National museum

Political: ismainly included political stability, government policy, trade barriers and attitude of
governments
Political stability:

Government policy:
New government change has
 Threaten the gov funding reduction from 90% to 40%. The 40% of funding must be linked to the
specific targets : disability access, social inclusion and electronic commerce and access. There is a
threat of no funding if NM is not able to achieve budget linking to specific performance.
Attitude of government:
 Forced the NM to appoint a new Director General. There is a threat of change in the organizational
power structure.
 However, resistance from staff and other directors has caused the DG to resign. The resignation of
DG has caused an angry response from the gov to further cut next year
 If the above objective does not meet, gov control directly
Economic
The annual increase in budget reflects inflation rate. Expenditure increase should control resource
effectively
Pressure to find new opportunities to increase income. Set new price for admission charge for visitors.
However, in recession situation, it is unlikely to increase the income.

1. The organization in its environment

JS&W divided the environment into 3 parts

What are key threats from external environment? (PESTEL, 5 forces) - (Political, Economic, Social,
Technological, Environmental, Legal)

2. The macro-environment (PESTEL)

Pilot paper, Technical Articles, Dec08Q1
(a) Assess the macro-environment of NMS by undertaking a PESTEL analysis. (10
marks)
(a) Analyse the macro-environment of the National Museum using a PESTEL analysis.
(20 marks)

The PESTEL framework may be used to explore the macro-environmental influences that might affect an
organisation. There are six main influences in the framework: political, economic, social, technological,
environmental and legal. However, these types are inter-linked and so, for example, political
developments and environmental requirements are often implemented through enacting legislation.
 [Education]It is assumed that social and technological influences will be the most significant
drivers of change.

2.1 Political – [Technology, education issue]

(i) Possibility of political changeeffect on economic policies
Government is responsible for providing a stable framework for economic activity, in particular for
maintaining and improving the physical, social and market infrastructure. The NMS must react to the
attitude of the political party that is in power at the time. NMS is situated in a country with a relatively
stable political system where monitoring, understanding and adapting to the political environment is
absolutely essential for the NMS.

Like many industrialised countries, all political parties in this country appear to value and promote (i)
technology, (ii) education, (iii) national museum.

(ii) Likely nature of impact  changes in tax, funding and interest rate
Tax incentives, funding and grants are often given to companies and individuals
 [NMS] to invest in technology and research and development. These incentives are not only
available to NMS, but also (in the United Kingdom) to their customers. This has helped fuel the
growth in the data communications market and although evidence suggests that this growth is
tailing off, investment is still significant
 to gain appropriate qualifications.
 [NM] to run the museum activities however, significantly affected by the recently elected
government’s decision to gradually reduce that funding. The implications of this were recognized
by the Board of Trustees and led to the appointment of a new Director General. Unfortunately,
senior staff at the museum did not share this perception of the significance of the funding
changes. Their opposition to change, which culminated in the Director General’s resignation, had
lead to further political ramifications.
(iii) Coping strategies  cash flow planning
Government itself is a major investor in
 [NMS] communications technology, often using such investments to facilitate economic growth in
this sector; lifelong learning to help its citizens develop and adapt to changing labour
circumstances.
Government is anxious about global competition in
 supplying equipments that links into the national telecommunications network; sustaining high
levels of employment in the national work force
Government itself is also a major consumer of
 high technological products and continue to exercise its control in the shape of the approval
process. Government may promote the recognition of technology through an awards scheme.
NMS has received such recognition through a Government Award for Technology
 labour and continues to demand that employees have appropriate qualifications and that
suppliers have a well-qualified work force. Many of its Information Technology (IT) suppliers use
certification as a way of demonstrating that their workforce is well qualified and this assists them
in successfully bidding for government contracts.
o Having said all this, British Governments have largely taken what has been referred to as
a voluntarist approach, with organisations left to finance and organise their own training
and development. Other countries have a more interventionist approach; for example,
using a payroll levy which is directly used to fund training
(iv) Consequences  cash flow and availability of resources
The political appointment of two (and possibly more) trustees is also important to the National Museum.
 [NM] It was significant that it was the two trustees appointed by the government who supported
the Director General and his proposed changes. Finally, the continued funding of the government
will now largely depend on performance measures – such as accessibility – which have been
determined by a political agenda. The museum must strive to meet these objectives even if they
are not shared by senior staff. The old ways – built around an assessment of Heritage Collections –
appear to have gone forever and senior staff members need to recognise this.
2.2 Economic environment
The economic environment affects firms at national and international level
At national level
(i) Growth or fall in gross domestic product
(ii) Local economic trends
(iii) Inflation: low in most countries, distorts business decisions, wage inflation compensate
for price inflation
 [NMS] Wage rates remain high in the United Kingdom and NMS may wish to re-consider their
commitment to manufacturing 40% of their components in the United Kingdom. Labour costs
(allied to compliance costs – see below) and legal obligations makes manufacturing in the UK
extremely expensive. It is likely that many of their competitors source 100% of their components
abroad and only assemble their products in the UK.
(iv) Interest rate – for education
 [IISA] The IISA is situated in a relatively stable economic environment, where interest rates are
relatively low and living standards are high. In general, system architects, like all IT staff, enjoy a
good income. If their employer does not support their interest in professional accreditation (and
this is unlikely – see below) then it is feasible for the individual to fund their own training and
examinations. However, the IISA will have to be aware that this may not be possible in some of
the countries which they are targeting. Hence they will have to monitor this situation.
(v) Tax level
(vi) Government spending – for national museum
 [NM] Up to now the National Museum has been largely sheltered from the economic environment.
It has been funded by the government, not the marketplace, and that funding has been largely
determined by stable internal factors, such as artefacts in the Heritage Collection. Evidence from
the scenario and Figure 1, suggests that this funding is stable, increasing on an annual basis to
reflect inflation. However, the progressive reduction of government funding will mean that the
museum will be exposed to economic realities. It will have to set realistic admission charges.
Resources will also have to be used effectively and new opportunities identified and exploited for
increasing income. The Director General included a number of these ideas in his proposals.
However, it will be difficult to set a charge that will attract sufficient customers to cover the
museum’s costs, particularly as visitors have been used to paying only a nominal entry charge.
(vii) The business cycle – for technology
 Economy is again a significant factor, in that the stage in the economic or business cycle can
clearly affect buying decisions. The case study suggests that 2006 has seen a slight downturn in
the UK and international economy and a consequent slowing down in large customers’
commitment to long-term investment.
 The bad news is that customers can postpone such investment. The good news is that if
innovation creates products and systems that bring cost and communication advantages to
customers then eventually they will have to invest in them.
At international level
(i) Relative exchange rate: costs of import, selling price, value of export, hedging against
fluctuation
(ii) Overseas market
(iii) International capital market – freedom of capital movement
(iv) Large multinational companies
(v) Government policy on trade/protection

2.3 Sociocultural environment

Social environment: growth, age, geography, ethnicity, family structure, social structure,
employment, wealth
For Technology
Communication and information exchange will continue to increase with consequent implications for
companies supplying the products and systems to meet these growing needs.

All evidence suggests that the social use of services on such networks will increase. Hence, although
demand appears to be dropping off, new social uses for telecommunication networks might spark off a
new wave of economic investment.

For National museum

The social environment is important to the museum from at least two different perspectives.
 The government is committed to increasing museum attendance by both lower social classes and
by younger people who they feel need to be made more aware of their heritage.

The visitor information shown in Figure 3 suggests that not only are visitor numbers declining in
total, but the average age of these visitors is increasing. The percentage of visitors aged 22 and
 under visiting the NM has decreased from 19% of the total visitors (in 2004) to just over 12% in
2007.
o The museum needs to identify what it needs to do to attract such groups to the museum.
The Director General had suggested free admission. This could be combined with popular
exhibitions and ‘hands-on’ opportunities.
o However, the comment of the Director of Art and Architecture about popularity and
historical significance hardly bodes well for the future.
 The decay of the neighbourhood and the increased crime rate may also deter fee-paying visitors.
o Traditional middle-class customers moving away from the area and reluctant to visit. The
extensive reporting of a recent assault on a visitor is also likely to deter visitors.
o The museum needs to react to these issues by ensuring that good and safe transport links
are maintained to the museum and by improving security both in the museum and in its
immediate vicinity.

Culture environment: Beliefs and value, customs, Artefacts, rituals, purposeful, learned,
shared, cumulative, dynamic

For Education
 [IISA] The IISA is operating in a country and sector where people tend to already have a good
education and the scenario suggests that many candidates studying for the IISA Diploma already
have a degree. There is evidence to suggest that candidates currently perceive that getting the
Diploma will enhance their career prospects. The IISA will need to monitor this and ascertain
whether this perception is correct and, if it is, ensure that this message is communicated to
prospective candidates.
 [IISA] There has also been the emergence of competency and skill frameworks with human
resource functions linking personal development and job roles to clearly defined competencies.
Research evidence suggests that competency frameworks have a wide range of use including a
more structured approach to training and development.
 [IISA] Organisations have been increasingly influenced by writers who believe that the strategic
capability of an organisation often lies in the day to day activities that people undertake in the
organisation. Consequently, developing an individual’s ability to recognise the importance of what
they do and the contribution it may have to the strategic capability of the organisation is
important.
 [IISA] The IISA should benefit from this value that organizations give to improving capability. In
many organisations there is a link between developing competency, delivering training, and
supporting professional certification. Human Resource Development has become a significant
force in organisations. Jeffrey Gold has suggested that ‘it carries the prospect of unleashing the
potential that lies within people, allowing employees to contribute and indeed transform strategy’.
Peter Senge’s promotion of the ‘learning organisation’ has also been very influential.

2.4 Technological environment

Technology contributes to overall economic growth:
(i) gains in productivity,
(ii) reduce costs, and
(iii) new products (For technology lesson)
a. It is clearly a significant factor in shaping the life cycles of existing products and the
introduction of new ones. The hi-tech sector is extremely innovative, with new and
improved technologies constantly emerging.
b. NMS must scan the marketplace for such technologies and identify how such they might
affect the future of their products. NMS must also consider how such emergent
technologies might be used in their own products.

Effects of technological change on organizations

(i) type of product, (for education lesion)
a. The introduction of computer-based assessment has been a major influence on many
examining boards.
i. They have been able to roll out examination schemes worldwide.
ii. Candidates for such examinations appreciate the objectivity of much computer-
based assessment as well as the provision of immediate results.
b. The introduction of examination workflow systems is much newer, allowing conventional
handwritten examination scripts to be scanned into a computer system and then
distributed electronically to markers.
i. Such systems eradicate the need for couriers and so remove the cost and security
risks associated with the physical movement of scripts.
 ii. Furthermore, markers can be geographically remote. E-marking software allows
scripts to be partitioned, allowing answers to be distributed to specific markers.
(ii) the way in which products are made,
(iii) the way in which services are provided,
a. [NM] It is estimated that only 10% of the museum’s collection is on view to visitors.
Technology provides opportunities for displaying and viewing artefacts on-line. It provides
an opportunity for the museum to become a virtual museum – allowing visitors from all
over the world access to images and information about its collections.
b. [NM] Indeed, such an approach should also help the museum achieve some of its
technology and accessibility targets set by the government. Technology can also be used
to increase marketing activity, providing on-line access to products and allowing these
products to be bought through a secure payment facility. The appropriate use of
technology frees the museum from its physical space constraints and also overcomes
issues associated with its physical location.
(iv) the way in which markets are identified,
(v) the way in which the firms are managed.

Ex. Brazillian ethanol industry had been established in response to the oil crises of the 1970s. Politics,
economics and technology are combined to solve the problem. Subsidies for cane mills and price controls
had helped to create the major industry. Then in 1980s, nearly all cars in Brazil were running on ethanol.
Unfortunately, in 1989, world sugar prices spiked and ethanol producers shifted their raw material (sugar
cane) to the production of sugar. Again, politics, economics and social factors interact and a further
prejudice was created against ethanol fuelled cars.
This has been overcome by the introduction of fuel-ethanol combination to result the rising issue.

2.5 Environmental protection –

Environmental protection is a key aspect of corporate social responsibility so as to comply with legislation
and to satisfy green pressure groups, employees and environmental risk screening. It has an impact on
the organization performance in term of short-term savings, environmental legislation, and pressure from
public, energy and environmental taxes.

Corporate social responsibility to satisfy

 Green pressure group
 Employee
 Legislation
 Environmental risk screening

Possible issues that affect an organization:

 Consumer demand for products that are environmentally friendly
 Opportunities to develop products and technologies that are environmentally friendly
 Demand for less pollution from the industry
 Greater regulation by government
 Demand that businesses be charged with the external costs of their activities
 Scarcity of non-renewable resources

The ways in which a company’s concern for the environment can impact on its performance
 Short-term savings through waste minimization and energy efficiency
 Pressures on businesses for environmental action are increasing
 Companies with poor environmental performance may face increased cost of capital
 Increasing energy and environmental tax
 Pressure group campaigns can cause damage to reputation

Renewable and non-renewable resource

Sustainability related to developing strategies is a key focus of an organization in using its resources and
embrace to environmental prosperity, quality and social equity.

For education
 Environmental issues continue to have an impact on organisations, as they are encouraged by
politicians and legislation to reduce their emissions and improve their recycling. The cost of
disposal is also increasing. The IISA is currently a significant user of paper (for its paper-based
examinations) and it currently has to pay for secure storage and disposal. The cost of this is rising
and will continue to rise.
  Paperless examinations will increasingly be seen as environmentally friendly and cost effective.
However, if a move to paperless examinations is not feasible, the organisation may commit itself
to the publicized recycling of its examination scripts.

For Technology
 Environmental issues continue to have an impact on organisations. Organisations are encouraged
by politicians and by legislation to reduce their emissions and improve their re-cycling. The cost of
disposal of raw materials is also increasing. There is no direct evidence of such issues in the case
study scenario.
 However, as a manufacturing company in the United Kingdom it is highly likely that NMS will be
affected by such factors.
For National museum
 It can be argued that all contemporary organisations have to be aware of environmental issues
and the impact their activities have on the environment. These are likely to be exacerbated by the
museum being located in an old building which itself requires regular maintenance and upgrading
to reflect government requirements. It is also very unlikely that such an old building will be energy
efficient and so heating costs are likely to be high and to continue to increase.
 The museum needs to adopt appropriate policies on recycling and energy conservation, but it
may be difficult to achieve these targets in the context of an old building. Consequently,
environmental issues may combine with social issues to encourage the consideration of the
possible relocation of the museum to a modern building in a more appropriate location. However,
the museum building is also of architectural importance, and so some acceptable alternative use
for the building might also have to be suggested.

2.6 Legal environment

Criminal law, employment law, health and safety law data protection, marketing and sales

For technology
 [NMS] NMS operates in a country where there are many laws defining employer responsibilities
and employee rights. It is likely that regulation will continue and the NMS will, like all
organisations working in the European Union (EU), have to evaluate the benefits and cost of
working within such legal structures.
 [NMS] Some organisations seek to gain advantage by moving to countries where regulation is
more lax and hence avoid the compliance costs incurred by their competitors. The case study
scenario suggests that NMS has significant international competitors. It is likely that some of
these will be based in countries where legislative requirements are less onerous.
For education
 [IISA] The IISA is working in a country where there are many laws defining employer
responsibilities and employee rights. It is likely that regulation will continue and the IISA will, like
all organisations working in the European Union (EU), have to evaluate the benefits and cost of
working within such legal structures.
 [IISA] Some organisations seek to gain advantage by moving to countries where regulation is
more lax, thereby avoiding the compliance costs incurred by their competitors. The IISA is
potentially a relatively footloose organisation, so moving to a less regulated regime might provide
cost advantages. It promotes itself as an international organisation (although all of its
examinations are currently held in the UK), so moving from the UK may actually give out a
positive message.
For national museum
Legal issues affect the museum in at least two ways.
 [NM] Firstly, there is already evidence that the museum has had to adapt to legal requirements for
disability access and to reflect health and safety requirements. Some of these requirements
appear to have required changes in the building which have been met with disapproval. It is likely
that modifications will be expensive and relatively awkward, leading again to unsightly (xau xi)
and aesthetically (khong tham my) unpleasing modifications to the building. Further tightening of
legislation might be expected from a government with a mandate (chi thi) for social inclusion (co
tinh chat xa hoi). For example, it might specify that all documentation should be available in
Braille or in different languages.
 [NM] Secondly, the museum is run by a Board of Trustees. There are legal requirements about the
behaviour of such trustees. The museum must be aware of these and ensure that their work is
properly scoped and monitored. Trustees have, and must accept, ultimate responsibility for
directing the affairs of the museum, ensuring that it is solvent, well-run, and meeting the needs
for which it has been set up. The museum is a charity and it is the responsibility of the trustees to
ensure that its operation complies with the charity law of the country.
Marking Scheme
Up to two marks awarded for identifying macro-environmental influences in each of the six
PESTEL areas – even if justifying the lack of influence.
A further five marks are available for candidates who have extended their argument in
selected areas of the framework. It must be accepted that each area of the PESTEL
framework will have a differential effect and that candidates will interpret this in various
ways. A further three marks are available for professional marks.

b. Explain the principles of strategic alliances and assess how appropriate this
development method is to the IISA.
(10 marks)
3. key drivers of environmental change
Market globalization grows as tastes converge and communications improve
Cost globalization spreads as trade barriers fall and economies of scale, experience grow.
Governments promote free trade and international standards.
International competition promotes further trade and interaction.

4. The competitive advantage of nation (factor, company factor, set up overseas facility)
Dec04Q2a (a) Using an appropriate model carry out an environmental analysis that
will highlight the factors Salem should take into account when trying to attract such
investment. (12 marks)
Porter’s ‘Diamond’ model offers Salem a means for assessing his country’s current level of competitive
advantage in areas that are important for the automobile industry. The model developed in his
Competitive Advantage of Nations is very different from the theory of comparative advantage traditionally
used by economists to explain how countries should concentrate on those industries where they have the
greatest comparative advantage compared to other countries.

Porter’s research emphasises the fact that no one nation will have a competitive advantage in all its
industries and that competitive advantage will be derived from the strategies pursued by firms in the
industry rather than from positive industry policies developed by governments. Indeed he produces
evidence to suggest that where a government encourages a ‘national champion’ to emerge through
merger and acquisition amongst the domestic firms in the industry, the champion rarely, if ever, has the
ability to compete globally.

Porter’s ‘Diamond’ model is made up of four determinants or influences that ‘individually, and as a
system, create the context in which a nation’s firms are born and compete’. These are shown in the figure
below: (draw a map)

Porter’s determinants of National Advantage

4.1 Factor conditions
Favourable factor endowments such as natural resources, climate, and availability of cheap labour do not
create a sustainable competitive advantage for a nation. Indeed there is compelling evidence to suggest
that on occasion the absence of key factors such as raw materials and oil may act as a stimulus to a
particular industry to look for innovative ways to overcome this disadvantage. Thus the emergence of the
globally competitive Japanese car industry was achieved without the advantage of cheap iron ore or oil as
enjoyed by some of its international rivals. Such basic factors will have a limited effect on Asia Invest’s
ability to attract global automobile manufacturers. However advanced factors including a highly educated
workforce and appropriate technology and data communications infrastructure may, if continuously
invested in, yield sustainable high order competitive advantage.

4.2 Demand conditions

Tough demand conditions in the shape of customers who set exacting demands from the firms seeking
their custom will encourage firms in the industry to be conscious of the need to meet those demands
through products that are innovative and of high quality. The global nature of the automobile industry
means that both the manufacturers and the final customers will expect domestic suppliers to have quality
and price comparable to suppliers in other countries.

4.3 Related and supporting industries

The existence of related and supporting industries will be of significance in attracting foreign direct
investment by the car companies. Domestic suppliers are an important part of developing an automobile
cluster which is a network of customers and suppliers (vertical relationship) or companies supplying the
same customers, or using the same technology and skills
(horizontal relationship). The ability of these related and supporting industries to compete globally may
be a key to attracting the automobile manufacturers. Many governments are looking to encourage the
development of key clusters in industries such as the biotech industry, which appear to hold the key to job
creation and economic development.

4.4 Firm strategy, structure and rivalry

Finally, firm strategy, structure and rivalry may have a significant influence on an industry being able to
develop global competitive advantage. These concern the conditions in the nation governing how firms
are created, organised and managed, and the nature of domestic rivalry. If the industry requires small,
innovative firms to be set up and grow, a climate that encourages enterprise is important. Companies also
need to pursue innovation in the way they created differentiated products for their automobile customers.
Interestingly some industries will flourish in a nation where the culture is supportive. Germany for
example seems to have the necessary skills and culture to encourage engineering firms to prosper.

Conclusion
 Porter emphasises that the diamond is a dynamic model where all parts of the system need to be
in place for competitive advantage to be present. There is also a need to recognise that in a
global industry such as cars the competitive advantage can quickly disappear if there is a failure
to invest in key factors.

 Porter in his Competitive Advantage of Nations shows the linkages between all of his strategy
models and clearly the diamond model can be linked to his five forces model in analysing the
industry environment. The value system could also be useful in understanding the links between
the automobile manufacturers and their customers and suppliers. Finally, LEPEST provides a
means of understanding the wider macro environment, but the diamond in its focus on national
competitive advantage would seem to identify the factors necessary to effectively create an
automobile industry able to compete globally.

5. The environment in the future (not important)

6. Industry and sector (not important)

7. Competitive force
(b) Michael Porter provides, through his five forces model, a useful means of analysing the competitive
environment. Analysis suggests the following key factors are shaping this environment.
7.1 Threats from New Entrants to the industry (economies of scales,
High threat to the existing company (low economies of scale, low switching cost, low capital
requirement)
New entrants will take away customers and market shares from existing companies in the market.
Application
NMS – new entrants are able to enter into the market by raising their significant output levels.
AutoFone – economies of scales are associated with purchasing, service and distribution of products
through a large scale retail network of 415 shops.

Low threat to the existing company (high economies of scale, high switching cost,
brandname, require high volume)
Economies of scales deter entry by forcing the new entrants to come in with a large scale that they
activate strong reaction from existing firms in the market place. Product differentiation can be used as
barrier to new entrants such as brand-name, complex products

Application
[NMS-high switching cost] Large international customers (such as OEMs, banks, public utilities) are likely
to be cautious in moving to new suppliers.
NMS - The products are complex and there is likely to be a significant learning curve with costs only falling
as volume builds up over time.
[Auto Fone] The AutoFone brand is well known in the market place, with consumers identifying it, in 2005,
as one of the ‘top 20’ brands in the country. NMS has shown there is a place for smaller innovative
companies able to identify specialist market niches.
Any new entrant would have to enter the market at a scale that would incur relatively significant capital
investment or knowledge intensive. AutoFone - Capital from new entrants will also be required for
establishing significant inventories in the large number of retail shops to achieve the required economies
of scale.
New entrants would support their entry by investing heavily in distribution channels with high costs.
[AutoFone] New entrants would not only have to fund a large number of retail outlets, but also inventories

(v) Cost advantages of existing producers, independent of economies of scale (patent rights, experience
and know-how, subsidies and regulations, favoured access to raw materials, technology).
 The need for government approval of new data communications equipment creates a process that
is both lengthy and expensive and this creates a significant barrier to entry. New entrants may be
discouraged by the considerable uncertainty surrounding the industry – both in terms of
technology, user acceptance and the R&D investment necessary to create components and
systems compatible with the OEM’s equipment and end user systems. The industry is very
specific nature in the shape of knowledge, skills and assets which reduces the attractiveness of
the market place to new entrants.
Application
NMS – the need to offer comprehensive support may deter a small company like NMS, however it does not
create a significant barrier to other new entrants. NMS’s ability to create a recognised brand with its end
users is creating a competitive advantage.

(vi) Response of existing competitors

The exiting companies may be unhappy when a new entrant comes into the market. They may try to force
the company out of the market before they become established.

The examiner may ask questions where he has asked candidates to identify the prime entry barriers that
exist in the business, based around key scenario.

What action should the company take to deal with the threat of new entrants?
1. raise barriers to entry
2. build brand
3. build exclusive distribution network i.e. pharmacy distribution network.

7.2 Threats from substitute products or services (ok)

High threat to the existing company
Substitute products are usually products that can perform the same function as the product of the
industry under consideration. High-tech industries are, almost by their very nature, prone to new
technologies emerging that threaten and then eventually replace the established technology. Hence it is
important that companies in the industry have scanning systems in place to warn of (canh bao) such
threats.
Application
The threat to the mobile phone industry is largely from other products that support mobile
communication, such as Personal Digital Assistants (PDAs). This trend has been to integrate this
technology into the offerings of the industry. The products offered by AutoFone include phones that are
also mp3 players, radios, cameras and allow email and web access. Hence the industry appears to be
relatively free of potential substitutes.
*The substitute poses a real threat of obsolescence to the firm’s products, i.e. pager was replaced by
mobile phone.
*low switching cost poses a high threat to the firm’s products.
When facing with strong substitutes, the existing company may increase switching cost or reduce the
price and increase performance of the product.

Low threat to the existing company:

Large successful, high-tech companies are particularly ignoring the challenge coming from disruptive new
technologies. They will need to ensure that they have innovative new products under development which
incorporate any significant technological change.
Application
NMS being small may have a competitive advantage in its ability to respond quickly and flexibly to such
change.

7.3 The bargaining powers of customers or buyers (OK)

a. High threat to the existing company (cost conscious, standardized products, low switching
cost)
Buyers attempt to obtain lower prices or seek to get increased or better quality services or products from
relative fragmented supplying industry. They do this by playing competitors off against each other as
information on NMS and its competitors’ products and services is easily available to potential buyers.
Application
1. Under certain conditions a buyer group (an organization, not an individual customer) can have
considerable influence.
 a. Hence, large industrial customers are becoming more cost conscious and this is likely to
lead to increased price negotiation with their suppliers.
b. The customers are OEMs who are large industrial buyers with the ability to demand a
testing combination of low prices, high quality and reliability. The OEM who accounts for
40% on the company’s current sales is in a particularly strong position.
2. Buyer power is high when there is a credible threat of the buyer integrating backwards into the
market place and so becoming a competitor. Such conditions do not appear to apply to the retail
phone industry which is largely aimed at individual consumers. However, some of the
circumstances of significant buyer bargaining power do appear to exist in the industry. For
example: the products buyers purchase are standard or undifferentiated.
3. Buyer power is therefore likely to become more significant – particularly in view of the downturn in
the global economy.- low switching cost
4. This is the case for sale of mobile phones as a whole, not just the retail sector. Furthermore,
buyers face few switching costs. The only real lock-in is the term of the contract, currently twelve
months long, after which buyers can switch to a competitor without penalty.

High threat to the existing company (skills of buyers)

The end users of this equipment are becoming less technically proficient and more demanding,
particularly in their unwillingness to adopt products that are difficult to use.

*When facing with high threat from the bargaining power of customers: then build your brand and
differentiate your products

b. Low threat to the existing company (supplier’s specialized system): boeing, airbus, intel
Buyer appears to have less bargaining power in the network management systems where there are a few
of competitors in this market. This makes it much harder for buyers to compare the prices of potential
suppliers, particularly given the modular design of the NMS product.
Application
Furthermore, this product represents a relatively small part of the overall cost of the end user’s
investment in information and communication systems. This is also likely to make such products less price
sensitive and hence provides an opportunity to generate good margins.

7.4 The bargaining power of suppliers (OK)

High threat to the existing company (dominant suppliers, low substitute products, products
buyers need to obtain)
Suppliers exert bargaining power over participants in an industry by raising prices, refusing to supply or
reducing the quality of their goods and services.
- This is the case with the mobile phone industry where the supply of networks is dominated by relatively
few suppliers.
- The purchase of components such as semiconductors and microprocessors is likely to be from major
global companies such as Intel and, as a consequence, supplier power may be very significant.
Suppliers tend to be powerful when the industry is dominated by a few companies. The supplier group
does not have to contend with other substitute products for sale to the industry. There are few direct
substitutes for the mobile phone.

Application
NMS, as a small company, will not have the power to exert buyer pressure on its suppliers, either in terms
of price or delivery. Such components form 60% of current product production and problems over
deliveries and scheduling are having significant impact on the company’s ability to meet customer
deadlines. For a small company like NMS, the supplier is in an excellent bargaining position.

There is a possibility that the suppliers themselves will seek forward integration, with ‘suppliers
competing directly with their buyers if they do not obtain the prices, and hence the margins that they
seek’ (Johnson, Scholes and Whittington, 2005). This is exactly the situation affecting AutoFone, with
network suppliers now running their own retail outlets

The supplier’s product is an important input to the buyer’s business. In AutoFone’s situation it is a vital
input into the business.
Hence the bargaining power of suppliers is extremely high in AutoFone’s retail industry, although this is
reduced by AutoFone’s long-term supply contracts.

* the bargaining power of suppliers will be strong when demand > supply, no substitute and suppliers are
branded.
* when facing with strong bargaining power of suppliers: use new suppliers, start to manufacture in your
own raw materials.
Low threat to the existing company

(iii)The supplier does not rely on the industry for its major sales
(v) High switching costs for consumers

7.5 The rivalry amongst current competitors in the industry (OK)

High threat to the existing company (market share, easy switching cost, exit barrier is
diffcicult)
Different levels of competition are being experienced in the market places where NMS is operating in. It is
clear that the high-volume and low-margin component business has resulted in fierce competition. In
addition, there was less than 1% growth in 2007. This means that competitors will increasingly pursue
growth by increasing market share. Therefore, buyers are able to use their size to extract favourable
prices.

Equally balanced competitors create instability in the retail sales market because the companies are
‘prone to fight each other and have the resources for sustained and vigorous retaliation’. (Porter, 2004)

Application
The ability of NMS to generate better market share and margins through product innovation in this market
seems highly unlikely.
Mobile phones are largely perceived by customers as commodities. In such circumstances buyer choice is
based on price and service, and this results in intense pressure for price and service competition.

Exit barrier is difficult because

 costs associated with leaving the industry i.e the high cost of terminating shop leases and
 loss of strategic interrelationship with other parts of the company i.e. impact to 2 divisions
AFDirect and AFInsure in terms of Reduced brand perception and Reduced sell-on into related
businesses
Application
AutoFone achieved low start up costs by taking on very long leases. These leases are often in areas just
outside the main shopping areas and so may be difficult to re-let. The high cost of staff redundancies and
the liquidation of stock. There are currently 1,400 employees in the retail shops division.
 Reduced brand perception. AutoFone is a well recognised brand which was built by the retail shops
division. The brand is also being constantly reinforced by consumers seeing and visiting these shops.
Removing these will lose this reinforcement. Customers may perceive that AutoFone is a company in
trouble and so the Internet and insurance arms suffer as a result.
 Reduced sell-on into related businesses. Most insurance sales are in the age bands which
predominantly purchase from the retail shops. Consequently, the closing of the shops may have a
major effect on the income of the insurance business.
o There is also the issue of the cross-selling benefits between the retail sales and Internet sales
business. There is evidence to suggest that some customers visit a retail branch to physically
see the phones and to get advice before ordering on the Internet. There is also evidence that
Internet customers value the option of visiting a shop to get after-sales service for a product
bought from AFDirect over the Internet.

Low threat to the existing company (product differentiation)

The rivalry amongst current competitors in the network management system market is significantly less
because there are only two or three competitors in this market.
Application
NMS is dealing with a small number of large end users and designing products specific to their needs. In
Porter’s terms, NMS are adopting a focused differentiation strategy. In these low-volume, high-margin
markets the emphasis has to be on increasing the volume side of the business, but at the same time
making sure they have the resources to handle new customers.
(c) The AutoFone retail shops division faces problems in remaining faithful to the original
business idea of offering impartial advice to customers and developing an appropriate rewards
system for its staff.
Evaluate what changes the AutoFone retail sales division should consider making to
both its business idea and its rewards system. (15 marks)
(c) There are a number of issues concerning the central business idea and its relationship to the rewards
system currently in place in the AutoFone retail shops division. Decline in profitability has led some to
question whether the central business idea that underpins the business is still appropriate in a maturing
industry and product environment. However, if it remains appropriate, it is currently being undermined by
a reward system which focuses on profitability.

Conflict between strategy and remuneration

The strategy has at its core the business idea that has driven the company since its inception. This is the
giving of impartial advice to customers so that they can select the best equipment and network for their
needs. This business idea is prominent in all of its promotional literature and is reflected in the company’s
motto ‘ethical advice: the customer’s choice’.
However, the CEO also claims that the shops are autonomous, being given profit targets but not closely
monitored within those targets. He states that the company is ‘about providing opportunity to its
employees, providing them with autonomy and responsibility to achieve their goals’. To support this
approach, sales staff are given a relatively low basic salary with a substantial element of profit-related pay
linked to the profit targets of the shop. Commission is also paid on sales of mobile phone insurance to the
customer.
Evidence from the scenario suggests a largely ‘hands-off’ approach to shop management based mainly on
the achievement of financial targets. The profitability of the central city branch was not fully understood
until the activities of the branch were investigated after the visit of three members of the strategic
planning committee. Shops are monitored on achieving profit targets, not on their adherence to the
central business idea.
The central business idea is undermined by the remuneration package offered to employees. Significant
elements of this package are based on the profitability of the shop and so are very dependent on margins.
It is clear from the experience of the central city store manager that margins are not the same for all
products and services. Hence to meet profit targets, he abandoned the central business idea and steered
customers towards products which had higher margins. As a result his shop, himself and his staff
achieved their targets and reaped financial rewards but at the cost of abandoning the central business
idea. Until he was investigated, he was held up as an example of what could be achieved. However, when
his activities were investigated and analysed he was formally disciplined and he left the firm soon after.
The message was that adherence to the business idea was more important than profitability, but this
message is not supported by the current rewards system.
Impartial advice is likely to lead to reduced income.
Business strategy
The challenge now for AutoFone is to ensure that its business strategy makes sense in the current market
place. The company will have to consider whether its original business idea is still a basis for a viable
business. Impartial advice was valued when the company was first established. Information about
competing products was difficult to gather and products and product details were difficult to access.
However, information about competing products is now readily available (on the Internet), rival phone
shops have been established and the consumer’s understanding of the product has increased.
The product has moved into a mature stage of its life cycle where competition often shifts towards greater
emphasis on cost and service. Companies are usually forced to rationalise the product mix. During the
growth stage of the industry it may be possible to support a broad product line with frequent introduction
of new products and options. However, at the mature stage it may be necessary to prune unprofitable
items and to focus on products with the best margins. This, of course, is exactly the policy pursued by the
manager at the central city branch.

Increased emphasis on service may be something that AutoFone can exploit through its retail shops. In
the mature stage of the life cycle firms are increasingly selling to experienced, repeat buyers. Such
buyers are more knowledgeable and their focus is on choice between brands, not on whether to buy the
product at all. This should suit the AutoFone business model which is based on choice – a model that none
of their network-based competitors can offer.
Reward management
AutoFone must also seek to align its business strategy with its reward management. If it maintains its
original business idea then it has to base its rewards system on factors that are not linked directly to
profitability – such as turnover and customer satisfaction. It also must recognise that the average wage of
an employee in 2007 is less than what it was two years ago.
 Finally, the company also has to tackle the thorny issue of the relationship of the shops with the Internet
operation. Giving impartial advice to customers who then place their order through the Internet and
providing support for customers who have purchased their phones through AFDirect are valuable services
for the group as a whole but are currently irritating, non-income generating activities for the sales staff in
the shop.

AutoFone currently give staff a relatively low basic salary with a substantial element of profit-related pay
linked to the targets of the shop. It may wish to consider restructuring this to offer a higher base pay, with
performance-relating pay reflecting, perhaps in part, achievement of a target associated with the central
business idea. However, it must be recognised that devising a measure of ‘impartiality’ will not be
straightforward. Another possibility, reflecting the concern about giving advice to AFDirect customers,
would be to include an element of performance related pay associated with the group as a whole.

Within the shop structure it would seem useful to explore a reward system that:
1. Provided higher basic pay to each individual working in the shop.
2. Provided performance-related pay associated with the shop itself. This may continue to be related, in
part, to profitability.
However other measures more obviously associated with the central business idea must be considered.
3. Provided an element of performance related pay associated with the group as a whole.
The first and third elements of this suggested structure might also replace the commission-based sales of
insurance currently paid to retail sales staff. The ethics of the current approach and how it fits in with the
central idea of the business seem open to question.
It must also be recognised that the company may also have to adopt a more ‘hands-on’ approach to
monitoring the performance of the shops to ensure that the business idea is being adhered to. It is
unlikely that the company can continue its distant approach, leaving shops alone to achieve their targets.
Furthermore, in mature organisations there often has to be scaled-down expectations for both financial
performance and personal advancement. This means that the company should consider setting more
realistic growth and profit targets.
Finally, the analysis might include some of the ethical issues listed below.
– The inclusion of the word ethical in the company’s motto appears to associate ethics with impartiality.
– The conclusion of the board that the manager of the central city branch acted ‘unethically’.
– The mismatch between the core business idea and the actual way shops are set targets and monitored.
– The mismatch between the core business idea and the actual way employees are rewarded.
– The treatment of the central city manager
– The commission-based sales of insurance

xxxxxxxxx
Political
The organisation must react to the attitude of the political party that is in power at the time. The
government is the nation’s largest supplier, employer, customer and investor and any change in
government spending priorities can have a significant impact on a business, eg the defence industry.

Political influence will include legislation on trading, pricing, dividends, tax, employment, as well as health
and safety.

Economic
The current state of the economy can affect how a company performs. The rate of growth in the economy
is a measure of the overall change in demand for goods and services. Other economic influences include:
- Taxation levels.
- Inflation rate.
- The balance of trade and exchange rates.
- The level of unemployment
- Interest rates and availability of credit.
- Government subsidies.
One should also look at international economic issues, which could include:
- The extent of protectionist measures.
- Comparative rates of growth, inflation, wages and taxation.
- The freedom of capital movement.
- Economic agreements.
- Relative exchange rates.
Social
The organisation is also influenced by changes in the nature, habits and attitudes of society.
- Changing values and lifestyles.
- Changing values and beliefs.
- Changing patterns of work and leisure.
 - Demographic changes.
- Changing mix in the ethnic and religious background of the population.
Technological
This is an area in which change takes place very rapidly and the organisations need to be constantly
aware of what is going on. Technological change can influence the following:
- Changes in production techniques.
- The type of products that are made and sold.
- How services are provided.
- How we identify markets.
Environmental
Legal
How an organisation does business:
- Law of contract, law on unfair selling practices, health and safety legislation.
- How an organisation treats its employees, employment laws.
- How an organisation gives information about its performance.
- Legislation on competitive behaviour.
- Environmental legislation.