MGT501 | Importance of Business Environment in the Organization

Answer:

Introduction

The external environment of a business plays a key role in the determination of the different factors which tend to have an impact on the operations of the company. For this reason, it becomes increasingly important for any business to ensure that it is aware of the different factors which may influence it in any manner (Ontario, 2014). The external environment factors may provide important information about the business like the customer needs, governmental policies and general society reactions. The company named Woolworths Supermarkets which is based in Australia will be taken an example for the report. Tools like the PESTLE Analysis and The Michael Porters Five Framework tool will be used for the external environmental scan.

About the Company

Woolworths Supermarkets is an Australian Supermarket and grocery chain which is primarily owned by the Woolworths Limited. The company along with the rival company Coles Group has formed a duopoly in the Australian market since the year 1924. The company largely specializes in the grocery business like fruits, meat, vegetables, packaged food and also sells magazines, DVDs, heath products, household products and baby supplies (Woolworths Limited, 2018). The company currently has more than 1000 stores in the country and has also started its online business with delivery service.

Analysis

The Australian Supermarket Industry

The Australian Supermarket industry is a mature industry. The different companies which operate in the given industry tend to employ quite aggressive cost reduction methods and thus the different companies are cost based rather than being based on differentiation (Wheelen et al., 2017). The popularity for private labeled merchandise has increased considerably and is a major demand from these supermarkets. The slowing industry growth is a common characteristic of the industry and is growing at an average rate of 2.5% between the years 2013-2018. The different companies engage in excessive price wars in the daily household products.  Hence, the macro environmental analysis play a crucial role.

Pestle Analysis

The given section will be discussing the six different factors which mostly lie in the external environment of the business lying under the headings, Political, Economic, Social, Technological, Environmental and Legal.

Political Factors

The political performance and environment of any country is quite closely linked with the long term performance of any company and the different retail companies tend to get affected by the political climate of a country. The political conditions shape the business environment by providing it with sufficient growth opportunities. If there exists any disturbances then, the political environment gets deeply affected. The political environment of Australia is quite stable and there exists various policies which tends to support local industries more than the foreign ones. Hence, Woolworths ensures that their loss in such a scenario us not significant. With due respect to the competition policies.

Economic Factors

The economic factors of the external environment of a business relate to the market conditions and deals with the different economic indicators which are a representation of the economic health of the external environment of a country (Hitt & Duane Ireland, 2017). The reduced consumer spending and the disposal household income tend to have an effect on the spending on supermarket. There have been global financial crises which has altered the purchasing behavior. Hence, as the living standards are quite high, Australians have cut their spending considerably. The Australian supermarket have been partly insulated against the disposable income which has been reduced.

Furthermore, factors like recession and higher unemployment also have an impact on the performance of the company. As the Australian market has been quite stable despite these impacts, the company has suffered controlled losses.

Social Factors

As the customers form an essential source of revenue for any business enterprise, it is important that their needs and dynamics are examined and the plans are based on their needs. According to Robson (2015), there have been major changes in the social context where the customers have been looking out for an enlightened retail shopping experience and inclusion of a wide variety of prices which they can afford. The changing age and the population of the demographics also has a huge influence on the decisions which are made for the establishment of newer stores (Business Tech, 2015). The societal values towards the healthy living has altered the purchase behavior and organic produce has attracted demand.  The companies have stocked up private label organizations which then satisfy the needs of the customers and to be able to gain the favor of government as well to support the local companies.

Technological Factors

As newer forms of technologies have been coming up the shopping experience of the different customers have changed and hence, the use of RFID in the retail stores have increased considerably. The use of the service oriented architecture in its operations has also increased which is being used by different companies in the Australian supermarket industry. It is the need of the hour for the different companies to update their technology and give in to innovation as well. It needs to be suitable as per customer preference (Rothaermel, 2015).  Considering this Woolworths has made two virtual supermarkets and makes customers convenience crucial which help customers to order online easily and go cashless as well.

Legal Factors

The taxation policies as developed by the government along with the recruitment and employee regulations form a crucial part of the legal framework which has been formed by the government for the retail industry in Australia (Team, 2013). The food licensing aspects also form a crucial law to be adopted by the companies.  The opening of the different stores also require government approval and other legal aspects.

Environmental Factors

The environmental factors refer to the factors which rise from the use of environmental friendly business practices and deal with participation in the different activities which are aimed at reducing harm caused to the environment (E. Dobbs, 2014). The different companies in Australia are required to ensure that they are able to maintain their carbon footprint and reduce the use of the resources like water. Furthermore, in the given industry large firms like Coles and Woolworths also participate in the recycling activities to reduce waste. Sustainability and ethicality in food items is also expected out of all business functioning the business environment.

Michael Porter`s Five Forces Analysis - Industry

Another method of scanning the external environment of a business is by measuring and analyzing the industry attractiveness. The Michael Porters five forces industrial framework states that the industry attractiveness can be measured through five dimensions which have been stated as follows:

 (1) Threat of entry

(2) Power of buyers

(3) Power of suppliers

(4) Threat of substitutes

(5) Rivalry between established competitors.

Threat of entry

The given industry is quite attractive and has suitable investment returns with low entry barriers which serve to be an attractive targets for the different potential entrants. As the growth rate of the industry has been decreasing, the existing companies have created a very challenging climate and thus new companies entering the industry will face significant problems. The different barriers include barriers like limited land size, zoning issues, foreign investment rules and major competitors like Coles, Aldi and Woolworths.

Power of buyers

The power of the users can be described as the power which is exercised by the different supermarkets on the suppliers or the general purchasing public who receives the end products.  The different buyers have a high power when the size of purchase is high (Epstein, 2018).  From the supplier perspective they are left by little option as a majority of supermarket are large and cannot be negotiated with. However different consumers have a high power to as they have various alternatives to choose from.

Power of suppliers

There has been a huge shit in the food supply chain of Australia and although they held huge powers back in the 1970s, at present they do not.  The giant multinational corporations have turned to manufacturing firms and hence, the private labelling formula has led to a decline in the power of the suppliers (Hill, Jones & Schilling, 2014). The supermarkets have increased their dominance considerably which has led to a low power position.

Threat of substitutes

As the supermarkets offer goods which comprise of basic essentials which are important to the customers and thus they serve as a one stop solution to those sets of consumers who want to purchase fresh fruits and vegetables. The convenience stores serve as a competition to these markets like the 7-eleven, but thy have limited options.  Hence, with its private label facility, discounts and delivery options the threat of substitutes is quite low.

Rivalry between established competitors

Although the smaller players have been emerging in the industry, the major players in the market are Woolworths and Coles. There exists different price wars between them and want to provide the customers their value for money (Walker, 2014). As the products being offered by the companies cannot be differentiated to a great extent, the company has to ensure that the fight on the basis pf the price being offered.

Conclusion

Therefore, from the above analysis, it can be concluded that the external environmental scanning helps in attaining useful information about a firm which can then be used for the welfare of the performance. The report throw a light on the background of the company, followed by the external environment factors using the PESTLE Analysis and the industry dimensions using the Michael Porters Five Forces.

References

Business Tech (2015). Woolworths takes sweets and chocolates off checkout shelves. Retrieved from https://businesstech.co.za/news/general/97057/woolworths-takes-sweets-and-chocolates-o-checkoutshelves

Dobbs, M. (2014). Guidelines for applying Porter's five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), 32-45.

Epstein, M. J. (2018). Making sustainability work: Best practices in managing and measuring corporate social, environmental and economic impacts. Routledge.

Hill, C. W., Jones, G. R., & Schilling, M. A. (2014). Strategic management: theory: an integrated approach. Cengage Learning.

Hitt, M., & Duane Ireland, R. (2017). The intersection of entrepreneurship and strategic management research. The Blackwell handbook of entrepreneurship, 45-63.

Ontario, C. (2014). Environmental scan. Student and Graduate Profiles.

Robson, W. (2015). Strategic management and information systems. Pearson Higher Ed.

Rothaermel, F. T. (2015). Strategic management. McGraw-Hill Education.

Team, F. M. E. (2013). PESTLE Analysis. Strategy Skills. Free management ebooks, 15.

Walker, R. M. (2014). Internal and External Antecedents of Process Innovation: A review and extension. Public Management Review, 16(1), 21-44.

Wheelen, T. L., Hunger, J. D., Hoffman, A. N., & Bamford, C. E. (2017). Strategic management and business policy. Pearson.

Woolworths Limited. (2018). Annual Report. Retrieved from https://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2016.pdf