Learning Unit 4

The Business Environments

 Learning Content:
Theme 1: The Business Environment
LO 1: Explain the meaning of environmental change.
LO 2: Explain the composition and characteristics of the business environmental
model.

Theme 2: The micro-environment

LO 1: Distinguish between and discuss the sub-environments of the
environmental model.
LO 2: Describe and comment on how each of the environmental variables in the
micro, market and macro-environments influence an industry or business
organisation.
LO 3: Distinguish between and comment on the differences between
opportunities, threats, strengths and weaknesses.
LO 4: Discuss how and why environmental scanning is conducted.
 Environmental scanning
• a process used by organisations to monitor
their external and internal environments.
• identification of opportunities and threats
affecting the business for making strategic
business decisions.
• “process of measurement, projection and
evaluation of change regarding the different
environmental variables” Erasmus
 Reasons for Environmental scanning
• Anticipating Market Trends: Environmental scanning helps businesses
stay ahead of emerging market trends, enabling them to capitalise on
opportunities and prepare for potential challenges before they arise.

• Identifying Competitive Pressures: By monitoring their external

environment, businesses can identify competitive pressures and
understand the strategies of their competitors, allowing them to
develop effective competitive responses.

• Managing Regulatory Changes: Environmental scanning enables

businesses to stay informed about changes in regulatory frameworks
and compliance requirements, helping them adapt their operations
and practices accordingly to avoid penalties or legal issues.
 Reasons for Environmental scanning

• Assessing Technological Innovations: Keeping abreast of technological

advancements through environmental scanning allows businesses to
identify new technologies that can enhance their processes, products, or
services, giving them a competitive edge in the market.

• Mitigating Risks: Environmental scanning helps businesses identify

potential threats such as economic downturns, geopolitical instability, or
natural disasters, allowing them to proactively implement risk
management strategies to mitigate the impact on their operations and
finances

• Enhancing Strategic Planning: Environmental scanning provides valuable

insights that inform strategic decision-making processes.
 Reasons for Environmental scanning

Shifts the organisation from

being reactive to being
proactive therefore its ability
to anticipate and meet market
changes and new customer
expectations.
 The External Business Environments

“The external environment is composed of all

the dimensions in the broader society that
influence an industry and the organisation”
Ehlers & Lazenby
• Business must be aware and understand all
dimensions in the environment
The Macro-environment- Recap
 The Market environmental factors

• The most important task of management in

capitalising on the market environment is to
identify, evaluate, and exploit opportunities
that exist in the market and to develop the
marketing strategy in such a way that
competitors and other variables of this
external environment do not pose a threat to
the organisation
 The Market environmental factors

The market environment consists of the following factors:

• Customers: individuals or organisations that purchase
and use products or services produced and sold by an
organization.
– To be successful, management must be informed regarding
consumer needs, purchasing power and buying behaviour.
– The consumer market can be sub-divided according to the
products that are bought:
• Durable products
• Semi-durable products
• Services
 The market environmental factors
The market environment consists of the following factors:
• Suppliers: provides inputs (raw materials, equipment and
energy), capital and labour to businesses
• Labour: Businesses need a supply of human resources /
employees
• Intermediaries: Includes wholesalers, retailers, agents, brokers,
representatives and spaza shops. Intermediaries play an vital
role in bridging the gap between the manufacturer and the
consumer
• Strategic alliances: allows organisations to work together
towards a common goal in the form of a joint venture. Skills
and expertise are shared across the organisations involved.
Porter’s Five Forces-Threat of New Entrants

Five competition forces influence the intensity of

competition in an industry and the industry’s profit
potential.

– The nature and intensity of competition according to

Porter’s five factors can be determined by:
• The possibility of new entrants
• The bargaining power of clients and consumers
• The bargaining power of suppliers
• Availability or non-availability of substitute products or
services
• The number of existing competitors
 Porter’s Five Forces
Porter’s Five Forces Model: Understanding the Business
Environment:
Porter’s Five Forces-Threat of New Entrants

• Barrier to Entry:
• If entry barriers are low, the threat of new
entrants is high.
• High capital requirements, strong brand loyalty, or
proprietary technology can deter new entrants.
– Economies of Scale:
• Existing players benefit from cost advantages that
new entrants struggle to match, creating a barrier
to entry.
Porter’s Five Forces-Threat of New Entrants
– Product differentiation
• Existing players benefit from cost advantages that new
entrants struggle to match, creating a barrier to entry.
• Established companies often invest heavily in building
strong brand loyalty among consumers.
• Customers develop preferences for specific brands due
to factors such as quality, reputation, or unique features.
• New entrants face difficulty in persuading customers to
switch from established brands to their offerings,
especially if brand loyalty is high.
Porter’s Five Forces-Threat of New Entrants
– Capital requirements
• To compete favourably, a new entrant may need considerable
resources to penetrate
• High capital requirements deter potential entrants, reducing the
threat of new competition and protecting the market share of
established firms.
• Established companies with access to sufficient capital can leverage
their financial resources to invest in expansion, innovation, and
marketing, further solidifying their competitive position.
• Limited access to capital restricts the pool of potential entrants,
resulting in a less crowded market and potentially higher barriers to
entry over time.
Porter’s Five Forces-Threat of New Entrants
– Switching costs
• Switching costs are initial costs costumers incur when they
switch from one supplier’s product or service to another
• Switching between products or services often involves
financial costs, such as cancellation fees, penalties, or upfront
investments in new equipment or software.
• Customers may hesitate to switch if the costs outweigh the
perceived benefits of switching to a new provider or if the
process is complex, time-consuming, or disruptive
• Switching also entails investments of time and effort, including
researching alternatives, learning how to use new products or
services, and transitioning data or processes.
Porter’s Five Forces-Threat of New Entrants

– Access to distribution channels

• This refers to the ability of firms to distribute their
products or services effectively to target customers
through established channels.
• New entrants have to persuade distributors to
carry their products
• Incumbents may have exclusive contracts or
agreements with key distributors, granting them
preferential treatment or priority access to
distribution channels.
 Porter’s Five Forces-Bargaining Power of
Suppliers
• Supplier Concentration: Few suppliers with
concentrated power can dictate terms,
affecting prices and quality.
• Switching Costs: High switching costs for firms
to change suppliers can give suppliers leverage
over industry players.
 Porter’s Five Forces-Bargaining Power of
Buyers
• Buyer Concentration: Few large buyers can
demand lower prices or higher quality,
impacting profitability.
• Price Sensitivity: Buyers' ability to switch
between products or negotiate prices affects
industry profitability.
Porter’s Five Forces-Threat of Substitutes

• Substitute Availability: Availability of

alternative products or services can limit
pricing power and industry attractiveness.
• High when many alternatives for an
organisation’s products or services available
– Add services to make organization more distinct
– Add fees to discourage customers from switching
Porter’s Five Forces-Competitive Rivalry
• Intensity of Rivalry: High rivalry among
existing competitors can lead to price wars,
reduced profitability, and innovation.
• High when many competitors occupy the
same marketplace position
• Low when there are few competitors
 Conclusion
In conclusion, this presentation emphasised the critical
importance of environmental scanning and strategic
analysis tools like Porter's Five Forces in responding
effectively to the evolving business environment. By
monitoring external factors, organisations can anticipate
threats and capitalize on opportunities, enhancing their
strategic decision-making. Porter's Five Forces offers a
structured approach to assessing industry
competitiveness, while the PESTEL framework provides a
broader analysis of macro-environmental factors.
 In Class Test
1. What comprises the business environment, and how does it
impact organizational performance? (maximum 80 words)

2. What are the key elements of a PESTEL analysis, and how do

they influence business decisions? (maximum 80 words)

3. What does SWOT analysis entail, and how does it aid in

strategic planning? (maximum 80 words)

4. What distinguishes a vision statement from a mission

statement, and how do they guide organizational direction?
(maximum 80 words)
 In Class Test
5. What is stakeholder analysis, and why is it essential for
organizational success? (maximum 80 words)

6. What do opportunities and threats signify in

external environmental analysis? (Maximum 50 words)

7. Explain Porter’s five forces. (Maximum 50 words)

8. Select one functional area within an organization and

evaluate how external factors can impact its
operations. (Maximum 50 words)
 In Class Test
9. Which sub-environment of the business environment includes factors like
suppliers, labour markets, and labour unions?

a) Micro-environment
b) Market environment
c) Macro-environment
d) Technological environment

10. The social environment is influenced by:

a) Interest rates and inflation

b) Availability of skilled labour
c) Demographics and cultural trends
d) Trade policies and regulations
THE END