• An industry is a group of firms producing products
and services that are essentially the same. For
example, automobile industry and airline industry.
• A market is a group of customers for specific
products or services that are essentially the same
(e.g. the market for luxury cars in Germany).
• A sector is a broad industry group (or a group of
markets) especially in the public sector (e.g. the
health sector)
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Porter’s five forces framework (Diamond)
• Porter’s five forces framework helps identify the attractiveness of an
industry in terms of five competitive forces:
1. Threat of entry
2. Threat of substitutes
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Extent of rivalry between competitors
The five forces constitute an industry’s “structure”.
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Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing
Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved
The five forces framework
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The five forces framework
The Threat of Entry & Barriers to Entry
• The threat of entry is low when the barriers to entry are high and vice
• The main barriers to entry are:
➢ Economies of scale/high fixed costs
➢ Experience and learning
➢ Access to supply and distribution channels
➢ Differentiation and market penetration costs
➢ Government restrictions (e.g. licensing)
• Entrants must also consider the expected retaliation from organisations
already in the market
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The five forces framework
Threat of Substitutes
• Substitutes are products or services that offer a similar benefit to
an industry’s products or services, but by a different process.
• Customers will switch to alternatives (and thus the threat
increases) if:
➢ The price/performance ratio of the substitute is superior (e.g.
aluminium maybe more expensive than steel but it is more cost
efficient for some car parts)
➢ The substitute benefits from an innovation that improves customer
satisfaction (e.g. high speed trains can be quicker than airlines from
city centre to city centre)
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