The document discusses strategic risk management and analyzing the external environment. It describes evaluating the remote environment using PEST analysis and Porter's Five Forces model to understand industry competition. Industry life cycles are also important to consider to determine strategic implications of external factors and their impact on an organization over time.

1. Strategic Risk Management The External Environment

2. The Aims of Today Develop your knowledge of Strategic Auditing and the process involved in auditing the external environment. Highlight the distinction between the operating and remote environments. Develop your knowledge of how to analyse the external environment using a range of models.

3. Turbulence in the external environment. A high degree of turbulence exists if: Changeability is high. Predictability is low. The prescriptive approach is more appropriate if turbulence is low. The emergent approach is more appropriate if turbulence is high.

4. Layers of the Business Environment.

5. Remote Environment Within Greenley’s Framework, the remote environment is related to as distant to the organisations business journey. The remote environment can be dynamic, uncertain and is constantly changing. The remote environment is complex with many variables which are categorised as follows: Political Variables Economic Variables Social Variables Technological Variables A PEST ANALYSIS SHOULD BE A DETAILED AUDIT NOT A POINT FORM DESCRIPTION

6. Macroenvironment – PESTEL (1)

7. Macroenvironment – PESTEL (2) Political Government stability Taxation policy Foreign trade regulations Social welfare policies Economic Business cycles GNP trends Interest rates Money supply Inflation Unemployment Disposable income

8. Macroenvironment – PESTEL (3) Sociocultural Population demographics Income distribution Social mobility Lifestyle changes Attitudes to work and leisure Consumerism Levels of education Technological Government spending on research Government and industry focus on technological effort New discoveries /developments Speed of technology transfer Rates of obsolescence

9. Macroenvironment – PESTEL (4) Environmental Environmental protection laws Waste disposal Energy consumption Legal Competition law Employment law Health and safety Product safety

10. Key Aspects of PESTEL Analysis Not just a list of influences Need to understand key drivers of change Drivers of change have differential impact on industries, markets, and organisations Focus is on future impact of environmental factors Combined effect of some of the factors likely to be most important

11. Mapping PEST outcomes Political/ legal Economic Socio- cultural Technological Strategic Implications Strategic Implications Strategic Implications Strategic Implications What are the main drivers of change? How are these affecting the industry? What implications does this have on strategy development?

12. Analysing Competitive Industry Structures An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry). Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of competitive structure in an industry.

13. Spectrum of Industry structures Perfect competition Oligopoly Duopoly Monopoly Concentration Entry & Exit Barriers Product differentiation Information Many firms A few firms Two firms One firm No barriers Significant barriers High barriers Homogenous product Potential for product differentiation Perfect information flow Imperfect availability of information

14. Porters 5 Forces

15. Threat of New Entrants New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency).

16. Key barriers to entry include Economies of scale Capital / investment requirements Brand loyalty and customer switching costs Access to industry distribution channels The likelihood of retaliation from existing industry players.

17. Threat of Substitutes The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on: Buyers' willingness to substitute The relative price and performance of substitutes. The cost of switching to substitutes.

18. Bargaining Power of Suppliers ( Suppliers are the businesses that supply materials & other products into the industry) The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive.

19. The bargaining power of suppliers will be high when: There are many buyers and few dominant suppliers They offer unique or scarce resources with high switching costs Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets) The industry is not a key customer group to the suppliers

20. Bargaining Power of Buyers (Buyers are the people / organisations who create demand in an industry) The bargaining power of buyers is greater when: There are few dominant buyers and many sellers in the industry. Products are standardised Buyers threaten to integrate backward into the industry (buyer sets up in competition to supplier). The industry is not a key supplying group for buyers

21. Intensity of Rivalry The intensity of rivalry between competitors in an industry will depend on: Structure of competition Competitors of similar size indicates fierce competition. A clear market leader indicates less competition. Growth rate of industry Industry growth indicates less competition. Extent of differentiation Customers can switch easily to other products if there is little differentiation. High exit barriers indicate increased competition.

22. The European airline industry – forces driving competition New entrants Relatively high entry barriers High capital costs for start ups Well established brands Some examples of tacit government support for flag carriers Shortages of airport landing and take-off slots Corporate jets, low cost carriers and regional airlines challenging larger more established airlines.

23. The European airline industry – forces driving competition Buyers Decreasing customer loyalty Airline frequent flyer programmes Greater choice on some routes Complicated and confusing fare structures Competition from charter carriers on some routes Consolidation amongst travel intermediaries

24. The European airline industry – forces driving competition Substitutes Development of high speed trains Extensive motorway network for car usage New telecommunications technologies such as teleconferencing

25. The European airline industry – forces driving competition Suppliers Oligopoly of aircraft and aircraft engine suppliers Oligopoly of aircraft leasing companies Local monopolies of infrastructure providers (airports and surface transport) National monopolies and undercapacity of air traffic control providers

26. The European airline industry – forces driving competition Rivalry among competitors Varies on different routes but generally increasing. Increasing price competition Increasing use of internet distribution Sophisticated yield management systems in place - price discrimination Collaborations Failure of some established airlines

27. Industry Life Cycles Highlights trends in Industry Evolution

28. Classification of Opportunities 10 Capability 0 Probability of Opportunity 1 I Monitor II Exploit IV Ignore III Investigate For each opportunity assess the highest level (probability)of potential compared with the lowest probable level of potential chosen level being based on a judgement of 0 – 1 To analyse the capability of the firm so to exploit each opportunity, linked to the internal audit. 0 – 10 representing total capability. (Greenley 1989:76)

29. Classification of Threats I Competent II Prepared IV Monitor III Defenceless 10 0 1.0 Capability Probability of Threat For each threat, asses highest level (probable) of potential compared with the lowest probable level of potential-chosen level being based on value judgement 0 –1 The analysis capability of the firm to react to each threat(through the internal audit) 0 – 10 is used representing the total capability. (Greenley 1989:78)

30. Summary The external environment can be turbulent. The external environment is made up of both an evaluation of the Macro & Micro (Remote and Operating) Environment The PEST analysis evaluates the Macro (Remote) Environment. Porters Five Forces assists in analysing scope of our competitive rivalry. (Micro (Operating) Environment) Industry Life Cycle is important in determining strategy.