Chapter 2

Business environment
Introduction
1 PESTEL analysis
 1.1 Political factors affecting business
(a) government organisation

Political Organisations cannot thrive in volatile environment.

stability
Capacity Government policy can encourage firms to increase or cut their capacity, e.g.
expansion
tax relief/subsidies
Emerging It can be promoted or damaged by the government.
industries
Entry Government policy can discourage firms from entering an industry, e.g. tariffs
barriers
Competition Government’s regulations and controls will strongly influence organisations,
for example, by forbidding takeovers among corporations.
1.1 Political factors affecting business

(b) Organisation government

• Employ lobbyists
• Influence public opinion
 P
Economic Chapter 4

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★ 1.2 Social factors

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ü Demographic trend
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Social ü Social trend

T ü Cultural trend
1.2.1 Demographic trend

(a) Population and the labour market

The aging problem

Increasing participation of women
in the labour force
1.2.1 Demographic trend
(a) Population and the labour market

• The aging problem --- Low birth rate, low death rate, low marriage rate.
Reducing birth rates mean fewer young people which increases the labour costs.

• Increasing participation of women

Due to the growth of service sector and change of perception in the modern
society, there is increasing participation of women in the labour force. This trend
can affect many other aspects, for example, the average age at which women
have their first children, furthermore, the birth rate.
1.2.1 Demographic trend
(a) Population and the labour market

Therefore, here is another question, that is how organisations can

cope with these demographic trends. Some general methods are
illustrated as following:
• Identify the labour force that organisations want to recruit (e.g.
school leavers, part-time workers)；
• Familiarise the supply trend of the labour force pool；
• Assess the possibility of using substitute supply to satisfy the
demand, for example, artificial intelligence (AI).
Example question 1

The aging problem is quite common worldwide, which three

of the following will be affected by this aging trend ?
A. Decrease demand for full-time education
B. Increase demand for health care
C. Conflict in the pension budget
D. Decrease demand for social services
E. Decrease in unemployment
 1.2.1 Demographic trend

(b) Family life cycle

Family life cycle is a “concept that attempts to describe the effect of time on a
family through the phases of marriage (and divorce) and births and deaths,
reflected in the family's income and consumption.”
1.2.2 Social trend – social class
The basic idea of class is that a society can be divided into broad strata
which comprise individuals whose members share common features, such as
type of occupation, income levels, education background and other variables.
 1.2.3 Cultural trends

(a) Health and diet issues

Major changes have been taken place in people’s attitude toward
diet and health. Most notable changes include the surge of
vegetarians and increased preference for organic food.
 1.2.3 Cultural trends
(a) Health and diet issues
The impact on business

• The market for sports-related goods, such as running shoes, tops and
leggings, will continue to expand.
• New foods such as organic food are springing up.
• Employers provide more fitness facilities for employees.
1.2.3 Cultural trends
(b) Environmentalism

The development of environmentalism prompts the transformation of consumer concept

towards green products. In order to satisfy new trend of customer needs, most
businesses devote themselves to reduce pollution and employ renewable materials.
In the long run, these actions can actually benefit the enterprises as they could obtain a
competitive advantage through sustainability development.
1.3 The impact of technology on organisations

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Ø General effects
Technological
Ø Organisation structure
1.3.1 General effects
AI: 人工智能
Blockchain: 区块链
Cloud Computing/Service: 云计算
Big Data:大数据

云计算、大数据和IT服务是近三年收并购最热门领域

IBM 340亿美元收购红帽（制造与服务业公司收购云计算龙头）
戴尔670亿美元收购EMC (制造业公司收购美国IT顶尖企业）
阿里收购中天微 （零售业公司收购人工智能龙头）
★ 1.3.2 The impact on organisation structure
(a) Span of control
• Span of control refers to the number of subordinates directly
responsible to a superior.
• The development of technology makes it possible for
managers to have a wider span of control
1.3.2 The impact on organisation structure
(b) Tall and flat organisations
• Tall-narrow organisations are characterised by
having many management layers, with each
manager take control of only a few subordinates.

• Wide-flat configurations have relatively few layers,

and each manager take control of more subordinates.
 1.3.2 The impact on organisation structure
(c) Delayering & Downsizing

• The aim of delayering is to reduce the hierarchy layers of the

organisation, especially the layer of middle management.

• Downsizing is the action to streamline the organisation’s

number of existing employees. Although both processes enable
the organisation to improve efficiency, only delayering brings
about a structural change, that is the move from a tall
organisation to a relative flat one.
Example question 2
Consider the following statement (TRUE OR FALSE):
An aging trend represents a risk to all companies that operate in technologically advanced industries.
★ 1.3.3 Outsourcing and offshoring
(a) Definition
• Outsourcing means contracting out tasks, operations, or processes to an external third party.
• Offshoring means the practice of outsourcing overseas.
1.3.3 Outsourcing and offshoring

★ (b) Appraisal of outsourcing

1.4 Environmental factors

Ø Economic activities Environment

Ø Environmental cost Organisation

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Environmental T
1.4 Environmental factors
Organisation environment

Environment footprint is the impact that a business's activities have upon

the environment including its resource environment and pollution emissions.

a. Depletion of natural resources

b. Noise
c. Residual air and water emission
d. Change in the local quality of life
1.4 Environmental factors

Environment organisation (environmental cost)

• Waste management
• Legal costs and fines
• Record keeping and reporting
• Employee health and safety
• Public/customer perception
 P
1.5 Legal environment Legal

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• Employment protection ★
• Data protection and security ★
• Health and safety

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• Consumer protection
T
1.5.1 Employment protection law
Termination of employment
• Retirement 退休
• Resignation 辞职
• Dismissal 解雇
• Redundancy 冗员
1.5.1 Employment protection law
(a) Retirement
1.5.1 Employment protection law
(b) Resignation

For leavers, they need to explain the reasons to go and provide period of notice.
1.5.1 Employment protection law
(c) Dismissal - Types of Dismissal ★
• Constructive dismissal 推定解雇
Constructive dismissal is one kind of deemed dismissal, which occurs where employer
repudiates some essential term of the contract, for example by the imposition of a
complete change in the employee’s duties, and the employee resigns.
1.5.1 Employment protection law
(c) Dismissal - Types of Dismissal
• Wrongful dismissal
Wrongful dismissal occurs when employer breaching the employment contract,
relating to the method of dismissal. For example, the employer has dismissed an
employee with less than the statutory minimum period of notice.
1.5.1 Employment protection law
(c) Dismissal - Types of Dismissal
• Unfair dismissal
Unfair dismissal occurs when dismissal without good reasons. For example:
• Joining a trade union
• Applying for maternity 产假, paternity 陪产假 and adoption leave 领养假
• Being forced to retire
• Belief- cannot work on Saturday
1.5.1 Employment protection law
(d) Redundancy
It should be noted that redundancy is one kind of fair dismissal,
and it usually occurs when:
• The employer has ceased to carry on the business
• The requirement of the business for employees to carry out
work has ceased or diminished
1.5.2 Data protection and security law
Data protection is concerned with protecting all living individuals’
regulated data against the misuse of information about them held by
organisations and harmonizing data protection legislation.

The aims of data protection act

a. Protect individual privacy in any form (soft/hard copy)
b. Harmonise data protection legislation
1.5.2 Data protection and security law

Data protection principles

a. Processed fairly and lawfully
b. Processed in accordance with the rights of data subjects
c. Obtained only for one or more specified and lawful purposes
d. Adequate, relevant and not exceeding the purposes why they are processed
e. Accurate and kept up to date
f. Not be kept longer than necessary
g. Measures against unauthorized processing
h. Not be transferred outside EU
Example question 3

Which of the following is data protection legislation primarily designed to protect?

A All private individuals and corporate entities on whom only regulated data is held
B All private individuals on whom only regulated data is held
C All private individuals on whom any data is held
1.5.3 Health and safety law
Importance of maintaining health and safety at work

a. The employer has legal obligations.

b. Accidents and illness cost employer money.

c. The company’s image may suffer.

1.5.3 Health and safety law

仅针对签约后的employee
ü Employer's duty
-A safe working environment
-Safe equipment and procedures
-Adequate information, instruction, training and supervision
-Adequate investigation of accidents

ü Employee's duty
-Take reasonable care of themselves and others
-Do not interfere intentionally or recklessly with machinery
-Use all equipment properly
-Inform employer of any potential dangerous situation
1.5.4 Consumer protection law

- Contract
A contract is a legally binding agreement which means if one party fails to carry out
the agreement; the other party can take legal action against him for breach of contract.

It should be noted that the contract is between the two parties who offer and accept.
Simply speaking, only these two parties are legally bound by the rights and obligation
of the contract, which is called as the privity of contract.
1.5.4 Consumer protection law
Sales of goods

ØThe goods must be delivered for a particular occasion or date.

ØThe seller must have the ownership of the item they are selling.

ØThe goods must correspond with this description.

ØThe goods sold must be of satisfactory quality and fit for their intended purpose.

Provision of service
ØCarried out with reasonable skill and care
ØComplete within a reasonable length of time
ØComplete at a reasonable price
Introduction
2 Porter’s five forces
 2 Porter’s five forces ★

It helps to explain why different industries are able to sustain different levels of profitability.

Threat of
new entrant

Bargaining Competitive Bargaining

power of rivalry power of
supplier buyers

Threat of
substitute
2 Porter’s five forces

(a) Competitive rivalry

The competitive rivalry describes the level of intensity among the existing competitors in
this industry, which as a result impacts the profit they could generate.

Competitive rivalry is likely to be high where:

• there are a number of equally balanced competitors of a similar size.
• the rate of market growth is slow.
• there is a lack of differentiation between competitor offerings
eg. price war, sales promotion and product improvement, introducing
new products for the market, improving after-sales service or providing
guarantees or warranties.
2 Porter’s five forces
(b) The threat of new entrants
The greater the threat, the higher the levels of competition.

The strength of the threat is determined by

u the strength of the barriers to entry
• Capital requirements

• Economy of scale

• Switching cost (the cost of switching supplier)

• Product differentiation

• Others: Loyalty, Policy, technology

u The strength of the resistance from existing firms.

2 Porter’s five forces

(c) The threat of substitute products or services

If there are products from another industry that can be used as substitute,
then the demand for the product will increase or decrease as it moves
upwards or downwards in price relative to substitutes.
The threat of substitute is likely to be high where:
• The quality of substitute is better and switching cost is negligible
• The loyalty of customer is low
2 Porter’s five forces

(d) The bargaining power of customers

Powerful customers can force price cuts and/or quality improvements.

The bargaining power of customers is likely to be high where:
• The degree of customer concentration is high
• The buyer’s product is not significantly affected by the quality of the supplier’s product
• The buyer has a choice of alternative sources of supply and switching cost is low
2 Porter’s five forces

(e) The bargaining power of suppliers

Higher supplier bargaining power might also influence the profitability of the whole entity.
The power of suppliers to charge higher prices will be high where:
• The degree of supplier concentration is high
• The reliance upon one single customer is low
• The impact of brand is powerful
• The switching cost for customer is high
Example question 4

XYZ Co operates in an industry with a high proportion of fixed costs but minimal
investment in machinery. The customers have strong loyalty to the existing brand but
little switching costs. The market has started to decline in recent years.
Which of the following will result in a greater threat of new entrants to the industry?
A. The strength of brand loyalty
B. The declining market
C. The minimal need for investment in machinery
D. The high fixed costs
Example question 5
Consider the following statements about Porter‘s five forces model (True or False)
A. The bargaining power of customers may be increased if products can be
differentiated effectively
B. A high level of competitive rivalry in an industry is always dependent on the
number of producers in the market
C. Threat of new entrant is lower when existing suppliers derive purchasing
economies of scale
 Extension-
Porter three generic strategies
Extension- Porter three generic strategies

○ ways of gaining competitive advantage

○ take profits away from your competitors

波特作为“竞争战略之父”从企业层面上提出了三种通用
战略，以帮助企业在竞争中长期处于不败之地。
三只松鼠 = 便宜又大包的网红坚果？

商业思维：
1、公司不会亏本吗？收益率如何？
2、没有代言人？
A) Cost leadership 成本领先策略

Set out to be the lowest cost producer in an industry to earn the highest unit profits

-高效规模的生产设施，全力以赴降低成本。
-贯穿于整个战略之中的是使成本低于竞争对手
-当别的公司在竞争过程中已失去利润时，这个公司依然可以获得利润
苹果的制胜秘籍是什么？

商业思维：
1、苹果的核心竞争力？
2、有多高的品牌转换成本？
B) Differentiation 差异化战略

-it provides something unique that is valuable to buyers

-is able to obtain a price premium in the market

-将产品或公司提供的服务差别化，树立起全产业范围中具有独特性的东西。

-许多方式：设计名牌形象、技术上的独特、性能特点、顾客服务的独特性。

-最理想的情况是在几个方面都有其差异化特点。
 顶奢品牌——爱马仕

商业思维：“一包难求”求的到底是什么?
C) Focus 专一化战略

-is based on fragmenting the market

-concentrate on a particular type of buyer or geographical area

-主攻某个特殊的顾客群、某产品线的一个细分区段或某一地区市场。
-能够以高的效率、更好的效果为某一狭窄的战略对象服务，其赢利潜力
超过产业的普遍水平。
Introduction
3 Value chain analysis
3 Value chain analysis
3.1 Primary activities
Inbound logistics

• Description: are those activities such as receiving, storing and distribution

of raw materials for the purpose of inputting to production.
• Examples: raw material handling, warehousing, inventory control, vehicle
scheduling and returns to suppliers.
3.1 Primary activities
Operations

• Description: are all processes of converting inputs (raw materials) to

outputs that are final products which are ready to sell.
• Examples: machining, packaging, assembling, equipment maintenance
and testing.
3.1 Primary activities
Outbound logistics

• Description: are those activities involving storing and delivering finished goods and services to customers
for outputting of products.
• Examples: finished goods warehousing, inventory (finished goods) control, delivery vehicle operations,
order processing and scheduling.
3.1 Primary activities
Marketing and sales
• Description: are activities where introducing products into the market and creating
awareness among customers through advertisements and promotions for increasing sales.
• Examples: advertising, promotion, channel selection and pricing.
3.1 Primary activities
After sales service
• Description: is such activity that developing good relationships with customers as
well as maintaining or enhancing the value of the products to customers.
• Examples: installation, repair, training and product adjustment.
3.2 Supportive activities
Procurement
• Description: means supportive activities related to acquisition of inputs such as raw materials.
• Examples: raw materials, other consumable items, machinery, office equipment and buildings.
3.2 Supportive activities
Technology
• Description: means activities intended to improve the products and
processes of the organisation, both internally and externally.
• Examples: telecommunication technology, accounting automation
software and customer servicing procedures.
3.2 Supportive activities
Human resource management
• Description: means the support activities where can enhance competitive advantages through
developing the workforce within the organisation.
• Examples: recruiting, selecting, coaching, training, developing and rewarding staff.
3.2 Supportive activities
Firm infrastructure
• Description: means all activities which make sure the organisation’s
daily operations are performed as intended.
• Examples: accounting, finance, company structure, systems and policies.
4 SWOT analysis
4 SWOT analysis

SWOT analysis summarises the key issues from the business environment and the strategic

capability of an organisation that are most likely to impact on strategy development.

4.1 Internal appraisal
Internal appraisal means evaluating strengths and weaknesses of organisations
themselves, which usually include those existing resources and experience. For example:
a) Financial factors:
Strength: The company has sufficient capital;
Weakness: The company has a poor credit grade in capital markets.

b) Physical resources:
Strength: The company is possessed with the most developed equipments;
Weakness: A fast-food restaurant has a poor location which is far away from town.
4.2 external appraisal
External factors include opportunities and threats, which cannot be
controlled by orginisations.
However, organisations are connected with these outside factors closely.
For example:
a) Economic trends (local, national and international financial trends)
Opportunity: According to economic cycle, it is in the stage of boom;
Threat: There is financial crisis around the world.

b) Political, environmental and economic regulations

Opportunity: The government encourages the development of industry
which the company operates in;
Threat: The political situation is turbulent of certain country which the
company invests in.