Case Study: Assessing Slovakia’s economic development
BUSINESS AND ITS EXTERNAL ENVIRONMENT 1.1 Perspectives on the Business Environment A common way to describe the business environment is to identify its key aspects or perspectives. These are illustrated below. Sometimes these perspectives are described as separate ‘environments’, though in reality they are integral parts of the environment as a whole. The diagram includes the major perspectives on the business environment, but other perspectives such as the natural environment could easily be added. It is often difficult to separate political, economic, legal, and other issues, as the business environment is essentially an eclectic concept.
1.2 The Business Environment as a Complex Adaptive System The business environment can be described as a ‘complex adaptive system’. A complex system is a structure made up of many elements that operate independently and also interact with each other, absorbing information from their surrounding elements. Complex systems and their individual elements adapt or evolve over a period of time. Complexity theory, as the study of complex systems is known, is derived from the natural sciences, but it is increasingly being applied to economic systems or economies. It may also be a useful way of thinking about the business environment. In a complex system it is important to explore the interrelationships between the various elements or perspectives.
1.3 Organisations, Strategy and the Environment An understanding of the business environment and the ability to analyse the business environment are essential tools for any organisation. In fact, there should be a sequential development from the organisation’s mission and objectives, and its analysis of the external environment and its own organisational capabilities, to the formulation of strategy, planning, and operations. This process is illustrated below.
1.4 Developments in the Business Environment The business environment has been undergoing considerable change in recent years. This situation is not unique to modern times, but the pace of change seems to have been increasing. Of course, not all aspects of the environment are constantly changing. For example, an Act of Parliament may remain in force for many years, but the Act may be re-interpreted or changes in society may alter its impact or make it obsolete. So changes in some aspects of the business environment may bring about changes in others – or, to express it in terms of a complex system, the elements of the complex system are responding and adapting to each other and thus causing changes in the system as a whole. Some of the major changes in the business environment in recent years are as follows:
Political Change – in particular the gradual re-emergence of China as an economic power (from 1978 onwards) and the collapse of communism in the former Soviet bloc (from 1989-91). Other political developments include the USA’s confirmation as the world’s only ‘superpower’ (for the time being at least), the economic success of Asia’s ‘tiger economies’ (mainly from the 1980s onwards), and the growing importance of Latin America’s larger states (especially since the late 1990s).
Globalisation - The huge growth in international trade, international capital flows, and the ability of people to travel, communicate, and work across an increasingly interconnected world has become generally known as globalisation. Globalisation has major implications for business organisations; even a small business operating locally may find itself competing with a foreign multinational company or have to respond to a change in world oil prices, for example. As the world’s nations and their economies have become more open to trade and investment, they have become more interdependent.
Technological Change - Technology is one of the main driving forces behind globalisation. As with other aspects of globalization, technological change is not new. ‘Modern’ methods of transport such as the motor vehicle and the aeroplane were first developed in something like their modern form during the years just before and after 1900 respectively. Even the computer has antecedents that date back to the mid-twentieth century in a form recognisable to us today (and much earlier in more limited forms). However, the pace of technological change seems to have been accelerating since the late 1970s.
Cultural Change - Globalization has far-reaching consequences for the way people live their lives. Not only does it bring opportunities for international travel and allow the local supermarket to stock goods from around the world, it also exposes people to unfamiliar cultures and practices. Cultural change can be regarded both positively and negatively. There is a view that the world’s cultures are converging and that ‘western’ or American culture is becoming dominant. Examples cited to illustrate this ‘dominance’ include the prevalence of western dress, fast food, and the English language. However, whilst some degree of cultural convergence has taken place, there is also plenty of evidence of cultural diversity. Religion also seems to be re-emerging as a dominant cultural characteristic, as illustrated by Samuel Huntington’s thought-provoking analysis of what he calls the ‘clash of civilizations’.
Free Market Economics and Corporate Social Responsibility - Just as free market policies had apparently triumphed as the world was approaching the new millennium, pressure on governments and companies to moderate the harsher aspects of free markets was increasing. Many commentators are now emphasizing the need for those engaged in any form of economic activity to be socially responsible. Examples of this trend include the following: the ‘fairtrade’ and ‘trade justice’ movements; Jubilee 2000 (calling for the cancellation of poor countries’ debts); the United Nations Millennium Development Goals (targets to improve conditions in developing countries); concerns about the impact of production and trade on the natural environment; and pressure on companies to take full account of their corporate social responsibilities (CSR).
1.5 Alternative Approaches to Environmental Analysis PESTLE-Type Analysis - One of the most common methods of analyzing the business environment is to identify and explain the key external factors that are likely to affect the performance of a business. This approach is centred on the business and is outward-looking. It is therefore generally specific to a particular business, though some of the external factors may be common to other businesses. This type of analysis builds on the approach taken by SWOT analysis, but the external factors are given more detailed consideration. Its simplest form is known as PEST analysis. PEST analysis focuses on four key aspects of the external environment: political, economic, social (or sociological), and technological. Individual factors are identified under each of these headings and their impact on the organization is explored. Inevitably, some writers have argued that other aspects of the environment should be included in the analysis, so acronyms such as PESTLE and STEEPLE have come into use. PESTLE (political, economic, social, technological, legal, and environmental or ecological) is now probably the most common form, though STEEPLE adds an additional dimension (ethical). PESTLE-type analysis provides a starting point for environmental analysis though, despite its popularity, it is of limited value unless accompanied by a detailed understanding and analysis of the factors involved and the interactions between these factors.
Measures of Competitiveness at the Industry Level - Whereas PESTLE analysis takes the individual organization’s perspective, a more detailed picture of its competitive environment can be gained using some form of objective analysis of the industry in which it operates. Michael Porter’s Five Forces Model is one of the most widely used methods of competitive analysis at the industry level (or industry analysis as it is often known). Porter provides a framework for the analysis of competition where rivalry between firms is influenced by five forces: supplier power, buyer power, the threat of entry by new firms, the threat from substitute products, and the nature of the rivalry between the firms themselves. As with PESTLE analysis, this model needs to be underpinned by an in-depth understanding of the competitive process.
Measures of Competitivenessat the National Level - Studies of the business environment at a national level are becoming increasingly common. Although these studies are essentially engaged in environmental analysis, they are generally expressed in terms of a country’s international competitiveness. They compare key elements of the business environment in a variety of countries, attaching a score to each of the elements and then ranking the countries’ international competitiveness according to their aggregate scores. The term ‘international competitiveness’ is not without its critics as ‘competitiveness’ implies the ability to compete. It is therefore more appropriate when applied to business organizations rather than to countries. However, in this context a country that ranks highly in terms of its international competitiveness is one that provides an environment that enables business organizations to be internationally competitive.
The best known rankings of international competitiveness are published annually by the International Institute for Management Development (known as IMD) and the World Economic Forum (WEF). The WEF ranks over 100 countries in relation to four main categories: economic performance, especially the quality of the macroeconomic environment; government efficiency, including the management of public finances and the efficiency of political and judicial institutions; business efficiency, including productivity, the efficiency and quality of labour and capital markets, and management practices; and infrastructure, including education, health, science and technology as well as the basic transport and communication infrastructure. This type of analysis builds on Michael Porter’s study of the determinants of national competitive advantage (known as ‘Porter’s Diamond’). These determinants are: firm strategy, structure, and rivalry (effective strategies and competition); factor conditions (especially advanced factors); demand conditions (demanding and discerning consumers); and related and supporting industries (to provide competitively price, high-quality inputs and business services).
Figure 1.1 The Determinants of National Advantage (Porter’s Diamond) Analysis of Alternative Futures - Although not yet mainstream, the study of possible future scenarios is becoming more widely accepted as an alternative way of planning for future events. Whilst the future is to a large extent unknown, it is argued that it is better to attempt to influence events in a positive direction rather than simply to allow negative events to happen. An example of this approach is the exhortation of most climate scientists that we should modify our behaviour to reduce the future impact of global warming. Governments and international organizations have also been urged to engage in strategic foresight activities. This approach is not unlike the strategic approach taken by the many of the more successful companies. It does not of course preclude the possibility of unforeseen events or of forecasting errors (using the term ‘forecasting’ in its broadest sense). As with other methods of analyzing the external environment, strategic foresight also benefits considerably from in-depth knowledge of the factors involved.
DISCUSSION QUESTIONS AND CASE STUDY TASKS Part 1: WEF Global Competitiveness Report, 2005-06