CHAPTER 4 - 1ST

CHAPTER 4 - 1ST

2. The 3. National Industry or 4. 4.1 using P«ter's five 4.2 life cyck 4.3 6. 2.1 PESTEL analysis of change dråt Stages in scenario 3.2 of the diamond 3.3 3.4 S. Customers and markets S. Customers 5.2 Markets 5.3 Market segm«ttation.

. 1 The external environment The external environment can analysed in terms of the broad factors which affect all businesses or those relevant to a specific industry or market . The macro-environment includæ factors which cot-Jld affEt all businesses; for example, political or factors, or technological change. These can be assessd using PESTEL analysis. The micro-environrtwnt relates to the factors which an organisation's ability to effectively in its chosen industry or market sector. Key factors here are: customers, competitors, distributors and suppliers. These can be assessed using Porter's five forces analysis. Macro-environment Industry or sector Competitors and markets The organisation Levels of the external environment (Adaptd from: Johnson, et al 2017:p.33) The external environment is a source of threats (external changes which could damage a business) and also opprtunities (external changes which a business could exploit to its advantage)..

2 The macro 2.1 PESTEL analysis use PESTEL coaly-siS framework enaly•sing gereral business environment (macro-environmental), are the ark threats present in 'he govet•nmen' end such in eom*itico ;nJizy Or p•icies in ways working. and demanded eg impae (recession inflation; foreign exchange Organi:wtion — (or issues. Such pollution. consumer attitudes to {environmentally friend*' in or culture Idemographie changes eon vell and including any Charges them ernploytrent hwlfh and sæy•,.

Activity 1: Organic fruit farm ACCA Professional skills Analysis: Consider Discussion: You are c management accountant For an organic fruit farm in Teland. The Farm grows apples and apple juice, both of which it sells ct local morkets and to retail cc.mpanies. The farm's management team are considering its future strategy, and have asked for your help in assessing its macro-environment. using the informatica below, analyse the THREE key factors in the environment which are likely to have most impct the farm. (6 marks) Professional skills marks are available for demonstrating analysis skills in considering how the environrnental factors affect the farm. (2 (Total 8.

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Organic farming and the industry Teeland Organic food must be prcduced using environmentally friendly farming methods, so no genetically modified (GM) crops. growth enhcncers or artificial pesticides and fertilisers may be used. Any farmer claiming to organic must be certihed by c government-approved body, such cs the Teeland Eil Assxiction. Food producers must also comply with government-approved regulations regarding the prc"tion, packaging and labelling of food. Regulatory bodies have the authority to forbid the use of misleading and prc•duct descriptions, and can issue fines for inappropriate production. In extreme cases, regulatory bodies can close down operations which regularly fail to comply with regulations for production, packcging and labelling of their prcducts. Consumers increasingly wont food that is healthy and is sourced both ethically and locally. Consequently, although orgonic food initially perceived as a luxury niche product, it is now increasingly seen as a lifestyle choice by those consumers who regard nonorganic products as more harmful to health and the environment. Mcior suprmcrkets in Teeland hcve started to sto:k more organic and locally grown food. A key issue for all farmers is the weather, which significantly affects the volume (yield) and quality of c crop and hence the market price. Organic farmers are unable to use artificial fertilisers or so have developed alternative high-tech forming methods to improve profitability and cash flow. Weather information systems help plan planting, harvesting and irrigation. Climate-controlled growing tunnels and stores provide a pest-free environment with temperature, light and humidify control. These methods increase yields, extend the possible growing season and allow crops to stored for longer before usage or sale, with no loss of Ravcur or quality..

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SOLUTION. ACTIVITY 1.

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3.2 Components of the diamond The inter-relcted elements that can be used to assess a nation's competitive are: — relates to a country's resources, (so in are 'supply side' factors). These can be as: Basic — for example, natural resources, climate, semi-skilled or labour. These are basic preconditions which are needed for an industry to be successful, but, by themselves, they do not provide any sustainable competitive Advanced — for example, infrastructure and communications, higher education, and skilled employees leg skilled scientists or engineers to high-tal industries. In contrag to basic factors, the presence of factors can help to promote competitive Demand conditions — A tough domestic market is likely encourage cornpetitiveness, as hrms have to produce cost-efficient, highsuality goods to satisfy the of their domestic customers- The experience a firm gains from mæting domesfvc customers' needs will then allow it to compete on an international scale. Related and — Industries to be by a good l«al supply chain, which contributes to quality and cost advantages Firm structure and rivalry — Cultural factors, s«al attitudes and styles can all to competitive advantcge in certain industries. Intense domestic rivalry arnong firms means they to perform well to survive (eg through cost reduction or quality improvement and innovation). Intense domestic rivalry may also encourage firms to look for export markets..

abstract. Exercise 1 Factor Related and industries Firm strategy and How canpthive Stanford University has always had c strong on technology and reserch, one so provides a good supply of highly workers. As the world's richest and most sophisticated economy, the IJS is the largest market for high-technology products. External of scale due to the presence of similar firms — Qal support firms, such as lawyers, to deling with high-tech firms and start-ups. Silicon Valley has a strong network of venture capitalists who are used to imuting in promising technology The direct competition between so many successful high standards. Firms are constantly competing for the best IT stag, which leads to excellent pay and conditions, and cttrccts skilled staff from all over the world to move there. (Some also argue, more generally, that the creative Californian culture innovation and new ides.).

4 Industry or sector environment An orpnisation's strategic position and performance is affected not only by the macro-environment (PESTEL factors) but also by factors specihc to its industry or market sector. Porter (1980) argues that the level of profit which can be sustained in an industry is influenced by the state of competition in that industry ('Porter's five forces'). The stronger the five forces, the lower the level of profit which can be sustained in the industry. 4.1 Using Porters five model The five forces model has three ncin uses: • Analysing the inherent profitability (and therefore attractiveness) of c particular industry or market segment. If possible, companies should cim to invest in industries where the five forces are in their favcur and high returns can be made. Identifying actions relating to the different competitive Forces on an organisation that Mitigate their damaging effects and/or Promote the beneficial effects (oportunities Considering whether all competitcts are affEted equally by the forces. For example, higher buyer power mcy mean that small competitors cannot raise prices, giving cn advantcge to large ones who can, or who can chord to operate on lower margins..

4.1.1 Porter's five forces rnodel If soopliers have strong pwer, the price of WII be driven JP Vhereby reducing profits). 2. Power su*rs A substhute is a different product *twice which satisfies the The Of restricts "its cusbrnets Cdn s•wtkh a substiute if Of a product Ot increases Of quality/utnity decreases. I. Treat of new 5. and rivalry — between existing firms in the industry 4. Thr«t of New entrants intensify corr«ihon in the industry. to entry (Skh as cooital econom•es Of among existing firms, or patents) prevent new firms from joining on industry. barriers entry help to sus'ain profits. 3. Power of they can ds•tve pn•ces reducing p•efi'sl. Factors as reiative size. and switch to an alternative product ee sevice (Surce: Porter, 1980) and rivalry — intense cccnptition in an industry will reduce profits. This may result from slow-growing or declining markets, excess ccæty, or barriers to exit. In some industries, it is consider c 'sixth force', organisations thct are This means cn organisation that 'enhances your business attractiveness to customers suppliers' tJohnson et OJ, 2017). For example, app developrs are complementors to smartphone and tablet providers cpps make the devices more useful. These organisations need to be taken into account in assessing the environment..

4.2 Industry life cycle The stage an industry has reached in its life cycle can have importnt implications for the level of and the basis on which firms look to compete. Stages Of the industry life Typkd five Low rivalry: High differenticfion, innovation key Low rivalry. High growth and weak buyers, but low entry barriers, growth ability key Increasing rivalry: Slower growth and some exits, managerial and financial strength key Stronger Low growth and standard products, but higher entry barriers, market share and cost key Extreme rivalry. Typically many exits and price comptition, cost and commitment key (Adapted from: Johnson et at, 2017).

Activity 2: Happy Day theme parks ACCA skills Analysis: Inwstigate Happy Day Company ('Happy Day') oprctes a chain of IS theme parks across Western Europe. Happy Day's Frks are family oriented, and are interQ to provide 'a gret day out for all the family'. Each Happy Day park offers roller coasters and other thrill rides, live enÉrtainment and exhibits (such as animals and sea-life). Each park also offers a range of food outlets and gift shops. You are a consultant, and your consultancy hrm has bnn asked to advise Happy Day on some issues, including an analysis of their industry environment. using the information provided in Exhibit I , analyse the theme park industry in Western Euro* (8 Professional skills marks are available for demonstrating analysis skills in invesfigating the likely impact of environmental factors on the profitability of the industry. (2 (Total 10.

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Exhibit I — The theme park industry in Europe The leisure and entertainment industry in Western Europe is a mature market. In addition to an increasing number of theme parks, there is also a wide range of alterncftu forms of entertainrnent available to tourists and domestic customers — for example, cinemas, sport events and cultural attractions. There are three typs of theme parks and park operators: • Maior complexes, worldwide by large mulinational entertainment corporations Regional chains, such as Happy Day Smaller, simpler local parks The mulfnatic•nal entertainment corporations gain marketing from linking rides with film and television characters. They also have access to the significant capital and to develop exciting new rides. Most multinational and regional theme park chains add at one new ride per Frk per to attract visitors. Operators spend, on average, 20% of annual revenue on building new rides and attractions. Competition in the industry is herce. To increase profits, parks to more visitors, and increase the amount they spnd during a visit. The key factors for a successful theme park are: • Convenience of location • Popularity of rides Health and safety Price • Availability and quality of wider amenities (eg food, merchandise) The difficult economic climate in Western Europe has led to a fall in consurner spending across leisure activities in However, this has also resulted in theme parks suffering attendance and falling profitability. In view of increasing compf'fvon in the established park lccctic•ns in North America and Western Europe, and the fact that possible lane for is expensive and restricted, a number of the multinational operators have started to look at other markets in Asia and South America..

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Mivity 2: Happy Days theme parks.

Suggested solution Threat Of new entrants — Low The barriers to entry to the theme park industry in Western are high due to difficult/ and cost of acquiring and the high capital cost of building rides. The maturity c' the market, and strong market position (and brand namel Of the existing multi-national entertainment corprations will also act as a barrier to potential entrants. In the short term, the economic climate may also act as a barrier to entry since consumer *2nding is falling. making p&nticl parks less profitable. rivalry — High The mature market in Western Europe means is intense. and opportunities for growth are limited. Companies have to spend large amounts cf money maintaining state-of-the-crt rides in order to attract, and retain, customers. The current economic climate means competition will be intensified further, as parks try to attract customers against a backdrop of reduced consumer The multinational operators are likely to be placed to withstand competition than smaller, local parks because they have access to resources- This might lead to multinational operators acquiring regional or local parks. However, industry consolidation in this way is likely to increase competitive rivalry even more. Threat Of substitutes — High There is a wide variety of other tourist attractions. cultural and entertainment offerings, all competing for a share of household leisure spend. Therefore the threat of substitutes. offering an alternative 'day out', is quite high. However there is an element thrill/ risk ass«icted with theme parks which may mean these other leisure pursuits are not perfect substitutes..