CH 6. WHAT INFLUENCES CONSUMER BEHAVIOR? Cultural Factors Social Factors Personal Factors.
ENVIRONMENTAL FACTORS THAT INFLUENCES THE OPERATIONS OF THE BUSINESS
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Transcript of ENVIRONMENTAL FACTORS THAT INFLUENCES THE OPERATIONS OF THE BUSINESS
Socio-Cultural Forces
(c) UNCLE BEN Strategic Management 1
What are Social, Cultural, and Demographic Forces?
The attitudes, values, standards, beliefs, and tastes held
by people including ethnic minority groups.
Factors that regulate the values, traditions, ethics,
morals, and customs of society
Consist of:
Culture
Demography
Social structure
Social factors affect economic factors
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What are Social, Cultural, and Demographic Forces (2)
Social and cultural changes include:
Changing population characteristics
Changing consumer values and lifestyles
Changing consumer purchasing power
Changing religious beliefs and practices
Demographic changes include:
Shifts in population characteristics such as income, education, and age levels
Geographic distribution of the population
Population growth
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Social, Cultural, and Demographic Forces
• Child bearing rates
• Number of births
• Number of deaths
• Number of marriages
• Number of divorces
• Immigration and emigration rates
• Life expectancy rates per capita income
• Attitudes towards business
• Lifestyles
• Traffic congestion
• Trust in government
• Attitudes towards government
• Attitudes towards work
• Buying habits
• Ethical concerns
• Attitudes towards savings
• Racial equality
• Attitudes towards investing
• Sex roles
• Attitudes towards product quality
• Attitudes towards customer service
• Attitudes towards foreign people
• Pollution control
• Waste management
• Air pollution
• Water pollution
• Number of churches and church members
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Impact of Social, Cultural, and Demographic Forces on Business
Demographic factors (e.g., size of the population, population growth, age, life expectancy, family size, occupational status, employment pattern etc.,) demand for goods and services, working hours
Consumer behaviour and attitudes different demand patterns and different marketing strategies
Mobility of labour availability and price of labour
Geographic distribution of population demand for goods/services, availability of labour for work
Income distribution purchasing power of workers
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Technological Forces
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What is the Technological Environment?
Factors that affect the way an organisation does its work and also the products and services it offers
Factors that create problem-solving inventions
The current state of knowledge regarding the
production of products and services
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Some technological factors that affect business activities
• Government expenditure on technology (i.e. R/D)
• Industry expenditure on technology (i.e. R/D)
• Patent protection
• Technological advancements
• Lifecycle of technology available
• The role of internet and the changes to it (if any)
• Availability of new products and srevices
• New developments in technology transfer from the labs to the marketplace
• Improvements in productivity through automation
• Availability of internet facilities
• Telecommunication infrastructure
• Computer hacking activities
• Biotechnology and new industries
• Information technology, computing and associated implications for production
• Transportation and distribution
• Production processes
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Impact of Technological Forces on Business
1. Type of products or services that are made and sold
2. The way in which products are made
3. The way in which services are provided
4. The way in which markets are identified
5. The way in which employees are recruited and trained
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Impact of Technological Forces on Business (2)
– Creation of new markets
– Proliferation of new and improved products
– Changing the relative competitive cost
positions in an industry
– Rendering existing products and services
obsolete
(c) UNCLE BEN Strategic Management 10
Impact of the Internet on Business Activities
– altering the life cycles of products,
– increasing the speed of distribution,
– creating new products and services,
– erasing limitations of traditional geographic
markets,
– changing the historical trade-off between
production standardisation and flexibility.
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Impact of the Internet on Business Activities (2)
– altering economies of scale (i.e., reduction in
input cost with an increase in output as the
business grows)
– changing entry barriers,
– redefining the relationship between industries
and:
various suppliers,
creditors,
customers, and
competitors
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Environmental or Ecological Forces
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Environmental or Ecological Forces
All the factors that influence or are determined by the surrounding environment.
Vital for certain industries such as tourism, crop farming, horticulture, fisheries, forestry, and livestock farming
Examples include:– Climate
– Weather
– Geographical location
– Global changes in climate
– Environmental offsets, etc.
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Example of PEST Analysis
Political
• Government has passed legislation which requires further reductions of CO2 , HC and NC emissions for vehicles until 2020
• New political forces, which are against tax reductions, may be elected in the next years’ elections
• Import restrictions will increase in 2016
• Government is increasing its funding to ‘priority’ industries
• Government is easing regulations for employment
• Increasing tensions between our government and our major export partner’s government
Economic
• GDP will grow by 3% in 2015• Availability of credit for businesses
will slightly grow or remain unchanged in 2015. The same applies for the cost of credit in the last quarter of increase to 15%
• Inflation will rise to 15% or 16% in 2015
• Corporate tax rate will decrease by 2% next year to 23%
• Dollar exchange rates are expected to decrease compared to euro
• Disposable income level will decrease• Oil prices will increase by 5% and 6%
respectively in 2016
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Example of PEST Analysis (2)
Socio-cultural
• Positive attitude towards “green” vehicles
• Number of individuals and companies buying through the Internet is 10% and 4% respectively and is expected to grow
• Immigration is increasing• Increasing attitude toward jobs with
shorter work hours• Increasing attitude toward “blue-
collar” jobs • People tend to buy more foreign
rather than domestic products• People change their eating habits and
now tend to eat unhealthier food
Technological
• New machinery that could reduce production costs by 20% is in development
• Country’s major telecom company announced its plans to expand its internet infrastructure and install new optic fibre cables
• Driverless cars may be introduced in the near future
• “New” type of chair will be introduced into the market next year
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Advantages and Disadvantages of PEST Analysis
Advantages
• The tool is simple and easy to understand and use.
• The tool helps understand the business environment better.
• The tool encourages the development of strategic thinking.
• The tool helps reduce the effect of future business threats.
• The tool enables projects to spot new opportunities and exploit them effectively.
Disadvantages
• The tool allows users to over-simplify the data that is used. It is easily possible to miss important data.
• The tool needs to be updated regularly to be effective.
• The tool is most effective when users come from different perspectives and departments.
• The tool requires users to have access to data sources which could be time consuming and expensive.
• Much of the data used by the tool is on an assumption basis.
• The business environment is changing drastically. Thus, it is becoming increasingly difficult for projects to anticipate developments
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THE TASK ENVIRONMENT
What is the Task Environment?
A. k. a. Micro environment or Industry environment
Those specific outside elements or groups with which the business interacts when conducting its activities.
Has immediate impact on the business and, in turn, is affected by the business.
Management has no control over it in the short term; instead management has control over it in the long term
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Elements of the Task Environment
government,
local communities,
suppliers,
competitors,
customers,
creditors,
employees/labour unions,
business owners
special-interest groups, and
trade associations.UNCLE BEN (c) STRATEGIC
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Industry Analysis
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Industry Analysis
A. k. a. Competitive Analysis
The in-depth examination of key factors within
the task environment of business.
Assists managers to:
– Identify rival firms
– Determine the strengths, weaknesses,
capabilities, opportunities, threats, objectives, and
strategies of rival firms
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Industry Analysis
Determines the intensity of competition
using the Competitive Forces Model
Rivalry among existing firms
Threat of new entrants
Threat of substitute products
Bargaining power of buyers
Bargaining power of suppliers
Relative power of other stakeholders
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Existing Firm Rivalry
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Rivalry Among Existing Firms
Competitive pressures arising from the efforts of rivals to get better market position, market share, higher prices, and competitive advantage
Rivalry is stronger when:
Competing sellers are active in making fresh moves to improve their market standing and business performance
Slow rate of growth of industry -- Buyer demand is growing slowly
Extra capacity-- Buyer demand falls off and sellers find themselves with excess capacity and/or inventory
Large number of competitors -- The number of rivals increases and rivals are roughly of equal size and competitive capability
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Rivalry Among Existing Firms (2)
Little opportunity to practice product differentiation -- The products of rival sellers are commodities or else weakly differentiated
Buyer costs to switch brands are low
One or more rivals are dissatisfied with their current position and market share and make aggressive moves to attract more customers
Diversity of rivals -- Rivals have diverse strategies and objectives and are located in different countries
Outsiders have recently acquired weak competitors and are trying to turn them into major contenders
No industry leader -- One or two rivals have powerful strategies and other rivals are struggling to stay in the business
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Rivalry Among Existing Firms (3)
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Rivalry is generally weak when:Industry members move only infrequently and are in a
non-aggressive manner to draw sales and market share away from rivals
Buyer demand is growing more rapidlyProduct or service characteristics -- The products of
rivals are strongly differentiated and customer loyalty is high
High exit barriers -- Buyer costs to switch brands are high
There are fewer than 5 sellers or else so many rivals that one company’s actions have little direct impact on rival’s business
High fixed costs
Rivalry Among Existing Firms (4)
Typical weapons for fighting rivals and attracting buyers include:
1. Lower prices
2. More or different features
3. Better product performance
4. Higher quality
5. Stronger brand image and appeal
6. Wider selection of models and styles
7. Better/bigger dealer network
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Rivalry Among Existing Firms (5)
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8. Low interest rate financing
9. Higher levels of advertising
10. Stronger product innovation capabilities
11. Better customer service capabilities
12. Stronger capabilities to provide customers with custom-made products
New Entrants
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Threat of New Entrants
Competitive pressures arising from the threat of new entrants to an industry who bring new capacity including the desire to gain market share and substantial resources
Entry threats are stronger when:
The pool of new entrants is large and some of the new entrants have resources that would make them formidable market contenders
Entry barriers are low or can be readily hurdled by the likely new entrants
New entrants can expect to earn attractive profits
Buyer demand is growing fastUNCLE BEN (c) STRATEGIC
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Threat of New Entrants
Industry members are unwilling or unable to contest the entry of new entrants
Access to distribution channels -- When existing industry members are looking to expand their market reach by entering product segments or geographic areas where they currently do not have a presence
Favourable government policy/action such as legislation
Product differentiation
Low switching costs
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Threat of New Entrants
Entry threats are weaker when:
The pool of new entrants is small
Capital requirements of entry are high
Existing competitors are struggling to earn healthy profits
The industry’s outlook is uncertain or risky
Lack of access to distribution channels
Buyer demand is growing slowly or is stagnant
Unfavourable government policy/action such as legislation
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Threat of New Entrants
Expected retaliation -- Industry members will strongly contest the efforts of new members to gain a foothold in the market
High switching costs
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Substitute Products or Services
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Threat of Substitute Products or Services
Competitive pressures arising from the attempts of companies outside the industry to win customers over to their products that appear different but can satisfy the same need as another product
Forms of substitution are:
Product- for- product substitution
Substitution of need
Generic substitution
Product not a necessity
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Threat of Substitute Products or Services
Competitive pressures from substitutes are stronger
when:
Good substitutes are readily available or new ones are
emerging
Substitutes are attractively priced
Substitutes have comparable or better performance
features
End-users have low costs in switching to substitutes
End-users grow more comfortable in using substitutes
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Threat of Substitute Products or Services
Indicators that competition from substitutes is strong:
Faster growth in sales of substitutes than sales of the
industry being analysed. This shows that sellers of
substitutes are drawing customers away from the
industry in question.
Producers of substitutes are moving to add new
capacity
Increasing profits of producers of substitutes
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Threat of Substitute Products or Services
Competitive pressures from substitutes are weaker when:
Good substitutes are not readily available or do not
exist
Substitutes are higher priced in relation to their
performance
End-users have higher switching costs to substitutes
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Power of Buyers
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Bargaining Power of Buyers
Competitive pressures arising from ability of buyers to force prices down, bargain for higher quality, and play competitors against each other including buyer-seller collaboration
Bargaining power of buyer is stronger when:
The identity of a buyer adds prestige to the sellers list of customers
Improvement in the quantity and quality of information to buyers
Buyers can postpone their purchases to later periods if they do not like the offer of the suppliers
There is threat of backward integration by the buyer into the seller’s business so that the buyer becomes a competitor
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Bargaining Power of Buyers (2)
Switching costs of buyers to competing brands or substitute products (i.e., change to new suppliers) are low
Buyers are many and can demand concessions when buying large quantities
Large-volume purchases by buyers are important to suppliers
Buyer demand is weak or declining
There are only a few buyers so each buyer’s business is very important to sellers
There is concentration of buyers
There are alternative sources of suppliers
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Bargaining Power of Buyers (3)
Bargaining power of buyer is weaker when:
Product represents a high percentage of buyer’s cost
Buyer earns low profits
Product is unimportant to buyer
Buyers buy the items infrequently or in small amounts
The switching costs of buyers to competing products are high
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Bargaining Power of Buyers (4)
The brand reputation of a seller is important to the buyer
A surge in demand by buyers creates a “seller’s market”
The quality or performance of a product is very important to buyers but it is not matched by other products
A partnership or cooperation of buyers with sellers provides attractive win-win opportunities
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Power of Suppliers
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Bargaining Power of Suppliers
Competitive pressures arising from the ability of suppliers to raise prices or reduce quality of raw materials, parts, components, and other resource inputs including supplier-seller collaboration
Bargaining power of supplier is stronger when:
There are only a few suppliers of a particular input
Supplier offers unique product or service
Substitutes are not readily available
Unimportance of product or service to the supplier
Cost of switching to another supplier is high
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Bargaining Power of Suppliers
There is a threat of forward integration by supplier into the business of industry members thereby making it possible of the supplier to become a rival
The supplier’s customers are highly fragmented so they have low bargaining power
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Bargaining Power of Suppliers (2)
Bargaining power of supplier is weaker when:
Switching costs to other suppliers are low
Good substitute inputs exist or new ones are coming onto the market
The collaboration or partnership of sellers with selected suppliers provides attractive win-win opportunities
Items supplied are commodities that are readily available from many suppliers at the existing market prices
There is a surge in the availability of supplies, thus greatly weakening the pricing power of suppliers
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Bargaining Power of Suppliers (2)
Industry members account for a large proportion of a sellers’ total sales and a continued volume high purchases are important to the well-being of suppliers
Industry members are a threat to integrate backwards into suppliers’ businesses and to self-manufacture their own requirements
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Other Stakeholders
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Relative Power of Other Stakeholders
Competitive pressure stemming from attempts by other stakeholders to influence business activitiesGovernmentLocal communitiesCreditorsTrade associationsSpecial interest groupsUnionsShareholdersComplementors- products that work well with a firm’s
product
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