Chapter 4: The macro environment

Question 1

What are the environments in which a business operates?

Answer 1

 The macro environment consists of external factors that affect the overall environment that the business operates in – chapter 4.
 The industry environment consists of external factors affecting the competitiveness of the industry that the business operates in – chapter 5.
 The internal environment (internal capabilities) consists of the organisation’s own internal resources and capabilities – chapter 6.

Question 2

What can PESTEL analysis be used for?

Answer 2

PESTEL analysis can be used to analyse the macro environment as part of strategic planning to identify potential opportunities and threats facing the industry

Question 3

What does PESTEL stand for and what are the potential issues to consider?

Answer 3

• Political: Taxation policy, government spending, foreign trade regulations
• Economic: Economic growth, exchange/interest rates, inflation
• Social and demographic: attitudes, tastes and fashions, population demographics, income distribution
• Technological: New products, improved production methods, rate of obsolescence
• Ecological (environmental): sustainability, pollution and climate change, natural capital impact, ‘green finance’ issues
• Legal: industry regulation, competition legislation, employment law

Question 4

What is scenario planning?

Answer 4

Scenario planning concerns the development of pictures of potential futures for the purpose of managerial learning and the development of strategic responses.

Question 5

What is Porter’s diamond?

Answer 5

Porter’s diamond can be used to explain why some nations have a competitive advantage in certain industries

Porter identified 4 key determinants of national competitive advantage. These four factors make up the diamond.

Competitive advantage =
- Demand conditions
- Related and supporting industry
- Factor conditions
- Strategy, structure and rivalry

Question 6

What are the details of the four points of Porter’s Diamond?

Answer 6

Factor conditions – supply side
 The availability of the factors of production (the resources needed to operate).
 These include human resources, physical resources, knowledge, capital and infrastructure.
 e.g. French wine industry benefits from being able to grow good quality grapes

Demand Conditions:
 Demanding local consumers force firms to become more innovative.
 Trend setting local consumers help local producers to anticipate future global
trends.
 e.g. German drivers demanded powerful cars from German car manufacturers

Related and supporting industries
Proximity of related and supporting industries leads to:
 Easy access to components, with reduced lead times and carriage costs.
 Encourages knowledge sharing which increases innovation.
 e.g. The finance sector in the UK is aided by large accountancy and legal firms

Strategy, Structure and Rivalry
Two key possible advantages:
 Strong domestic rivalry forces local firms to become more efficient to survive.
 The strategies or structures that have become prevalent in a particular nation
may give advantages in particular industries.
 e.g. flat, decentralised organisation structures are popular in Japan and are
believed to encourage innovation

Question 7

What are the details of the four points of Porter’s Diamond?

Answer 7

Factor conditions – supply side
 The availability of the factors of production (the resources needed to operate).
 These include human resources, physical resources, knowledge, capital and
infrastructure.
 e.g. French wine industry benefits from being able to grow good quality grapes