2. An Organisation's Environment

Question 1

What is the PESTEL model?

Answer 1

Looks at at environmental influences that are large and powerful:

The macro-environment

Question 2

What does PESTEL stand for?

Answer 2

• Political
• Economic
• Social
• Technological
• Ecological/environmental
• Legal

Question 3

Describe political environmental influences.

Answer 3

For example:
- Joining/leaving the EU
- Political tensions
- War
- Alliances
- Change of government

Question 4

Describe economic environmental influences.

Answer 4

For example:
- Interest rates
- Exchange rates
- Tax rates
- Global economy health

Question 5

Describe social environmental influences.

Answer 5

Aka demographic change.

For example:
- Many western countries have decreasing number of young people compared to old people.
- Taste/fashions/fads (e.g. veganism)
- Expectation for easily available travel (flights)
- Streaming services more popular than TV (Netflix)

Question 6

Describe technological environmental influences.

Answer 6

For example:
- Banks need fewer branches
- Bookshops and music shops affected by Amazon
- Information on customer preferences
- Movement to electric vehicles

Question 7

Describe ecological environmental influences.

Answer 7

For example:
- Airlines under pressure for high emissions
- Pressure for effective waste disposal

Should improve long-term sustainability.

Question 8

Describe legal environmental influences.

Answer 8

For example:
- Consumer protection
- Employment protection
- Safety laws

Question 9

What is Porter’s 5 Forces model?

Answer 9

A framework to analyse industry sectors and industry attractiveness.

Question 10

What is industry attractiveness?

Answer 10

How easily a business will be able to make reasonable profits?

Question 11

What are reasonable profits?

Answer 11

A profit large enough to compensate investors for their risk while making enough to reinvest to keep the company successful.

Question 12

What are the five forces of Porter’s 5 Forces model?

Answer 12

• Rivals/competitors
• Customers/buyer pressure
• Suppliers
• Potential entrants
• Substitute products

Question 13

Describe competition (Porter’s 5 Forces).

Answer 13

• Ranges from perfect competition to monopoly.
• Perfect competition is where selling prices are governed by market prices.
• The seller with monopoly can mostly determine the price, and this will govern the demand.

Question 14

When might a monopoly be bad?

Answer 14

If you have a monopoly of something nobody wants.

Question 15

How might a business gain a monopoly?

Answer 15

By taking over rivals or forcing them out of business by lowering prices temporarily.

Question 16

Describe buyer pressure (Porter’s 5 Forces).

Answer 16

• If buyers are powerful, they can exert pressure on prices, quality and delivery time.
• Having fewer customers will make them more powerful

Question 17

How might a business decrease the power of buyers?

Answer 17

• By having lots of buyers
• By making it hard for them to switch between suppliers. Can do this by creating switching costs/impediments

Question 18

Describe suppliers (Porter’s 5 Forces).

Answer 18

• Buying components from a monopoly supplier can be disadvantageous
• They could raise prices
• They could be taken over by rival, leaving you with no supplies.
• Combat this by trying to multi-source supplies, set up own supply organisation or take over an existing supplier.

Question 19

Describe potential entrants (Porter’s 5 Forces).

Answer 19

• Are on the edge of the industry and may be attracted into it by potential for good profits.
• They can be deterred if there is a legal monopoly or regulations.
• E.g. banking is hard to get into because of regulatory authorities that need to give permission. Other deterrents include high initial capital requirement, and expert knowledge.

Question 20

Describe substitute products (Porter’s 5 Forces).

Answer 20

• Usually arise from advance of technology.
• Can catch businesses off-guard.
• Can’t really be avoided.
• Most old industries have to join the new industry.
• E.g. landline companies thought they almost had monopoly due to cost of laying landlines, but mobile phones meant that coverage could be achieved with lower expense.

Question 21

What is Porter’s value chain?

Answer 21

A method used to examine how a business makes profits or margin.

Question 22

Describe the Porter’s value chain diagram.

Answer 22

• Looks like a house turned 90° clockwise.
• The bottom half has the primary activities next to each other horizontally.
• The top half has the secondary/support activities above and below each other vertically.
• The right side (roof of house) represents profit or margin.

Question 23

What are the primary activities in Porter’s value chain?

Answer 23

Equate to direct costs
- Inbound logistics
- Operations
- Outbound Logistics
- Marketing & Sales
- Service

Question 24

What are the secondary/support activities in Porter’s value chain?

Answer 24

Equate to indirect costs
- Infrastructure
- Technology & development
- Human resources management
- Procurement

Question 25

Are any costs excluded from Porter’s value chain?

Answer 25

No, every activity is shown in the diagram, and every activity has an associated cost.

Question 26

What is value-added (Porter’s value chain)?

Answer 26

It is the explanation for why buyers are willing to spend more on goods/services than the sum of it cost the business to procure them.

For example:
- Bringing expert skills
- Providing convenience
- Having lower prices than competitors
- Having good research and development.

Question 27

Give examples of how sections of the Porter’s Value Chain are linked.

Answer 27

• Spending more on human resource management may reduce cost of operations (because staff are better trained)
• Spending more on technology and development may reduce cost of after-sale service (because quality of goods are higher)

Question 28

What is a value network?

Answer 28

A set of organisations, each with their own value chain, that each contribute in some way to the value of the final product.

Question 29

What does SWOT stand for in SWOT analysis?

Answer 29

Refers to an organisation’s:
- Strengths
- Weaknesses
- Opportunities
- Threats

Question 30

Which factors in a SWOT analysis are internal?

Answer 30

Strengths and weaknesses
- An organisation may have strong finance but a weak portfolio of products.

Question 31

Which factors in a SWOT analysis are external?

Answer 31

Opportunities and threats
- An organisation may have the threat of an overseas competitor moving into the country, or there could be opportunities to take over a competitor.

Question 32

What should organisations aim to do in relation to a SWOT analysis?

Answer 32

Match strengths to opportunities
- Strong finance would give the opportunity to takeover a weak competitor.

Avoid relying on areas they are weak, or try to improve the weakness to defend themselves.