COLLEGE OF ACCOUNTANCY

C-AE24, Strategic Business Analysis

Second Semester | AY 2024-2025

Course Code – Title : C-AE24 Strategic Business Analysis

Module No. & Title : M5 - The Business Environment
Time Frame : Week 6 - 1.5 Hours
Materials : Course Syllabus and Modules

A. Overview
Obtaining sufficient and relevant information about the business environment and the
changes that take place within it is an essential component of business analysis.

Accountancy students who are preparing to become professional business analysts should
be equipped with the knowledge and skills about how this phase is done in order come up
with vital inputs for the strategy formulation and implementation.

You will be able to achieve the desired learning outcomes by devoting time and effort in
studying this material, listening and participating actively in the online discussion, and
accomplishing the tasks assigned in the Classwork section of the Google Classroom for this
course.

B. Desired Learning Outcome

After studying this module, you should be able to describe the entity’s macro-environment,
industry or sector, competitors and markets, and the changes in its environment.

C. Values Integration

In studying this module, it is hoped that you will be able to develop and manifest the
following UA Core Value/s:

✓ Integrity
✓ Excellence
✓ Teamwork
✓ Open Communication

D. Content/Discussion

The Business Environment

Whether a strategy is effective or not depends primarily on how it was formulated, and its
success is anchored on how the essential inputs were gathered by the analysts and provided to the
ultimate decision-makers.

Crucial to this initial phase is the thorough understanding of the environment in which the
organization operates in. Various forces and factors which contribute to (or at times, hinder) the

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 COLLEGE OF ACCOUNTANCY
C-AE24, Strategic Business Analysis
Second Semester | AY 2024-2025

attainment of the goals and objectives need to be identified and their corresponding impact to the
organization needs to be studied in order to draw a clear path towards realizing the vision and mission
of any entity.

In BPP Learning Media’s ACCA P3-Business Analysis, p49, traditionally, strategy in business
has been seen as a process of adapting the firm to its environment. Other views place less emphasis on
adaptation but in dominating its environment. It is clear, therefore, that whether the entity is a market
leader or follower, a full knowledge of the nature of that environment will spell not only survival but
the ultimate success of the business.

Environment defined

Jenkins and Williamson (2016) defined the environment as the external surroundings in
which the organization operates, which includes competitors, non-competitors, suppliers, buyers, and
governments. Some writers, such as Teece (2009) use the term ecosystem instead of environment.
Teece defines the ecosystem as the community of organizations, institutions, and individuals that
impact the enterprise and the enterprise’s customers and supplies.

The environment may be divided into three layers: the macro-environment, the industry or
sector, and the competitors and markets.

THE
ORGANIZATION

Competitors and
markets
Industry or
sector
The macro-
environment

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 COLLEGE OF ACCOUNTANCY
C-AE24, Strategic Business Analysis
Second Semester | AY 2024-2025

Studying these layers of the environment should be done while considering uncertainty.
Environmental uncertainty depends on the degree of complexity and the degree of stability present.

The greater the uncertainty, the greater the strategic challenge and the more complex or dynamic the
environment is, the more uncertain it is.

A stable environment can be dealt with as a matter of routine. The security and efficiency of a well-
established system can be optimized. Since the future will most likely resemble events that happened
in the past, extrapolation from history is a cost-effective way of anticipating future events.

However, if the environment is dynamic, management must be able to come up with a system that
would allow quick response to changes that occur frequently. Scenario planning, intuition and a
learning approach are all valid features of this system.

If the business organization is complex, the environment may be difficult to identify and understand.
Operations and technological advances may be so diverse that conclusions from analyses made may
not be valid to all areas or aspect of the entity. This may be dealt with through a combination of
experience and extensive decentralization.

MACRO-ENVIRONMENT

The Monash University’s

Marketing Dictionary defines the
macro-environment as the major Political
uncontrollable, external forces
(Economic, demographic,
technological, natural, social and Economic
Legal
cultural, legal and political) which
influence a firm’s decision making
and have an impact upon its
THE
performance. ORGANIZATION

This may be analyzed into

six segments using the PESTEL
framework. Environment Socio-cultural

1. The political environment

Government is responsible
Technological
for providing a stable
framework for economic
activity and for
maintaining and improving the physical, social and market infrastructure. Public policy on
competition and consumer protection is particularly relevant to business strategy.

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 COLLEGE OF ACCOUNTANCY
C-AE24, Strategic Business Analysis
Second Semester | AY 2024-2025

For case studies, you can refer to this checklist as your guide in maneuvering the planning
activities of your client or firm:

Consideration Example

Possibility of political change Effect on economic policies

Likely nature of impact Change in taxes and interest rates

Consequences Cash flow and availability of resources

Coping strategies Cash flow planning

Influence on decision making Lobbying and publicity

2. The economic environment

The economic environment affects firms at the national and international level.

Factor Possible Impact

Overall growth or fall in the GDP Increased/decreased demand for goods and services

Local economic trends Type of industry in the area. Office/factory rents. Labor
rates, house prices.

Inflation Low in most countries; distorts business decisions;

wage inflation compensates for price inflation

Interest rates How much it costs to borrow money affects cash flow;
level of debt; how much customers can afford to spend is
also affected as rises in interest rates affects mortgage
payments

Tax levels Effect on investments and ROI, spending patterns,

overall demand

Government spending Suppliers to the government are affected by spending

The business cycle Economic activity is always punctuated by periods of

growth followed by decline, Government policy can
cause, exacerbate or mitigate such trends (boom and
bust in economy) but it cannot abolish the business

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 COLLEGE OF ACCOUNTANCY
C-AE24, Strategic Business Analysis
Second Semester | AY 2024-2025

Factor Possible Impact

cycle.

Impact of international factors on the economic environment:

Factor Possible Impact

Exchange rates Cost of imports, selling prices and value of exports; cost
of hedging against fluctuations

Characteristics of overseas Desirable overseas markets or sources of supply

markets

International capital markets Generally, advanced economies accept that supply and
demand set the value of their currencies, using interest
rates only to control inflation.

Large multinational companies MNCs have huge turnovers and significant political
MNCs) influence because governments desire to attract capital
investments

Government policy on Cost of barriers to trade, effect on supplier interests of

trade/protection free trade, erection of reciprocal barriers, possibility of
dumping

3. The sociocultural environment

The social and cultural environment features long-term social trends and people’s beliefs and
attitudes.

Factors of importance to organizational planners

Factor Description

Growth Rate of growth or decline in population (national and

regional)

Age Changes in the age distribution

Geography The concentration of population in certain areas

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 COLLEGE OF ACCOUNTANCY
C-AE24, Strategic Business Analysis
Second Semester | AY 2024-2025

Factor Description

Ethnicity A population might be comprised of groups with

different ethnic origins from the majority

Household and family Number of children, whether elderly parents live at

infrastructure home, single-person households, lone parent families
and so on

Social structure Subgroups within society (different attitudes, access to

economic resources)

Employment Changes related to the workplace; nature of employment

Implications of demographic change:

a. Changes in patterns of demand

b. Shift in the location of demand

c. Effect on recruitment policies

d. Effect on wealth and tax

Other than demographics, analysts must also study culture of the entity’s external environment.
Through contact with a particular culture, individuals learn language, acquire values, and learn
habits of behavior and thought. Knowledge of a society’s culture is important to business in a
number of ways:

a. Culture influences tastes and lifestyles.

b. Marketers can adapt their products accordingly.

c. Human resource managers may need to deal with cultural differences in recruitment.

4. The technological environment

Technological developments can affect all aspects of business. Technology contributes to

overall economic growth. The following are ways in which technology can increase total
output.

a. Gains in productivity

b. Reduced costs

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 COLLEGE OF ACCOUNTANCY
C-AE24, Strategic Business Analysis
Second Semester | AY 2024-2025

c. New types of products

Any change in technology may affect the business organization as to the following:

a. The type of products or services that are made and sold.

b. The way in which products are made.

c. The way in which goods and services are sold.

d. The way in which markets are identified.

e. The way in which firms are managed.

f. The means and extent of communication with external clients.

Nowadays, we see the social consequences of technology that has impacted the way we do
business:

a. Homeworking (currently referred to as “work-from-home arrangements”) – Work from

home arrangements have dramatically affected the traditional way of providing goods and
services.

b. Knowledge work – Competencies and skills related to interpretation of data and

information systems have become more valued than manual or physical skills.

c. Services – Technology increases manufacturing productivity. Human resources can focus

more on service jobs which require greater interpersonal skills.

5. Environmental protection

While businesses are primarily established for profit, the impact of business activities on the
physical environment is now a major concern to which governments have responded by
increasing the regulatory requirements pertaining to the environment and natural resources.
Since these measures will impose costs, businesses are challenged to incorporate
environmental protection into their plans.

Possible issues on environmental protection:

a. Consumer demand for products that are sustainable or environmentally friendly

b. Demand for less pollution from industry

c. Greater regulation by government

d. Demand that businesses be charged with the external cost of their activities

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 COLLEGE OF ACCOUNTANCY
C-AE24, Strategic Business Analysis
Second Semester | AY 2024-2025

e. Scarcity of non-renewable resources

f. Opportunities to develop products and technologies that are sustainable or

environmentally friendly

g. Taxes

Sustainability involves developing strategies so that the company only uses resources at a
rate that allows them to be replenished. Emissions of waste are confined to levels that do not
exceed the capacity of the environment to absorb them. John Elkington, chairman of
Sustainability, Ltd. Wrote about the triple bottom line, which means that business people must
increasingly recognize that the challenge now is to help deliver simultaneously economic
prosperity, environmental quality and social equity.

6. The legal environment

Laws come from common law, legislation and government regulations derived from it, and
obligations under international agreements or treaties.

Legal factors affecting all companies:

Factor Example

General legal framework; Basic way of doing business; negligence proceedings;

contract, tort, agency ownership; rights and responsibilities; property

Criminal law Theft; insider dealing; bribery; deception; industrial

espionage

Company law Directors and their duties; reporting requirements;

takeover proceedings; shareholders’ rights; insolvency

Employment law Union recognition; wages and benefits; unfair dismissal;

redundancy; equal opportunities

Health and safety Fire precautions; safety procedures; health protocols

Data protection Use of information about employees and customers

Marketing and sales Laws to protect consumers; what is allowed or not in

advertisements and promotions

Environment Pollution control; waste disposal

Tax law Income, business and transfer taxes; fines and penalties;

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 COLLEGE OF ACCOUNTANCY
C-AE24, Strategic Business Analysis
Second Semester | AY 2024-2025

Factor Example

appeals; refunds

Competition law General illegality of cartels

The macro-environment provides a general background of the factors that influence the organization.
On a day-to-day basis, the environment of the business comprises the industry or sector, competitors
and markets. Taken together, these factors are sometimes referred to as the task environment.

INDUSTRY OR SECTOR

The immediate business environment of firms producing similar goods is called the industry. Sector
may be used in a similar way in public and not-for-profit services

Industries tend not to be stable because of features like location, products, customers and rate of
growth. Boundaries may also change as some industries can converge. This convergence can be
supply-led or demand-led.

a. Supply-led convergence – occurs where suppliers discover links with suppliers in other
industries and move together to cooperate in building new markets. This is common in the
public sector where government
departments are regularly
merged and re-organized.
Threat of New
Entrants
Another example happened in
the UK’s financial services
industry because of
deregulation.
Customer Supplier
Bargaining Bargaining b. Demand-led convergence –
Power Power
occurs when customers treat the
PORTER’S
FIVE FORCES products of different industries
as substitutable, as in the case
of mobile and fixed line
telephones, or complimentary,
as in the case of air travel and
car rental.
Threat of Competitive
Substitutes Rivalry
COMPETITORS AND MARKETS

The competitive environment is

structured by five forces: threat of new

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 COLLEGE OF ACCOUNTANCY
C-AE24, Strategic Business Analysis
Second Semester | AY 2024-2025

entrants, substitute products, the bargaining power of customers, the bargaining power of suppliers
and competitive rivalry. These five forces influence the state of completion in an industry and
collectively determine the profit potential of the industry as a whole.

KEY DRIVERS OF ENVIRONMENTAL CHANGE

Analysts recognize the fact that these environmental factors are not static. They are bound to change
in varying degrees and in either anticipated or unanticipated times. Management would not want to
be caught off guard as these changes occur. Therefore, they should strive to create systems that would
allow them to proactively respond to such changes. One major driving force of these changes is
globalization. The following are the four aspects of globalization which are the key drivers of
environmental change:

1. Market globalization
2. Cost globalization
3. Government activity and policy
4. Global competition

Market globalization
1. Consumer tastes are becoming more homogenous in such matters as clothes and
entertainment.

2. As markets globalize, firms supplying them become global customers for their own inputs and
seek global suppliers.

3. Improvements in global communications and logistics reduce costs, make globalization easier
and allow the creation of global brands. The latter feeds back to the homogenization of taste.

Cost globalization
1. Economies of scale are a major source of cost advantage.

Economy of scale means that there is a proportionate saving in costs gained by an increased
level of production. So, if companies in certain industries can go global and expand their
operations, they are able gain such economies.

2. Experience effects can continue to drive down costs in the same way. An organization
undertaking any activity learns to do it more efficiently over time as it gains more experience
of carrying out that activity. This increased efficiency reduces unit costs.

3. Sourcing efficiencies may be achieved by central procurement from global lowest-cost

suppliers.

4. Country-specific cost advantages, such as low labor costs or a favorable exchange rate
encourage purchases to search globally for suppliers.

5. High costs of product development can be spread over longer production runs if products are
standardized and sold globally.

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 COLLEGE OF ACCOUNTANCY
C-AE24, Strategic Business Analysis
Second Semester | AY 2024-2025

Government activity and policy

Government activities and policies on business registration and operations have indeed affected how
foreign investors view a particular country. While most of these policies support free trade, there are
some governments who are becoming more conservative when it comes to patronizing their country’s
products while there are some which continue to use imports as a way of controlling the prices of
commodities.

Global competition

1. Existing high levels of international trade encourage further interaction between competitors.
2. The existence of global competitors and global customers in an industry prompts purely
national firms to start trading globally so as to be able to compete on an even footing.

After describing the business environment and how this can change, it can now be analyzed using the
tools that will be discussed in the next module.

E. Assessment of Learning

1. Choose a company and, guided by the concepts presented in this module, describe the
a. Macro-environment;
b. Industry or sector;
c. Competitors and markets; and,
d. Changes in the environment that may affect the company.

F. References

Jenkins, W., & Williamson, D. (2016). Strategic Management and Business Analysis. New York, NY, USA:
Routledge.

Congratulations for having completed this module!

See you in the next module!

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