Report on environmental analysis & industry consolidations Introduction This report is about the importance of environmental analysis for the companies operating in the UK alcohol industry and what kind of tools is available for analysis. Also report will highlight the industry consolidation in the light of Greene King experience.
Importance of environmental analysis This analysis is used to measure the internal (Strengths and weaknesses) and external (opportunities and threats) environment factors which affect companies in future and also help to make a strategy to compete environment influences. (J&S) If companies do not analyse their internal and external environment then it would affect the company’s growth and others will have a chance to get competitive advantages. “Boiled frog syndrome” is a good example for understanding the importance of environmental analysis. Lecture notes 1, 28. 09. 2005) Procedure There are three models for analysing the environment: (J&S) • PESTEL analysis • Industry life cycle • Porter’s five forces frame work But in this report only two models will be used for scanning the environment. PESTEL analysis recognises the opportunities & threats for companies from internal or external environment and Porter’s Five Forces model recognises the source of competitor. Firstly this report will look at the PESTEL analysis and how could companies use this model for analysing the environment.
PESTEL analysis is used to see the future impact of environmental factors. There are six categories of environmental factors in PESTEL analysis i. e. Political, Economical, Socio--cultural, Technological, Environmental and Legal. (J&S) Secondly this report will look at the Porter’s five forces model for identifying the source of competitors in an industry. (J&S) Findings PESTEL analysis for environmental scanning Political factors • Government stability • Taxation policy • Foreign trade regulations • Social welfare policies (Adapted from J&S)
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Report will show how these political concerns influence alcohol industry. According to Philip Webster and David Rose (The Times, 27. 10. 2005) “smoking has been banned in all pubs in Scotland and Northern Ireland and now Government is concerning to put a ban on smoking in pubs that serve food in England and Wales”. This new threat will affect the industry’s profitability as it has mentioned in Greene King case study. It will also affect the Government stability. Government is also planning to reduce the consumption of alcohol by putting more taxes on alcoholic drinks.
Again it will affect the alcohol industry and prices of alcoholic drinks will rise. If the Government decide to put more tax on alcohol industry then they have to change the policies for tax-free product and also they have to control the black market that offers cheap cigarettes and alcohol. Otherwise new law will not be affective. Therefore companies need to analyse the Government regulations that could jeopardise the profitability and plan for future strategies in order to compete those influences which they could have direct impact on company’s performance.
Economical factors • Inflation • Interest rate • Currency fluctuation and exchange rate • Unemployment • Disposal income • Money supply (Adapted from J&S) Companies need to analyse economical factors that affect alcohol industry. For instant if the Government decide to increase the taxes on alcohol industry in order to the alcohol consumption then it will increase the prices of alcoholic drinks. Public’s health is major concerned from the Government prospective but it will affect the companies profitability and their share value.
Because high inflation reduces the consumer’s spending power. (According to Greene King case) High interest rate also affects the disposal income. Because it reduces the investment in business and consumer spending power. So it is very important for companies to analyse the economic factors which they could influence the company’s profitability or growth. Socio-cultural factors • Change in lifestyle • Social mobility • Demographic changes • Distribution of income • Education and health (Adapted from J&S) Socio-cultural is another important factor. It needs to analyse continuously.
Consumer lifestyle provides opportunities and threats to companies. But it depends how they will tackle them as a valuable opportunity and threat for future strategy. Unequal income distribution also affects the consumer power. So companies need to analyse different level of income and then make their strategy accordingly. Public’s health is an important concern for alcohol industry. Therefore, they need to analyse Government policies on the industry that affect the public’s health. For example in Greene King case Government is more concerned about public health and safety.
This is the reason they are planning to increase the taxes in order to reduce the consumption. Another social concern is increased drinking hours that could cause violence and noise. Therefore companies need to analyse those factors to make their future strategies accordingly. Technological factors • Government spending on research • Speed of technology transfer • New development • Government and industry focus on technological effort (Adapted from J&S) The technology factor can influence the companies.
It is necessary for companies to make a continuous effort to develop their technologies. It has a direct impact on companies’ performance and could jeopardise the profitability. Companies’ need to analyse external environment for updated their technologies for its future strategies. Sam Smith’s, an owner of chain of pubs, is using CCTV technology. According to company’s spokesman “it is much easier to watch every single floor at a same time”. (Greene King case) Environmental factors • Environmental protection law • Waste disposal • Energy consumption (Adapted from J&S)
Environmental factors also affect the companies’ reputation and performance. Companies’ should analyse the new environmental law regarding wastage and energy consumption. There are two obvious reasons, public health and environment for government. According to The World Health Organisation “alcohol is the third- biggest threat to public health” (Greene King case). Resent survey shows that “10% increase in alcohol prices would cut the alcohol related deaths by 28. 8% for men and 37. 4% for women”. (Greene King case) Legal factors • Monopolies legislation Heath and safety law • Employment law • Product safety (Adapted from J&S) Government is planning to introduce a complete ban on smoking publicly or in social places. An industry magazine reports that 42,000 pubs serve food and about 65 per cent of their customers smoke (Webster, P and Rose, D, The Times, 27. 10. 2005). If they continue to serve food then the new regulation could affect their earnings. Greene King’s annual report shows that they are planning to increase the amount of no-smoking floor in their pubs and making out-door areas for smokers.
The British Beer and Pub association wants to increase drinking hours. If the Government decided to increase drinking hours, then extra safety and security measure will be required (Greene king case). People will require frequent public transport after social hours to get their destination safely. Government proposal to extant drinking hours will affect employees as well. Its mean they will have to work long hours. Some times new legislation brings new competitors in the market which changed the company’s monopoly in an industry. Porter’s five forces model for environmental scanning
There are five parts of this model. 1. Threat of entry 2. Threat of substitute 3. The power of buyer 4. The power of supplier 5. Competitive rivalry (See appendices for figure 1) Threat of entry “Threat of entry will depend on the extent to which there are barriers to entry. These are factors that need to be overcome by new entrant if they are to compete successfully”. These barriers include: legislation, economies of scale, capital requirement, distribution channel, experience and relationship with supplier & customers. (J&S, page 113 to 115)
In order to compete successfully companies’ need to analyse following barriers: • Cost of capital to enter in an industry with regards to technology and economies of scale • Strong relationship of exiting company with supplier and customer could be costly for new entry • Product differentiation or high quality services could give competitive advantage or barrier • Existing high experienced companies could take an advantage in terms of cost, customers and supplier loyalty • Threats of Government policies • Changes in technology would affect the competitive advantage (Source adapted from J&S page 113 to 115)
Threat of substitutes “Substitution reduces demand for particular ‘class’ of product as customer switch to the alternatives. ” (J&S, page 115) Threats of substitutes work when other companies provide the same product with more benefits and value. Therefore companies need to develop their products by analysing their environment. A Victorian style of pub is a good example where customers can have smoking and non-smoking floor separately. The power of buyers Buyers power likely to be high when customers could get same product at low price from different suppliers.
Buyer will have more bargaining power when switching cost from one supplier to another is low. In order to reduce the buyer’s power company’s needed to develop their products. So they could offer more benefits and value. (Adapted from J&S) For example if Government decided to increase tax on alcoholic drinks in order to reduce the crime and consumption rates then this impact reduce the company’s sales. Longer drinking hours will increase the buyer’s power in terms of alternative. It’s necessary for companies’ to analyse those factors so they can reduce bargaining power. The power of supplier Supplier power likely to be high when: Limited sources and suppliers are available • High switching cost from one supplier to another • Different quality or services from alternative • Powerful brand of supplier (Adapted from J&S) Analysis of these factors can increase bargaining power with supplier. I. e. change in tax policy could affect the supplier’s power. In other word if Government increased the taxes on alcoholic drinks then whole production cost will change. Because supplier will charged extra and as result prices of alcoholic drinks will raise. Competitive rivalry “Competitive rivals are organisation with similar product and services aimed at same customer group”. Adapted from J&S, page 118) Factors affecting competitive rivalry • High fixed cost of products may increase price war • Customer could switch to other competitor if products are undifferentiated. • High exit barriers could lead to increased in competition because of high investment in non-transferable fixed assets or high redundancy cost • Competitors are in balance-roughly equal size – lead to higher rivalry (Adapted from lecture note 2, 5. 10. 2005 and J&S) Therefore companies need to analyse those factors which are affecting on competitive rivalry. If they do not keep an eye on them then growth of company will be affected.
Industry consolidation in light of the Greene King experience Industry consolidation in the light of Greene king experience is very successful. According to the case study, Greene king is the British pubs and brewery group based in Suffolk. Since 1996 they have acquired 1,600 pubs (See appendices figure 2 for Greene king’s acquisitions experience). Now they are taking over Scotland’s oldest brewery company ‘Belhaven’ and Essex based brewery & pubs group ‘Ridley’. Greene King has an opportunity to enter in a competitive market and expend their operations across UK.
Greene king has a large distribution channel, 2,064 owned pubs which can sell their own brewed drinks. Industry consolidation reduces per unit cost of product because of the mass production and increases the profitability. Consolidation also reduces the supplier power and increase the bargaining power with supplier. It also increases the wealth of shareholders. Small company has got benefit from being part of large company and has a chance to sale their drinks in new market. It’s a good step for small companies to develop their businesses for the future. Consolidation reduces the competition in an industry and creates more jobs. Greene king case) Conclusion Environmental analysis gives better understanding for decision making and help to make positive strong future strategies. In order to competing environmental influences companies’ need to analyse their environment on continuous basis. Consolidation of industry is cost effective and has wide horizon of competitive market. It also increases the interest of stakeholders. Recommendation Companies need to analyse their internal or external environment on regular basis. This report highly recommends the PESTEL analysis and Porter’s five forces model for environmental analysis. These models help in decision making and company’s future growth.
References • Greene King annual report 2004 & 2005, access date: 20. 10. 2005 and 01. 11. 2005. www. greeneking. co. uk • Johnson, G and scholes, k (2002), Exploring Corporate Strategy 6th ed UK: Prentice Hall. • Webster, P and Rose, D (2005) “Pubs will call time on food to keep smokers” in The Times newspaper, 27. 10. 2005, page 1 and 9. • Wiscarson, G, Strategic Environment, Lecture notes 1, 28. 09. 2005. • Wiscarson, G, Strategic Environment, Lecture notes 2, 05. 10. 2005.
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