Chapter 5: The Micro, Market and Macro environments

Which environments make up the external environment?

The market environment and macro environment.

What characterises the external environment?

It presents unlimited and ever-changing demands that are out of management's control

What characterises the internal environment?

It is usually within management's control but has limited resources.

Why must management analyse the different environments?

To determine which factors can be controlled and which cannot.

What is environmental scanning?

A process where entrepreneurs stay in touch with their environment to remain successful.

What are the benefits of environmental scanning?

It identifies threats, opportunities, competitor activities, and assists with short- and long-term strategies.

What does environmental scanning identify before they become imminent?

Threats.

What does environmental scanning identify in the market?

Opportunities and gaps.

Why is environmental scanning described as a 360° process?

It includes both internal and external aspects.

What should entrepreneurs investigate before starting a business?

Product/service viability, competitor strength, market size, and resource stability.

Which resources should be assessed before starting a business?

Suppliers, financiers, staff, premises and investors.

Can all techniques be used for all the different markets?

Some techniques can be used in either the external (macro and market) or internal (micro)

There are various commonalities in elements that are controllable or not.

What tools may be used for continuous environmental scanning?

Micro-(SWOT, Value Chain); Market -(SWOT or Porter’s); Macro- (PESTLE or P²E²STLE)

What is the first step in developing a management strategy?

Define the business's vision, mission and objectives.

What is the second step in developing a management strategy?

Analyse the Micro (SW- Internal aspects of SWOT),

Market (OT- External aspects of SWOT analysis) and

Macro environments (P²E²STLE analysis)

Third step in developing a strategy: What issues should be considered when choosing a strategy?

ROI, risk factors, business growth potential, business image, ownership implications, political (BBBEE or EE) and social issues e.g. (CSI, AIDs)

Step 4 and 5 in developing a management strategy: What should management do after identifying strategic options that vary according to type, size, aims and objectives of the business?

Evaluate and prioritise them in order of importance

Step 6: What follows the evaluation of strategic options (step 5)?

Planning implementation, ensuring all factors are considered especially the assumptions on which the chosen strategy is based. e.g. if a car requires an oil change before shipping then the assumption is that all other parts of the car are taken care of.

Step 7 and 8 of developing a management strategy: What are the final two steps in strategy development?

Implement the strategy, then monitor and control it.

Which five elements make up the micro environment?

Business functions, resources, business policy, organisational structure and strategy.

Which environment is under the greatest control of management?

The micro environment.

Business Policy

-Elements and divisions or functions in the business

What is the role of the General Management Function?

Overall running of the business, planning, organising resources and ensuring departments have what they need.

What is the role of the Financial Function?

Control finances, budgeting, expenditure and funding decisions.

What is the role of the Human Resource Function?

Employ the correct number of qualified and experienced employees.

What is the main role of the Marketing Function?

Is more than just advertising and selling

includes aspects such initial market research, transport, storage, financing, insurance, sorting, grading, standardisation, branding

Identify customer needs and wants and satisfy the target market.

What is the purpose of the Production/Operations Function?

Assemble and finalise goods or services to meet customer demand.

Is normally a service enterprise

What are the factors of production

Land, Labour, Capital, entrepreneurship

Rent, Wages and salaries, Interest, Profit

What is the role of the Purchasing Function?

Obtain reliable suppliers, quality inputs and low input costs.

What is the purpose of record keeping?

To store information and support future planning.

What is the purpose of the Public Relations Function?

Maintain a positive business image and reputation.

What does SWOT stand for?

Strengths, Weaknesses, Opportunities and Threats.

Which parts of SWOT are internal?

Strengths and Weaknesses.

Which parts of SWOT are external?

Opportunities and Threats.

Why is SWOT used?

To identify strengths, weaknesses, opportunities and threats and develop strategies.

Quadrant 1 of the SWOT Matrix

When the business views an internal characteristic as a strength while simultaneously viewing it as a strength in terms of the ability of the competition.

Quadrant 2 of the SWOT Matrix

When a certain aspect presents as a weakness for the business but once addressed may create competitive advantage therefore an opportunity if well handled

Quadrant 3 of the SWOT Matrix

The business writes down ways in which it can eliminate its current threats from the external environment.

Quadrant 4 of the SWOT Matrix

If something is identified as an internal weakness, the business formulates a strategy to eliminate this threat.

What is the Resource-Based Approach?

An approach used to assess strategic assets in a business.

Based on the idea that the effective and efficient application of useful resources helps determine the competitive advantage of a business

What are tangible resources?

Physical resources such as buildings, equipment, raw materials and finances.

What are intangible resources?

Skills, patents, processes, customer service, brand reputation and staff morale.

Are all resources in a company strategically relevant?

No only certain resources are capable of being put into the value creating strategy which put the business in a competitive advantage.

What four types of strategically relevant resources provide competitive advantage?

Valuable - add to the competitive advantage of the business, bring value

Rare - when the resource doesn’t exist in the competitor business

Unique - resources that aren’t easily copied

Non-substitutable resources - are irreplaceable

What is the purpose of Value Chain Analysis?

To analyse activities and inputs to add value and gain a competitive advantage.

Used specifically to find the costs of those component parts with the aim of reducing the costs

e.g. finding a different paper cutting company in a paper wholesaler business

What is the main aim of Value Chain Analysis?

Reduce costs and increase product value.

What is a Balanced Scorecard?

A strategic management tool used to assess business performance.

What is a Balanced Scorecard?

A strategic management tool used to assess business performance.

Who developed the Balanced Scorecard?

Kaplan and Norton, in the early 1990s

Why was the Balanced Scorecard developed?

To provide a quick but comprehensive understanding of business performance.

Why must Balanced Scorecard variables be measurable?

Because what cannot be measured cannot be managed.

Q: What is the Financial Perspective?

Measures:

• Profit

• Profitability

• Liquidity

• Financial ratios

What is liquidity?

The ability to convert assets into cash quickly.

What is the Customer Perspective?

Focuses on:

• How customers see the business

• Customer expectations

What is the Internal Business Process Perspective?

Evaluates critical internal processes.

Which operational processes are examined?

• Supplier relationships

• Production

• Distribution

Which social processes are examined?

• Compliance with laws

• Community investment

• Environmental issues

• Employee diversity

• Health and safety

What is the Learning and Growth Perspective?

• Information

• Human capital

• Intangible assets

• Knowledge creation

Why is knowledge important today?

It is often regarded as the fifth factor of production.

Is the market environment internal or external?

External.

Can a business control the market environment?

No.

Can a business influence the market environment?

Yes.

List the elements of the Market Environment.

1. Customers

2. Suppliers

3. Competitors

4. NGOs

5. Strategic alliances

6. Intermediaries

7. Industry regulators

8. Trade unions

9. Government departments

Why must management monitor the market environment?

Problems can immediately affect business success.

What is Environmental Scanning?

Monitoring internal and external environments to identify threats and opportunities.

Sources of Environmental Scanning?

• TV

• Newspapers

• Magazines

• Internet

• Networks

• Physical observation

Examples of Environmental Scanning?

• Competitors opening stores

• Suppliers downsizing premises

• Delivery vehicles not maintained

Which tools can be used during Environmental Scanning?

• SWOT

• Porter's Six Forces

When analysing the Market Environment with SWOT, which parts are used?

• Opportunities

• Threats

Why is Porter's model successful?

It takes a holistic view of the industry.

What are Porter's Six Forces?

1. Rivalry

2. Substitutes

3. New entrants

4. Suppliers

5. Buyers

6. Complementors

What competitor information should businesses gather?

• Location

• Finances

• Products

• Patents

• Brand loyalty

• Market share

• Promotion strategies

• Distribution channels

• Employees

• Culture

Is competitor profiling illegal?

No.

Why do competitor profiles?

To anticipate competitor actions.

What attracts customers to competitors?

• Better location

• Better service

• More products

• Free deliveries

How may competitors attack aggressively?

• Price wars

• Market trends

• Added value offerings

What is an oligopoly?

A market controlled by a few powerful competitors.

What is perfect competition?

A market with many buyers and sellers.

What is the biggest threat in perfect competition?

• Technology changes

• Macro environment changes

What is a substitute product?

A different product satisfying the same need.

Give the textbook example of substitutes for Simba Chips.

• Peanuts

• Rice cakes

• Savoury biscuits

• Popcorn

Why do customers use substitutes?

• Lower cost

• Better health

• Greater convenience

• Availability

• Preference

What can substitutes do to businesses?

• Reduce profits

• Remove customers

• Cause long-term decline

Why are new entrants dangerous?

They create future competitive threats.

When are new entrants likely?

• High profits

• Low competition

• High demand

What barriers reduce new entrants?

• Brand loyalty

• Government regulations

• High capital requirements

• Distribution limitations

Two sources of new entrants?

1. Small start-ups

2. Large corporations

Why are small start-ups dangerous?

• Innovative

• Unpredictable

Examples of successful start-ups?

• Microsoft

• Google

• Facebook

Why are large corporations dangerous?

• Capital

• Experience

• Expertise

• Brand recognition

Why are suppliers important?

Businesses need the right quality and quantity at the right time and price.

Consequences of stock-outs?

• Loss of production

• Idle labour

• Lost discounts

• Lost goodwill

What causes production delays?

• Late deliveries

• Incorrect deliveries

• Load shedding

• Service failures

How can supplier relationships be improved?

• Open communication

• Prompt payment

• Regular reviews

• Prioritisation

Who are buyers?

• Consumers

• Agents

• Wholesalers

• Retailers

Buyer demographics?

• Age

• Income

• Gender

• Education

• Occupation

Other segmentation criteria?

• Hobbies

• Recreation

• Politics

• Culture

How can businesses keep customers happy?

• Market research

• Meeting needs

• Return policies

• Warranties

• Good service

• Loyalty rewards

What are complementors? Example?

Products providing more value together than separately.

• Hotdog + bread roll

• Airline ticket + hotel booking

When is complementary power high?

When one product cannot function without the other.