Common Frameworks for Evaluating the Business

Environment

Introduction
The environment is always changing, and this is just as true for the business
environment as it is for the physical world around us. Managers try to avoid being “taken
by surprise” by unexpected events that would impact their organizations through an
ongoing process called environmental scanning. Environmental scanning is a high-
level, broad-based process of gathering, analyzing, and dispensing information for
purpose of developing strategies or tactics. The process entails getting both factual data
and qualitative opinions. Organizations also scan when they are considering whether to
enter a particular industry.

PESTEL

The PESTEL framework organizes information gathered from environmental scans.

You may wonder just how you go about analyzing the total external environment that
would affect your company. A commonly used management tool is called PESTEL.
PESTEL is an organizing framework that allows decision makers to understand and
make connections with a mass of information. (You may sometimes see the name of
this tool written as PESTLE or even just PEST in older sources.)

A PESTEL analysis examines six key macro-environmental factors in order to

understand their interactions with the organization.
Besides alerting top management to potential threats in the environment, a PESTEL
analysis is a part of the external strategic analysis when conducting research into new
markets. It gives an overview of the different macro-environmental factors that the
company has to take into consideration. Descriptions of the six key PESTEL factors
follow.

Political

Political issues are a function of how much the government intrudes or is involved in an
organization’s operations. In particular, it looks at taxation and tariffs, regulations,
political stability, and elections. For example, Google and other Internet providers have
financial, legal, and ethical issues relating to operating in countries like China or Iran,
where repressive governments want to control the flow of information. In another
example, Google was slapped with a $2.7 billion fine by the European Union for
antitrust abuses (Google can appeal this decision with the European Court of Justice).
Finally, the CEO of Apple is awaiting changes in the tax law before bringing almost
$250 billion in foreign reserves back to the United States. Often, decision makers for
these organizations must choose between making money or suppressing information
critical of the repressive regimes.

Economic

Economic factors start with indicators for the U.S. economy as a whole. These are
growth, employment, inflation, and interest rates. Companies with foreign operations will
worry about exchange rates. These factors are important in long-range forecasts for
revenue and expenses. Businesses in the financial industry may pull back from
aggressive strategies in times of rising interest rates.

Social

Society and culture have great impacts on the business environment. These factors
include demographics like population growth, age distribution, and attitudes toward
safety and health consciousness. For example, rising rates of obesity have forced
management to look closely at marketing campaigns in giant food corporations such as
Nestle and Kraft Foods.

Technological

Technology facts include research and development (R&D), automation and robotics,
and technology incentives. The rate of technological change in the business
environment is staggering. A term often paired with technology is disruption, a
description for innovations that completely change the cast of leading competitors in an
industry. Many organizations not only scan the technological environment but also
monitor closely for new and disruptive processes. Walt Disney and Alphabet (Google’s
parent corporation) are both investing heavily to become leaders in virtual reality. They
are betting billions that augmented reality will have the power to disrupt the gaming and
entertainment industries.

Environmental

Weather, climate change, air quality, and natural disasters are all environmental factors.
Some industries are especially at risk from changes in the natural environment,
including manufacturing, agriculture, tourism and travel, and sports and entertainment.
Many pollution regulations limiting water and air pollution have been passed that affect
the operation of businesses. Today, the impact of climate control is being debated in
Congress, and organizations in many industries are concerned how this latest
environmental threat will affect their operations. Recently, Shell Oil spent more than $7
billion exploring parts of the Arctic Circle for oil—a venture that was not possible before
global warming increased drilling access in the area. They have since cancelled this
initiative due to a lack of results, as well as strong international protests that it may
cause further damage to an environmentally sensitive location.

Legal

Legal factors include discrimination laws, consumer protection laws, and employment,
health, and safety policies. Antitrust, piracy and copyright laws, as well as immigration
issues are also of growing importance in the business environment. All of these factors
affect how organizations operate, their costs, and the demand for products. For
example, after the collapse of Enron, the government passed the Sarbanes-Oxley Act in
2002. This legislation completely changed accounting and reporting requirements for
corporations. These businesses have had to implement rigorous procedures to ensure
compliance with the new regulations. After the Great Recession of 2008–2009,
Congress passed the Dodd-Frank Act, which greatly increased regulations and
oversight for banks and other financial firms. Bank lobbyists successfully slowed the
implementation of many rules, but compliance costs doubled and totaled $70 billion in
2016.

Porter’s Five Forces

Michael Porter, a well-known business consultant and professor at Harvard University,

identified five critical external factors that affect strategies being developed by
organizations in any industry. This system, known as Porter’s Five Forces, has
become an important management strategy tool. Managers use the tool to examine
opportunities and threats and to facilitate decision making in the context of their
company’s external environment. It measures the competitiveness of an industry and
thus its attractiveness or potential profitability. An unattractive industry is one in which
the combination of these five forces acts to drive down overall profitability.
The five forces defined by Porter include:

 The threat of new entrants (or barriers to entry). This refers to the threat that
new competitors pose to the existing businesses in an industry. A profitable
industry will attract new competitors. If it is easy for new businesses to enter the
industry, then the businesses already operating in the industry are at a greater
risk. There may be a high threat of new entrants to an industry when brand names
are not well-known, when it is easy for customers to switch to a new supplier, and
when trademarks or copyrights are not involved in the production process. For
example, it would be very hard to enter an industry such as airlines, which
requires a huge financial investment to pay for equipment, personnel, and airport
gateways.
 The threat of substitute products or services. A substitute product is not a
similar product from a competitor, but rather a different product or service
altogether but that performs the same purpose in the mind of the consumer. For
example, a city subway system could be a substitute product to an automobile
manufacturer. Likewise, e-mails may substitute for writing letters, olive oil may be
a butter substitute, and tea may substitute for coffee. If there are good substitutes
to a product, the industry is less profitable.
 Competitive rivalry within the industry. Porter believes that the intensity or the
level of competition in an industry is one of the main forces that determines the
profitability of that industry. A highly competitive market suggests that the
competitors are aggressively trying to take market share from their rivals. Intensity
can be affected by the number of competitors, the size of the market, the growth
of the industry, and how difficult it is to differentiate your product (make it unique in
some major feature). The airline and automotive industries are examples of high
rivalry industries.
 The bargaining power of buyers. Buyer bargaining power refers to the amount
of pressure customers can put on a seller. The buyer wants to lower prices,
increase service, or improve the quality of the product. From the viewpoint of the
seller, an industry where the buyer has high bargaining power is not particularly
attractive because competitors will have many possible strategies for easily taking
the customer away. High buying bargaining power decreases potential profits if
the seller responds to the buyers’ tactics. Remember that the buyer is not always
a consumer; many businesses sell to other businesses who also have buyer
bargaining power. A company like Walmart has a lot of buyer bargaining power
because of the extremely high volume of its purchases.
 The bargaining power of suppliers. Supplier bargaining power is another force
that shapes the competitive measure of an industry because it limits the ability of
the seller to make a profit. Powerful suppliers can pressure buyers by raising
prices, lowering quality, or reducing the availability of the supply.

An important thing to remember about Porter’s Five Forces is that it is useful at an

industry level and not for groups or segments of a market. It is also a “snapshot” of what
the industry looks like at a particular time and needs to be updated regularly. And as
with any management tool, it is not perfect and infallible. When considered as a starting
point for discussion and further investigation, however, Porter’s Five Forces is very
useful.

Competitive Analysis

Earlier in this module, you read about the concept of competitive advantage. You
learned that knowing the strengths and weaknesses of your competitors are key
elements in devising organizational goals and determining strategies to meet the goals.

Once the external business environment has been analyzed for its suitability, industry
competitors must be profiled to determine who your specific competitors are. Not all
“players” in an industry will be in direct competition with your organization. (You don’t
want to spend valuable resources on an in-depth competitive analysis of BMW and
Mercedes if you sell Hyundais.) A robust competitive analysis will allow you to focus on
those companies that will compete for customers in your target market.

A competitive analysis looks at competitors and tries to answer such questions as these
in the following categories:

 General Background: Who are my competitors? Where are they located? Who
are the key personalities? What type of organizational structure is it?
 Financial: How profitable are they? Have they grown in the recent past? And any
other data you can ethically discover.
 Products: What products do they sell? Have they introduced new products and
what is their success rate? What brands do they carry? Do they hold patents and
licenses?
 Customers: What market segment do they serve? What is the customer growth
rate? How strong is the customer loyalty?
 Advertising and Sales: What are their distribution channels? What is their
promotional strategy? How large is their sales force? What is their pricing and
discount structure?
 Personnel: How many employees do they have? What is their compensation
package including benefits? What kind of managers and what management style
do they show? More importantly, what skills is the competition hiring? If a
company is hiring experts in artificial intelligence, it tells the competition quite a bit
about the plans for the future.

There are many more questions that would be relevant to this kind of in-depth analysis.
The more you know about your competition, the better prepared you will be when you
go up against it. The next section will identify industry components that affect your
ability to operate. It will introduce tools that allow organizations to focus on only the
specific internal and external features that affect them.

What Is Organizational Culture?

Organizational culture is a term that can relate to any organization at all, from a
church to a university. When talking about the culture of a business, you’ll often hear the
term “corporate culture.” Corporate culture is, according to INC Magazine:
“the shared values, attitudes, standards, and beliefs that characterize members
of an organization and define its nature. Corporate culture is rooted in an
organization’s goals, strategies, structure, and approaches to labor, customers,
investors, and the greater community. As such, it is an essential component in
any business’s ultimate success or failure.”

Like families (or nations), corporations have cultures. Sometimes those cultures “just
happen.” All too often, when corporate culture is not intentionally created, the culture
winds up being disjointed or even antagonistic. Employees are all working toward
different goals, in different ways, with different approaches. For instance, although Bob
is dedicated to the idea of crafting quality products, Suzanne is eager to sell as much
product as possible (even if the quality is only so-so). Meanwhile, Brad thinks the
company should start making a wider range of products and is trying to push his ideas
forward during sales meetings.

The idea of corporate culture developed from our knowledge of national, regional, and
family cultures, and many theories exist about what makes a good (or poor) corporate
culture. To get an idea of what a corporate culture looks like, think about families you
know well. Some are formal whereas others are easygoing. Some work together toward
shared goals whereas others encourage individuality and independence. Some are
always having fun whereas others seem to be in a permanent state of internal conflict.
We can describe corporate cultures in similar ways.
Although some businesses give little thought to corporate culture, many successful
companies have cultures that are intentionally created or tweaked. Sometimes
corporate cultures are the result of a founder’s personal vision. But just as often,
corporate cultures are created through a collaborative effort that involves not only upper
management but also managers and employees.

What Do Corporate Cultures Look Like?

Perhaps the best way to get an idea of what we’re talking about when we talk about
corporate culture is to consider some examples. Let’s take a look at the cultures inside
a few well-known companies.

IBM

IBM’s founder Thomas Watson was one of the great developers of corporate culture.
Based on a very different worldview than the one we have today, it encouraged
morality, temperance, and consistency. Men who worked for IBM were expected to
dress in a certain style (dark suits, white shirts) and behave conservatively. The “IBM
Spirit” was even represented in corporate songs such as “Ever Onward” that employees
were required to sing at gatherings and conventions.

The lyrics to “Ever Onward,” captured in a songbook from 1937, are a great way to
understand the original culture of a company that became one of the truly great icons of
American business. Read one verse of the song that follows.

EVER ONWARD – EVER ONWARD!

That’s the spirit that has brought us fame!
We’re big, but bigger we will be
We can’t fail for all can see
That to serve humanity has been our aim!
Our products now are known, in every zone,
Our reputation sparkles like a gem!
We’ve fought our way through – and new
Fields we’re sure to conquer too
For the EVER ONWARD I.B.M.[2]

Google

One business that has revolutionized the way of work and its vision about it is Google.
Google has become known as the company with endless perks for its valued
employees. Some of these include coffee bars, free meals, lounge breaks, and even the
option to bring your pet to work! Google has locations worldwide, and management
embraces the idea that a happy employee leads to a productive workplace. The
company’s long-term success ties back to its corporate culture and values. Here’s a list
of Google’s core values, around which it builds its corporate culture:

1. We want to work with great people.

2. Technology innovation is our lifeblood.
3. Working at Google is fun.
4. Be actively involved; you are Google.
5. Don’t take success for granted.
6. Do the right thing; don’t be evil.
7. Earn customer and user loyalty and respect every day.
8. Sustainable long-term growth and profitability are key to our success.
9. Google cares about and supports the communities where we work and live.

Apple

Google likes to make sure its employees are having fun, but Apple’s corporate culture is
a bit more focused on getting things done. Its founder, Steve Jobs, passed along a set
of core values that make it clear that competition, focus, and hard work are part of the
organizational culture:

1. We believe that we’re on the face of the Earth to make great products.
2. We believe in the simple, not the complex.
3. We believe that we need to own and control the primary technologies behind the
products we make.
4. We participate only in markets where we can make a significant contribution.
5. We believe in saying no to thousands of projects so that we can really focus on the few
that are truly important and meaningful to us..
6. We believe in deep collaboration and cross-pollination of our groups, which allow us to
innovate in a way that others cannot.
7. We don’t settle for anything less than excellence in every group in the company, and we
have the self-honesty to admit when we’re wrong and the courage to change.[3]

Compare Apple’s values to those of Google. Apple focuses on competition, outcomes,

and excellence, whereas Google emphasizes values such as having fun, behaving
ethically, serving the customer, and engaging with the wider world. Both companies
make digital products, both have seen great success, and both attract plenty of
dedicated employees. But because the corporate cultures are so different, Apple and
Google attract different people who have different personal goals, work styles, and
expectations.
Corporate Culture as a Competitive Advantage

Why is it so important to have a strong, positive corporate culture? There are three good
reasons:

 A strong culture helps employees, customers, and the general public to identify
your corporate values. Say, for example, that your company culture values
innovation. In that case, your employees will know that they will be encouraged to
come up with new ideas—and your customers will know that your products and
services are likely to have a creative or unique quality.
 Companies with strong, coherent cultures attract high-quality employees who
believe in the same values as the corporation. Once those employees come on
board, they start to feel that they “belong” because they are part of a shared
culture. Employees who feel that their jobs are a great match for their personal
values are more likely to be loyal to their employers. After all, they are doing what
they enjoy doing for an organization that shares their ideals and goals.
 A strong corporate culture can help a corporation to build its brand. For example,
Starbucks has built a culture and brand that includes very public dedication to
international fair trade. Customers who care about fair trade are more likely to buy
from—and stay loyal to—Starbucks.

Levels of Corporate Culture

E.H. Schein’s model of corporate culture includes artifacts, values, and assumptions
E.H. Schein is a theorist who studies corporate culture. In 1992, he wrote a book
titled Organizational Culture and Leadership, which suggests that there are three levels
of corporate culture. At the core of a culture are basic assumptions about human
behavior, which are usually so ingrained into the culture that they’re difficult to pinpoint.
Surrounding the assumptions are expressed values drawn from those assumptions.
These usually appear in the form of standards, rules, and public expressions of the
organization’s philosophy. At the surface level are artifacts that are the outcome of the
assumptions and values—these appear as actions, policies, the physical environment,
office jokes, and so on.

For example, when Home Depot, under the leadership of a new CEO, needed to return
the company to its customer-centric roots in 2007, it quickly introduced artifacts—
buttons and awards—to remind everyone who came first: customers. Sales associates
began wearing buttons that invited customers to ask for help. Associates were rewarded
for outstanding customer reviews and recognized in meetings with sales plaques and
more buttons. With a renewed focus on its stated value of providing excellent customer
service, Home Depot began hiring people who loved serving customers instead of
worrying about costs and profits. Management did not completely abandon the cost
discipline of its previous CEO, but it loosened the reins substantially. The underlying
assumption was that profits would return if the company took care of customers. Profits
did return, although the competition from Lowe’s has been stiff.

There is no right or wrong set of assumptions and values, and companies can be
successful no matter which values they embrace. You are, however, most likely to do
well with a company that shares your beliefs. Just looking around a workplace can help
you to determine whether a company values hierarchy or shared authority, individual
achievement or teamwork.