An important part of the strategy development process is the assessment of the

business environment.

a) Describe and explain the three tools that aid the manager to do this.
b) Illustrate the application of these tools with practical examples. Where
possible use examples taken from your own country, and industries and
companies with which you are familiar.

a) As postulated by the System Theory, organizations in the globalised 21st

century have to operate as an open system model, whereby, organizations
have a close relationship with the environment, which resulted in its
competitiveness and profitability being affected by the constantly
changing internal and external environmental influences.

As such, it is of utmost critical for managers to be well verse and equipped

with the skills and knowledge to assess the internal and external
environment accurately and precisely, making use of both formal and
informal information, in order to be able to develop a strategic plan that will
ensure the competitiveness and survival of the organization.

PESTEL
There are many factors in the macro-environment that will affect the
performance and decisions of any organization and industries. These factors
have been classified into Political, Economic, Social, Technological,
Environment and Legal factors. The Analysis helps managers to identify and
understand the operating external environment and future direction and
plans.

Political
These refers government policies such as the degree of government
intervention in the industry, through means of taxation and subsidies. For
example, the opening of the two integrated resorts in Singapore recently are
due to government amending and changing the regulations to allow the
setting up of casinos in Singapore.

Other political factors include political stability, where a stable environment

is conducive for investment and operating business, whereas riots (Bangkok
riot and recently France riot over labor law reviews) serve to deter business
development.

Economic
Economic factors include economic growth, interest rates, exchange rate and
inflation. These have a huge impact on how organizations operate and make
decisions.

Having a low interest rate will encourage organizations to setup and having a
low exchange rate will boost the economy by making export more
competitive and leads to higher profitability. (US politicians claim that
Chinese government has been undervaluing the Yuan to create an
competitive advantage in the Chinese export)

Social
Social factors consist of cultural aspects, population growth rate, age
distribution, and attitude towards career. Japanese are renowned for their
working attitude. Whereas, an aging population implies a smaller workforce
thus increasing the labor cost significantly

Technological
Factors include aspects such as R&D activity, technological incentives and
rate of technological change. Singapore has created a niche area in petrol-
chemical and oil refining and has established itself as a hub for biomedical in
the region through its effort in encouraging R&D and innovation in the
various industries. As such, organizations have various incentives to innovate
and provide better services and products.

Environmental
With the growing emphasis on global warming and climate change (the
highly profiled COP15 in Copenhagen), new markets are created (carbon
offset industry) while existing industries are being severely affected, such as
tourism and farming industries are directly affected by climate change, while
airlines and other industries are indirectly affected through carbon taxes and
levies imposed by the government.

Legal
Laws can affect how an organizations behavior in different countries,
especially laws directly affecting the industries such as anti-monopolizing
law and labor law.

Porter’s Five Force Model

There are various models and tools to analyze the business environment. To
effectively assess the micro-environment, the manager can consult the
Porter’s Five-Force Model.

Porter’s Five Force Model draws upon Industrial Organization economic to

derive the five different forces that determine the competitive intensity and
attractiveness of the market. Attractiveness of the market is referring to the
industry profitability. The secondary function of the framework enables the
manager/organization to realign and reconfigure its internal components
to stay ahead of the changing competitive conditions.

In the framework, it consists of three “horizontal” forces: threat of new

entrants, threats of substitute products/services and the intensity of
competition/rivalry within the industry. The model is then completed
with analysis of the two “vertical” forces: bargaining power of the
suppliers and bargaining power of the customers.

Threat of New Entrants

Profitable industry will attract new firms, which will eventually decrease the
profitability for the firms in the industry. Attractive markets are usually
characterized by high barriers to entry and low barriers to exit.

A high entry barrier will deter potential competitors from entering the
industry. At the same time, a low exit barrier implies that the business can
exit easily if the market is no longer profitable.

A prime example of this market is the education sector in Singapore, which is

highly regulated by the government, posing a high entry barrier.

Threats of Substitute Products/Services

Threats of substitute products/services arise from alternative
products/services with lower costs but yield better performance or
satisfaction for the same purpose. This implies that if substitutes exist, the
substitutes can potentially attract a huge proportion of the market value and
hence, reducing the sales volume of existing firms.

Industries where substitutes are easily available usually deter new firms
from entering, as the profitability is low.

Intensity of Competition within the Industry

For most of the industries, the main and major determinant is the
competition existing within the industry. High competition force is
characterized by many existing firms of the same size, employing similar
strategies. This will in turn lead to low level of differentiation thus creating a
downward pressure on the price (lower profitability). In the long run, it will
lead to overall low market growth.

As such, industries with high intensity of rivalry will prove to be unattractive

for firms to enter. However, firms with strong innovation culture will have an
advantage to enter nearly any industry.

Bargaining Power of Suppliers

Business organizations have to depend on some form of inputs and resources
to in turn produce goods and services, they will have to procure from the
suppliers. This in turn leads to a delicate relationship between the
organizations and the suppliers, which will determine the attractiveness and
profitability of the industry.

There are certain industries that face high supplier bargaining power,
especially in the computer manufacturing industry, where most companies
have little or none bargaining power with Intel, the most dominant supplier
for processor chips. High supplier bargaining power can also arise from
forward integration of the suppliers, henceforth, bypassing the industry.

As such, the bargaining power of the suppliers plays an important role in

determining the attractiveness of the industry as a whole.
Bargaining Power of Consumers
The last determinant of the five forces is the bargaining power of consumers.

Low bargaining consumers power can be resulted from the industry

providing and supplier a unique product, which has low degree of
substitutability. On the other hand, high bargaining power arises when the
consumers have the ability to integrate backward.

For example, Anheuser-Busch, Coors and Heinz have integrated backwards

into metal can manufacturing to reduce their reliance on metal can suppliers,
thus increasing their bargaining power.

Porter’s Five Forces Model provides an insight and analysis of the state of
competition in the industry, which in turn collectively determines the
profitability. A weak force on the balance is ideal for organizations to enter
and is a powerful tool for the manager to strategically decide which industry
to enter into.

Porter’s Value Chain Analysis

The Value Chain Analysis is a model, which enable the manger to effectively
assess the internal environment of the organization. A value chain is a
chain of activities for a firm operating in a specific industry. It describes the
process whereby products are produced at different stage of the chain in
order, and most importantly, how will the different stages value-add to the
product.

The analysis divides the 9 different stages of activities into 2 classifications.

The “primary activities” consists of: inbound logistics, operations, outbound
logistics, marketing and sales and services. The “support activities” includes
infrastructure management, human resource management, technological
development and procurement.

This model is useful for identifying the core competencies of the

organization, which creates a niche that competitors have difficulties to
duplicate and imitate, thus creating the organization’s unique offering
(differentiation & cost reduction). The Analysis also enables the managers to
understand the strength and weakness of the organization, and thus facilitate
outsourcing decision.

Managers have to access the macro-environment, micro-environment and

internal environment simultaneously in order to correctly and effectively
draw up strategic plans and access the current position of the organization. It
will be a hideous oversight of a manager if he or she fails to access the
environments using appropriate tools and models or overlooking any part
of the environment before drawing up a new strategic plan. It will only lead
to a waste of resources of the organizations, leading to great potential losses.

Applying the Value Chain Analysis concurrently with the Five Forces Model
will enable the managers and organizations to make timely strategic
 decision to reconfigure their chain of activities to respond to the changing
competitive forces, thus allowing them to stay ahead of the competition in the
industry. It will also assist in gaining a better insight and understanding of
the organization’s Strength, Weakness, Opportunity and Threats (SWOT
Analysis), thus making better strategic planning to serve and be answerable
to the various stakeholders of the organizations.

b) Tesco is one of the largest food and grocery retailers, with global operation
spanning over Asia, Europe and United States with over 4,300 stores. Their
revenue in 2009 has been reported to be in excess of 54 billion pound with
over 470,000 employees.

PESTEL Analysis
Political
The opening up of the Chinese’s market has attracted many foreign
companies to venture into the most profitable market encompassing over 1.3
million people. Tesco has committed to a joint-venture agreement in 2009 to
development shopping malls in China, including three shopping malls in
Anshan, Fushan and Qinhuangdao.

In the European Union, Tesco has expanded into 10 further countries, with
the promotion of trade between Western and Eastern Europe. This has
provided Tesco with an additional platform to expand its retail network.

The growth of Tesco’s international business is expanding rapidly and it is

predicted to account for a quarter of the company’s profit.

Economic
Even though much of the countries suffered from the economic depression
during the financial meltdown, Tesco is hardly affected due to the basic fact
that food and groceries are necessities that people will continue to consume
even in difficult times. In fact, the positive aspect of the recession provides
groceries distributor such as Tesco to increase their output (sales volume).

Social
Tesco is aware and quick to respond to change in consumers’ attitude. In
recent years, consumers are gradually getting more health conscious and
thus lead to an increase in demand for organic food and related products.
Tesco has made the appropriate response to increase their stockpile of
organic food products to satisfy the increase in demand.

Technological
Technology has radically influenced the supply chain and operation of
grocery and food retailer. Tesco is one of the first few retailers to offer online
shopping and this strategic move has gained considerable popularity.
Customers are also able to purchase wine via an application made available
on mobile phones.
Environmental
Governments have been encouraging the use of recyclable bags over plastic
bags. In response, Tesco introduced a loyalty and reward scheme through the
Tesco’s Green Club Point. Tesco has also added carbon footprint data on their
products to certify that their products are made available at little impact to
the environment.

This might be insignificant but it has actually assist to reduce the overall cost
and improve Tesco’s corporate social responsibility image, by heeding to the
call of the governments to be more environmentally friendly.

Legal
Labor law has affected an increase in the minimum wage by 15.5% and this
has resulted in an increase of operating costs of supermarkets across the
industry.

Porter’s Five Forces Model

The Five Forces Model will enable Tesco to gain a better analysis of the
industry, and thus able to develop effective sources of competitive advantage.

Threat of Substitute Products and Services

The threat of substitutes in the grocery retail market is considered low for
food items. The main threat actually arises from small chains of convenience
stores, which are actually competing on a different level with supermarkets
such as Tesco, which offer high quality products at lower prices (due to
economies of scale).

However, Tesco is venturing outwards by opening Express stores in local

towns and city centers (similar to NTUC Express). This strategic plan has
created a high barrier of entry for potential substitutes to enter to the
industry.

Threat of New Entrant

The threat of new entrants into the food retailing industry is low. This is
because of the huge capital required in order to start up and to compete with
the established brands. Tesco and other establish retailer such as Morrisons
account for 80% of all shopping in the United Kingdom.

Therefore, new entrants will have to offer their products at exceptionally low
price and to provide high quality services in order to establish their market
value.

Intensity of Competition/Rivalry
The intensity of competition in the food retailing industry is high. Huge and
established companies dominate the industry, and they are competing
directly through price, products and promotions.

Slow market growth coupled with increasing market shares from direct
competitors have intensified the competition, which is threatening Tesco’s
position as the industry leader.

Bargaining Power of Suppliers

The Bargaining Power of suppliers is fairly low as suppliers are inclined
towards major food and grocery retailers. Much of their business are catered
to providing suppliers to the retailers and hence, strengthening the
negotiating position of the retailers to get the lowest possible price.

Bargaining Power of Consumers

The Bargaining Power of Consumer is high as products are largely
standardized with little differentiation. This implies that consumers have
fairly low switching cost and price of products can be easily compared with
the availability of online shopping.

Value Chain Analysis

Inbound Logistics (Primary)
Logistical tasks include the receipt of goods from suppliers, storage of goods,
handling and transportation of goods internally. In this aspect, Tesco
attempts to maintain the level of consumer choice in store whilst improving
the efficiency of its distribution system.

At the same time, Tesco implemented a quality control procedure concerning

damaged goods; hence reducing cost unfairly incurred and ensuring
consumers will receive goods of high quality.

Operation (Primary)
The main operation elements of Tesco’s activities are service oriented. Hence,
tasks such as ensuring daily operating hours are strictly adhered to,
maintaining the stocks and the shelves are fairly important.

Tesco is expanding its operation further by opening new Express outlets.

Outbound Logistics (Primary)

Tesco provides home delivery service and this is a key valuing adding
element of the Outbound Logistic stage.

Marketing and Sales (Primary)

Tesco has introduced the Clubcard loyalty system and it has been a huge
success. The reward card offers further discounts for the customers.

As previously mentioned, Tesco has been trying to establish itself as an

environmentally friendly retailer by printing environmental information on
their products. This has created a positive image and at the same time, adds
value for environmentally conscious customers.

Infrastructure Management (Support)

Tesco placed continuous focus on the costs and cash control of the company’s
operations. It has introduced an upgraded anti-fraud and security system to
reduce internal theft.

New trolley deposit system has also been introduced to ensure tidiness and
trolleys are readily available.

Human Resource Management (Support)

Tesco aims to increase the number of training schemes and further develop
its recruitment programs so as to pass on the benefits of a well-recruited,
well-trained staff. Tesco firmly believes in providing a positive shopping
experience and thus continuing to invest in customer service, offering pay
incentives to motivate staff to learn and upgrade, and are encouraged to
improve their service provision quality.

Technology Development (Support)

Tesco has introduced online retailing option to their customers. This offers
an alternative to their existing customers and at the same time, allows them
to penetrate into another segment of the market.

In a rapidly changing business environment with high competitor’s pressure,

Tesco has to adopt new expansion strategies or diversifying the existing in
order to sustain its position as an industry leader.

The company must constantly adapt to the fast changing circumstances, at

the same time retain best practices that value add to the customer and its
operation.

In large organizations such as Tesco, strategic planning should be analyzed

and implemented at various levels within the hierarchy. The different
strategies should be related and mutually supporting in order to achieve
greater synergies and to further develop its core competencies to ensure
competitive advantage.