ch02 course notes f1

8/13/2019 CH02 Course Notes f1

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2Syllabus Guide Detailed Outcomes

Having studied this chapter you will be able to:

Appreciate factors outside the organisation, but which impact on it, using PEST analysis.

Understand the necessity for legislation around areas such as data protection and health and safety procedures.

Understand what the Value Chain is and appreciate how it enhances competitive advantage.

Think through the impact of technology on organisations.

Exam Context

The topics covered in this chapter are heavily tested in the pilot paper- there are 5 questions. They cover population

trends, environmental factors and scanning, data protection regulation and employment legislation.

Business Context

Organisations need to understand and appreciate the environment in which they operate in order to maximise their

potential competitive advantage.

The business

environment


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2: THE BUSINESS ENVIRONMENT

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Overview

The business environment

PESTEL

Porter's 5 forces

Technology

SocialPolitical

Economic

Environmental

Legal

Value chain


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1 Analysing the environment

1.1 The environment can be described as everything which is beyond the organisational

boundary.

1.2 Management cannot control the environment, however it influences all aspects oforganisational activity and so must be viewed strategically.

1.3 The environment comprises a number of different elements, illustrated by the rings in the

diagram below:

ORGANISATION

CO M P E T I T I V EE N V I R O N M E N T

POLITICS TECHNOLOGY

ECONOMY SOCIETY(& CULTURE)

M A C R O E N V IR O N M E N T

P H Y S IC A L E N V I R O N M E N T

MATERIALS SUPPLIERS

LABOUR

CAPITAL

GOODS TO

CUSTOMERS

WAGE TO

LABOUR

PROFIT TO

INVESTORS

POLLUTION

G E N E R A L

E NV I RO NM E NT

1.4 The general environment covers all the political/legal, economic, social/culturaland

technologicalinfluences in the countries in which an organisation operates.


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Lecture example 1 Class d iscussion

Required

Consider a company specialising in building houses in the UK, generate as many ideas as you can

as to why they should analyse their environment?

Solution

Models to asses the environment

1.6 It would be a good idea, from the above example, if we had a structure or framework within

which to analyse a businesses environment, In this chapter we look at 3 models which can

we used to assess a companies environment:

(1) PESTEL analysisis used as a framework for generating ideas for the factors that are

influencing the environment:

P Political/Legal/Regulation (sections 2, 3,4 and 5 below)

E Economic (chapter 3&4)

S Social/Cultural/Fashion (6 below)

T Technology (section 7 below)

E Environmental

L Legal

(2) Competitive Forces and

(3) The Value Chain


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2 Political and legal environment (P and L in PESTEL)2.1 The political factorsimpacting on the environment include:

(a) Degree of government intervention(b) Policy direction

(c) Political risk / stability

2.2 The legal frameworkin which organisations operate derives from:

(a) Parliamentary legislation(b) Government regulations

(c) Treaty obligations

(d) Official regulations

(e) International bodies

2.3 Lobby groups put forward their case to influence ministers and civil servants in government.

2.4 Key legislation for organisations may include:

Employment law (see 3 below) Data Protection (see 4 below)

Health and Safety (see 3 below) Sale of Goods Act (see 5 below)

3 Legal framework for employees

3.1 Employees in many countries are protected by a range of laws including the following areas:

Termination of employment (see below)

Health and safety in the workplace. (see below)

Plus be aware there a laws around other areas eg recruitment, equal opportunities

3.2 Termination of employment

3.3 There are two types of dismissal which you should be aware of for this syllabus, these are

Wrongful dismissal

Unfair dismissal

3.4 Wrongful dismissal

Where the employer has dismissed an employee however they have breached the terms of

the contract.

3.5 Unfair dismissal

Where the employee has been dismissed for an arbitrary reason the onus is on the

employer to prove that it was a fair dismissal


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Health and safety

3.6 Both employers and employees have a duty to maintain health and safety standards at work

for the following reasons:

To meet legal obligations

To minimise the risk of accidents

To minimise the risk of litigation


Required

(i) What are costs of accidents to an organisation?

(ii) Which areas of Health and Safety would fall under the responsibility of the employer?

Solution

3.7 Employees'duties over health and safety include:

(a) Take care of themselves and others

(b) Do not interfere with machinery

(c) Use all equipment properly

(d) Inform employer of any potentially dangerous situation

3.8 Many employers have a health and safety pol icywhich details:

(a) Statement of principles

(b) Detail of safety procedures

(c) Compliance with the law

(d) Instruction on equipment use

(e) Training requirements


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A scene from everyday office life is shown below

Required

Note down anything that strikes you as being dangerous and allocate responsibilities between

employer and employee.

Solution


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Stress

3.9 Stress in employees can arise for a variety of reasons, connected with the job or the

employee's private life. Symptoms of stressin the work environment include:

(a) Nervous tension

(b) Withdrawal

(c) Low morale

(d) Denial of the problem

3.10 Causes or aggravators of s tressin the work place:

(a) Clash of personality of employee

(b) Ambiguity/conflict in employee's roles

(c) Change, insecurity, risk

(d) Management style

(e) Job related factors (eg environment, work load)

4 Data protection and security

4.1 In recent years, there has been a growing popular fear that information about individuals

which was stored on computer files and processed by computer could be misused.

4.2 In particular, it was felt that an individual could easily be harmed by the existence of

computerised data about him or her which was inaccurate or misleading and which could be

transferred to unauthorised third partiesat high speed and little cost.

4.3 In the UK legislation is included in various Data Protection Acts.

4.4 The key risksaffecting data are:

(a) Human error

(b) Technical malfunction

(c) Deliberate/malicious action

(d) Hacking

4.5 Using the Internetbrings numerous security dangers:

(a) Viruses

(b) Deliberate damage caused by disaffectedemployees(c) Damage caused by outside people (hackers)

(d) Downloading of inaccurate information and/or virus ridden software

(e) Internal information may be intercepted, but this can be avoided by encryption

(f) Communications link could break down

4.6 Data stored electronicallyis at risk of a security breach. At particular risk is:

(a) Information regarding the business's standing and competitive advantage

(b) Personal and private information

(c) Information regarding the business's security

(d) Information integral to the outcome of deadlines (eg tenders)


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4.7 When data is transmittedover a network or telecommunications link (especially the

Internet) there are numerous security dangers:

(a) Corruptions such asviruses on a single computer can spread through the network to

all of the organisation's computers.

(b) Disaffected employees have much greater potential to dodeliberate damage tovaluable corporate data or systems because the network could give them access to

parts of the system that they are not really authorised to use.

Data protection principles

4.8 To illustrate some of the issues in data protection we can consider some of the details

relating to UK legislation. Note that you will not be tested on specific UK legislationor

requirements. However, some useful definitions to be happy with include:

(a) Personal datais information about a living individual, including expressions of

opinion about him or her. Data about other organisations (eg supplier or customercompanies) is not personal data, unless it contains data about individuals who belong

to those other organisations.

(b) Data usersare organisations or individuals who control the contents of files of

personal data and the use of personal data which is processed (or intended to be

processed) automatically ie who use personal data which is covered by the terms of

the Act.

(c) A data subjectis an individual who is the subject of personal data.

4.9 The principles of data protection include that personal data should be:

(a) processed fairly and lawfully.

(b) obtained only for one or more specified and lawful purposes.

(c) adequate, relevantand not excessive.

(d) accurateand, where necessary, kept up to date.

(e) not be kept for longer than is necessaryfor that purpose or those purposes.

(f) not be transferred to a countries where data protection is less strictly applied or

protected

4.10 Therefore the key points of the Act in the UK can be summarised as follows:

(a) With certain exceptions, all data users and all computer bureaux have had to

register under the Act with the Data Protection Registrar.

(b) Individuals (data subjects) are awarded certain legal rights.

(c) Dataholdersmust adhere to the dataprotectionprinciples.


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5 Contract law and the Sale of Goods Act

5.1 A contract must have three elements for it to be legally enforceable:

a) Consideration normally money offered, as in a contract of employment but equally

as in the c ase of bartering, it could a cow, a bag of rice or even the promise of aservice.

b) Offer & Acceptance There must be an offer and an acceptance by the two parties.

c) Intention to enter into a legally binding contract this could be written or verbal.

5.2 The most common contract which we all enter into would be a simple transaction in a high

street store.

Lecture example 4 Group exercise

Consider walking down the high street and coming across a bed side table in the window of a

furniture store, costing 30. What are the three elements of forming a contract which take place

during the transaction

Solution

Consideration -

Offer Acceptance -

Intention -

5.3 So the Sale of Goods Act 1979 is concerned very much with the forming of a contract

between the buyer and the seller and some of the key principles of this law are set out

below:

Sellers right to sell the goods must have legal title to sell goods

Description of the goods goods correspond to description

Satisfactory quality for the purpose intended of such a good, free from minor

defects and safe


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6 Social and demographic trends (S of PESTEL)

6.1 Organisations are impacted by social and demographic factors in two ways:

(a) Managing HR

(b) Successfully marketing products

6.2 Managing HR

Organisations must take account of a range of factors when managing its labour force:

(a) What skills do we need? recruitment, retention, motivation

(b) What skills are available

internally?

externally?

(c) How does the education system contribute to our labour supply?

6.3 Cultural trends

6.4 As cultural trends develop they change the demand for goods and services, and so

opportunities open up or close down. For example, there have been significant changes in

attitudes to diet and health in some countries in areas such as:

(a) Smoking

(b) Diet (eg organic food)

(c) Obesity

6.5 The impact on business of these trends in health and diet include:

(a) Growing market (for sports-related goods)

(b) Employee health (and its impact on employers' productivity)

(c) New foods (with added vitamins)

(d) New convenience foods (time poor culture)

(e) Organic foods

(f) Smokers demand for outdoor heating equipment

7 Impact of technology on organisations (T of PESTEL)

7.1 Information technology has played a significant role in the development of the modern

business environment.


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Required

Suggests ways in which IT has improved the working environment since 1990 also consider how

you have benefited from IT.

Solution

7.2 Structure and IT

New structures through

Downsizing Delayering Outsourcing


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Required

(i) State what outsourcing is

(ii) Identify the benefits and risks of outsourcing an organisations IT department.

Solution

7.3 When finalising arrangements for outsourcing ITthe following factors need to be

considered:(a) Is the system of strategic importance? Yes, tend towards keeping it in house

(b) Can the system be relatively isolated? Yes, tend towards outsourcing

(c) Do weunderstand the systemsenough to manage the service agreement?

8 Converting resources: the value chain

8.1 Michael Porter says that competitive advantage is achieved by the way a firmorganises

and performs activities.

8.2 Example A restaurant

A restaurant's activities can be divided into buying food, cooking it, and serving it. The

ultimate value a firm creates is measured by the amount customers are willing to pay for its

products or services above the cost of carrying out value activities.

A f irm is profi table i f the realised value to customers exceeds the collect ive cost of

performing the activities.

BUYING COOKING SERVING


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8.3

8.4 Activitiesthat add value do not stop at the organisation's boundaries. For example in 9.3,when a restaurant serves a meal, the quality of the ingredients although they are chosen

by the cook is determined by the grower.

8.5 The Value Chain: Porter analysed the various activities of an organisation into this model.

The Value Chain can be used to focus on how the business processes inputs into outputs to

meet customer needs. Activities in each area should always Add Value to the company

and thus increase MARGIN. This is our third model for assessing a company

8.6 Value Chain is usedto identify the following:

(a) Internal strengths and weaknesses(b) Benefits frominternal li nkages

(b) Benefits from external linkages(c) How the value chain supports the generic strategy

Growing Packing Distribution Buying Cooking Serving

INBOUND

LOGISTICS

OPERATIONSOUTBOUND

LOGISTICS

MARKETING

&SALES

SERVICE

FIRMINFRASTRUCTURE

TECHNOLOGYDEVELOPMENT

HUMAN RESOURCE MANAGEMENT

PROCUREMENT

PRIMARY ACTIVITIES

SUPPOR

T

ACTIVITIES

MARGIN

MARGIN


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8.7 Primary activities are those directly related to product ion, sales, marketing, delivery and

services:

(a) Inbound logisticseg raw material warehousing, transport, stock control.

(b) Operationsare those activities that convert resource inputs into a final product.

(c) Outbound logistics are those activities relating to storing the product and itsdistribution to customers.

(d) Marketing and sales are those activities that relate to informing customers about the

product, persuading them to buy it, and enabling them to do so. This includes

advertising, promotion etc.

(e) After sales service. For many companies, there are activities such as installing

products, repairing them, upgrading them, providing spare parts etc.

8.8 Support activitiesare those which provide purchased inputs to support the primary

activities, eg human resources, technology and infrastructural functions:

(a) Procurement refers to those activities which buy the resource inputs for the primary

activities (eg purchase of materials, subcomponents and equipment).

(b) Technology development(in the sense of apparatus, techniques and work

organisation). These activities are related to both product design and to improving

processes and/or resource utilisation.

(c) Human resource managementis the activities of recruiting, training, developing and

rewarding people.

(d) Firm infrastructure.The systems of planning, finance and quality control are activities

which Porter believes are crucially important to an organisation's strategic capability

in all primary activities.

Lecture example 7 Preparation question

Required

Draw two Value Chain diagrams and in each section make notes on what you would expect to

see within the value chain for

a) McDonaldsb) A Celebrity Chefs Restaurant


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Solution


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9 Competitive forces

9.1 Michael Porter argues that the pressures of five competitive forces, specific to the industry

or organisation, will determine long-term shareholder returns (1980). This is our second

model for analysing a business.

9.2 This model may be used in two ways:

(a) To understand the inherent attractivenessof an industry.

(b) By understanding the impactof each individual force on an organisation, actions

may be taken to mitigate that force.

9.3 Porter's 5 forces model

Potent ia lEn t ran ts

Threa t o f New Ent ran ts

Supp l ie rs

Barga in ing Power o f Supp l ie rs

Indust ryCompet i to rs

Riva l ry AmongExist ing F i rms

Barga in ing Power o f Buyers

B u ye rs

T h re at o f Subst i tu te P roductsor Serv ices

Subs t i t u teIndust r ies

(a) Substitutes. The threat that alternative products or services will equally satisfycustomer needs, eg substitutes for travelling to France, ferry, plane, train or even

swimming!

(b) Potential entrants. The threat posed by an outside organisation that may try to

penetrate the market place. Examples of barriers include economies of scale, product

differentiation, capital costs, distribution channels.

(c) Buyer power. The power customers have to reduce prices and increase quality or to

simply shop around. This depends on switching costs to change provider, customers

relative size, and number of buyers.


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(d) Supplier power. The power suppliers have to increase prices and reduce quality.

This depends on, for example, monopoly power and switching costs and relative size

of supplier.

(e) Competition and rivalry. The inherent level of rivalry and competition in the industry

between existing firms.

9.4 IT can be used to support an organisation's competitive strategy and can be used in a

collaborative venture (eg linking systems with trading partners).


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10 Chapter summary

Section Topic Summary

1 The generalenvironment

The environment is anything outside of theorganisations boundaries. It can be assessed for

opportunities and threats by using the PESTEL

framework.

2 Political framework Organisations need to be aware of government stability

and policy, both present and in the future, organisations

can lobby governments to affect change in policy and

legislation

3 Legal factors a range of areas of legislation including employment,

health and safety, data protection and sale ofgoods. Failure to comply with legislation could lead to

legal and reputational consequences.

Basic knowledge of a contract is required,

understanding that you need an offer and acceptance,

consideration and intention by both parties to enter into

a contract.

4 Social andenvironmental

Social trends impact on employment and demand forour products. Technological change impacts on

products and processes. Both may create

opportunities and threatsfor an organisation.

5 Porters models

value chain and five

forces

Michael Porterdeveloped a range of models for

assessing an organisations strategy. His five forces

modelshows the industrial forces that impact on

particular businesses and determine their profitability

and attractiveness. The value chainallows the

business to consider internal and external linkages

between activities to assess how best to getcompetitive advantage.


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Overview

The business environment

Porter's 5 forces

PESTEL

Technology

SocialPolitical

Economic

Environmental

Legal

Value chain

INBOUND

LOGISTICS

OPERATIONSOUTBOUND

LOGISTICS

MARKETING

&SALES

SERVICE

FIRMINFRASTRUCTURE

TECHNOLOGYDEVELOPMENT

HUMANRESOURCEMANAGEMENT

PROCUREMENT

PRIMARYACTIVITIES

SUPPORT

ACTIVITIES

MARGIN

MARGIN

Substitutes

Potential entrants

Buyer power

Supplier power

Competition and

rivalry

Data Protection Act

Health and Safety in the Workplace Act

Employment Law

Sales of Goods Act (Formation of a contract)

ch02 course notes f1

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