Question

Strategic Management

-what is the STEEP (or PESTEL) Analysis for EY(Ernst & Young) company ?what is Political, economic, social and technological factors affect industry structure and performance ?

-What is the Porter's five forces Analysis for EY(Ernst & Young) company ?what is the impact of each force on industry profitability?

Answer 1

1.

EY PESTEL Analysis

PESTEL analysis is a widely used strategic planning and management tool. It is an acronym for political, economic, social, technological, environmental and legal factors that shape the macro business environment. EY. operates in a complex and dynamic environment characterized by regulatory changes, growing environmental activism, collective social trends, technological changes and evolving legal system.

2 Application of PESTEL to EY.

The application of PESTEL analysis can help EY. identify the major external environmental forces that shape the strategy and competitive landscape and support its strategic decision making process. As EY. looks to expand and leverage its competencies and core capabilities, conducting the PESTEL analysis is imperative for developing effective strategies and achieving long-term growth objectives.

2.1 Political factors

2.1.1 Importance of political factors in the PESTEL framework

Within PESTEL analysis, political factors exert a strong influence on the long-term sustainability and profitability of EY. The presence at international stage increases the company’s sensitivity to changes in political environments of different countries. In a political context, the key to success in a dynamic international business environment is to diversify the systematic risks. The political environment of a country comprises multifaceted factors. EY. needs to consider the following political factors during the strategic planning process:

2.1.2 Political factors that influence EY.

2.1.2.1 Political stability

High political stability provides a stable and friendly business environment with predictable market growth trends. However, when there is political chaos, it deters the investors and harms the stakeholders' trust in economic and consequent organizational performance. Currently, EY. is present in different countries, each having own political tensions. Growing tensions and instabilities in the global political environment can affect the Gold industry growth and limit the growth opportunities available to EY.

2.1.2.2 Changing policies

Frequent changes in government policies harm business performance by increasing environmental uncertainty. It is important for EY. to study the current trends in the country's political scenario as changes in government may alter the government's priorities towards the development of different industries.

2.1.2.3 Protests/pressure groups and governance system

EY. should carefully analyze the protests by pressure groups, social/environment activists and worker unions as such protests play an important role in the policy making process. Close collaboration with such groups may enhance the EY.’s ability to collaborate with community and achieve long-term corporate goals. Moreover, a well-developed governance system with a democratic political environment makes the business environment more comfortable for international business organizations like EY.

2.1.2.4 Bureaucracy and corruption

Bureaucracy and corruption negatively influence the business environment. Operating in countries with high corruption level and weak law enforcement makes the business environment increasingly unpredictable for EY. due to jeopardized public trust on business organizations and overall political and economic structure. The corruption can influence various business operations, ranging from licensing, contracting, fraudulent deals to frequent lawsuits. If EY. decides to enter in markets with the corrupt economic, political system, it will threaten the organization's sustainable development by destabilizing the society, harming justice system and endangering the rule of law.

2.1.2.5 Taxation, trade restrictions and intellectual property protection

Entering in countries with high taxation level will directly influence the profitability of EY. High taxation affects international trade and prevents exports. EY. can enter in low taxation markets and benefit from high profits that can be invested in research and development activities. The organization may also study the industry specific taxation policies to understand the host government's priorities and interest in developing industries. Similarly, high trade restrictions can make the business environment more complex by affecting the exports and harming relationships with foreign trade partners. Moreover, if the government of the country under consideration is not serious about protecting the intellectual property rights of business organizations, it will deter the entrepreneurs from investing in organizations due to high risk of ideas being stolen. Hence, EY. should study how intellectual property rights are protected in the host country and make the business strategies accordingly.

2.2 Economic factors

2.2.1 Importance of economic factors in the PESTEL framework

It is important for EY. to understand economic factors such as foreign exchange/interest rate, labor market conditions, inflation and saving rates etc. as they determine the overall economic environment of the country. A detailed understanding of the economic environment can help EY. estimate the growth trajectory of industry and organization. Following economic factors need to be considered by EY. to make informed decisions:

2.2.2 Economic factors that influence EY.

2.2.2.1 Economic/business cycle stage

The economic development of a country directly influences organizational performance. Growing economies offer wide-ranging growth opportunities to the EY. Similarly, it is important to understand the industry lifecycle stage. Entering in mature industries can be more challenging due to market saturation than industries at the growth stage. Moreover, the business performance of EY. is also influenced by the extent to which the host country government has spent on core infrastructure development. A well-developed infrastructure facilitates the business environment and increases the growth potential of the gold industry in the respective country.

2.2.2.2 Inflation/employment/interest/exchange rates

The GDP growth rate will determine the EY.’s ability to pursue its long-term growth strategies. High GDP also signals the consumers’ ability to spend more on offered products. High unemployment signals the availability of surplus labor at comparatively lower wages. Operating in such a market can lower the production cost of EY. The organization should also carefully consider the interest rate and its influence on borrowing ability and attitude towards investment. The high interest rate will encourage the attitude towards investment and increase growth opportunities for EY. Finally, the exchange rate fluctuation can also influence the profitability and international trade. The high fluctuation on local currency can be a cause of serious concern for EY.

2.2.2.3 Labor market conditions

The demand and supply of labor determine the wage rates and supply of skilled workforce. EY. must study and predict the labor market conditions to understand how it can attract talented workers and leverage their skills to improve business performance. When labor markets are flexible, EY. can take advantage of higher labor productivity. Whereas, operating in rigid labor markets may cause labor wage and other issues raised by powerful labor unions. EY. should also carefully analyze the availability of skilled human capital as a shortage of skilled labor can affect business efficiency and make talent attraction and retention more challenging.

2.2.2.4 Financial markets efficiency

The global expansion strategies of the EY. are influenced by the financial market efficiency as operating in highly efficient financial markets leads towards improved liquidity position and strengthened ability to enter new markets. The health and efficiency of financial markets will determine EY.’s ability to raise the capital at fair prices.

2.2.2.5 Economic structure

The business practices of the EY. are influenced by the prevailing economic structure. The economic and regulatory environment in a monopolistic or oligopolistic structure will be different from the monopolistic competition and perfect competition.

2.3 Social factors

2.3.1 Importance of social factors in the PESTEL framework

Organizational culture derives strong influence from the societal norms, values and trends. Understanding the demographic trends, power structures, consumers’ spending patterns and shared beliefs can help EY. design effective marketing messages and fulfil corporate objectives through informed PESTEL analysis. The marketing department of EY. can use the information retrieved from social, environmental analysis to target the consumer groups and increase the appeal of offered products to potential buyers. EY. must consider the following social factors to conduct macro-environmental analysis:

2.3.2 Social factors that influence EY.

2.3.2.1 Demographic trends

Changes in demographic patterns like aging population, migration trends and socio-economic variables have paramount importance for international business organizations like EY. Studying the demographic characteristics can help EY. in choosing the right market segment/segments with high growth potential. The business and marketing strategies are also influenced by migration. It is important for EY. to understand the people’s general attitude towards migration as it can influence firms’ ability to bring international managers to host country.

2.3.2.2 Equality and power distance

The power distance within any society shows the acceptance of hierarchy and income inequality. EY. must adjust its business management practices while entering in markets with high or low power distance. The growing inequality in many countries is altering the power structure, which has serious implications for international business organizations like EY.

2.3.2.3 Gender Roles

EY. need to study the traditionally assigned gender roles to align its marketing and communication practices accordingly. Marketing and human resource strategies in a traditional, patriarchal society with clearly distinguished gender roles will be different from societies with low gender stereotypes.

2.3.2.4 Societal norms and class distribution

Culture is considered an important variable by international marketing managers. Each society has distinctive norms and values that play an important role in shaping consumer behavior. EY. should develop local teams and develop local partnerships for understanding the societal attitudes and norms to tailor marketing strategies according to unique cultural context. The observation of social class stratification is also important for EY. Offering luxury products at premium prices to a market where the high-end market is considerably small in number will require EY. to adopt the niche marketing strategies. Similarly, market segmentation based on social class may be ineffective where social class stratification is low.

2.3.2.5 Online shopping

The advent of social media and e-commerce has encouraged online shopping behavior among customers. EY. needs to understand the online shopping behavior by considering the generational differences as younger consumers are more inclined to shop online than older customers. The growing use of mobile phones and social networking sites must be considered when developing marketing and communication strategies.

2.3.2.6 Spending patterns and behavior

The consumers’ spending patterns are influenced by their purchasing power of money. Studying and forecasting the consumers’ purchasing power based on relevant economic indicators is important to analyze the customers’ interests and spending patterns. In some societies, consuming the offered product is considered a status symbol, while, some people use the same products for functional aspects. EY. should invest time on understanding the consumption motivations and social trends that define the consumption behavior. EY. should also attempt to understand the degree of consumer ethnocentrism and consider the country of origin effect to determine local consumers’ evaluation of foreign products. Lastly, EY. should study the consumers’ leisure interests and should focus more on enhancing the customer experience if customers prefer experiential products over traditional product offerings.

2.4 Technological factors

2.4.1 Importance of technological factors in the PESTEL framework

‘Technology' is the fourth factor of PESTEL analysis. The rapid technological advancement and technological diffusion across the globe have increased the importance of understanding technological factors during the strategic decision making process. A detailed analysis of the technological environment can help EY. capture the technological trends to achieve certain business advantages, such as- increasing profitability, boosting innovation process and enhancing the operational efficiency. Following technological factors can influence the business performance of EY.:

2.4.2 Technological factors that influence EY.

2.4.2.1 Social media marketing

The development of information and communication technologies has led towards the adoption of innovative marketing techniques to enhance collaboration with customers. Use of social media has become common in a modern business environment. EY. can leverage the opportunities offered by social media marketing to improve business performance. Technological trends can be used to start the creative social media campaigns for developing online brand communities.

2.4.2.2 Technological innovations and development level

EY. should carefully consider the on-going technological innovations to stay ahead of the competition. A close eye should be kept on analyzing the 5G and determining its potential to deliver positive business outcomes through enhanced user experience, increased speed and expanded access. Technological innovations like this can bring major transformations in the industry and reset the success rules for market players. Moreover, considering the development and maturity level of technology in the respective market is also important. Entering in markets where technological advancement has not reached the maturity means EY. can increase the market share by focusing on emerging technological innovations.

2.4.2.3 Research and development on technology and impact on cost structure/value chain

EY. needs to consider the investments made by competitors on a micro and macro level to understand how new technologies influence the firm’s value chain and prevailing cost structure. Research and development activities are highly important in an environment characterized by creative disruption. In such an environment, EY. should invest in disruptive technologies to maximize the profits and re-invest the profits for future disruptive technologies.

2.4.2.4 Shortened product life cycles

The adoption of new technologies has shortened the lifecycle of new product development. Today, new products are developed quickly, and supply chain partners have also gained more power. It pressurizes the EY. to develop new products quickly, increase product range diversity, integrate flexibility into the value chain and develop healthy business relationships with value chain partners.

2.5 Environmental factors

2.5.1 Importance of environmental factors in the PESTEL framework

The growing environmental consciousness and changing climatic conditions have made ‘environmental analysis’ an important part of the PESTEL analysis. The environmental standards, laws and regulations vary across different markets. The international presence of EY. require the organization to consider these differences to avoid undesired circumstances carefully. Detailed environmental analysis is imperative before deciding to enter a new market or start a new product line. Some examples of environmental factors that EY. need to consider are given below.

2.5.2 Environmental factors that influence EY.

2.5.2.1 Recycling and waste management

The growing environmental pollution coupled with technological advancement has compelled business organizations to adopt innovative recycling and waste management practices. In some countries, recycling has almost become a business norm. Moreover, adopting efficient waste management practices in organizational units that are located in or near urban areas is highly crucial for EY. Many countries have placed strict norms to protect their urban areas through effective waste management.

2.5.2.2 Renewable technologies

Some countries offer subsidies for encouraging investment in renewable technologies. EY. can benefit from it and invest in renewable technologies to ensure long-term sustainability. This investment will also increase stakeholder satisfaction and expand the customer base due to enhanced brand image.

2.5.2.3 Weather and climatic conditions

Changes in weather and climatic conditions can influence business efficiency. For instance, extreme weather conditions can increase the cost of operations and compel the EY. to make the value chain more flexible. Such changes can also influence the consumers' spending patterns, causing the organization to revise its product and marketing strategies.

2.5.2.4 Attitude towards eco-friendly products

There is a growing trend towards the use of green/eco-friendly products. EY. can take it as an opportunity and adopt green business practices to win the trust of stakeholders. Regulatory bodies’ emphasis on ensuring compliance with environmental norms is altering the product innovation priorities. It requires EY. to prioritize and focus on marketing the eco-friendly nature of their products over customary value propositions.

2.5.2.5 Environmental regulations to avoid resource depletion

Excessive resource depletion by EY. can draw the negative response from media, environment protection groups, customers and the general public. EY. must study the specific environmental regulations of the country under consideration to understand which resources (like water, electricity etc.) are considered rare or which species are endangered whose excessive consumption can cause trouble for the organization.

2.6 Legal factors

2.6.1 Importance of legal factors in the PESTEL framework

“Legal” is the sixth factor of PESTEL analysis. EY. cannot enter a new market without studying in detail the legal environment and regulatory structure of the new consumer market. A careful evaluation of legal aspects is required to avoid getting into some serious trouble. Ignorance in this regard can cause undesired circumstances for EY., such as- hurting competitive advantage as a result of intellectual property rights violation and harmed organizational image due to violation of consumer/employee/environment protection standards. EY. should consider the following legal factors when exploring a new market.

2.6.2 Legal factors that influence EY.

2.6.2.1 Employee protection laws (discrimination and health and safety)

EY. must follow the employee/labor health and safety laws as some countries have strict regulations to ensure labor safety. Providing a secure work environment for the workforce is the ethical and moral obligation of EY. Similarly, anti-discrimination laws (like equal employment opportunity) also need to be carefully studied when developing human resource practices as discriminatory suits against employer harm the organizational image and affect organizations’ ability to attract and retain the talent.

2.6.2.2 Consumer protection laws

The data protection has become an important issue due to consumers’ privacy and security concerns. EY. need to study data protection regulations to protect the customer data. Moreover, there are laws to set the maximum price, ensure a certain quality standard and protect consumers from fraudulent marketing claims. EY. must consider these factors to ensure compliance with consumer protection laws.

2.6.2.3 Intellectual property laws

Intellectual property regulations are designed to protect the companies' patents and valuable ideas. Inability to protect intellectual property rights can result in losing competitive advantage, which may weaken the positioning of EY. against other market players.

3 Concluding statement

To conclude, the PESTEL model is an important business tool that involves a detailed analysis of macro-environmental factors that shape the business environment. Ranging from political factors to environmental factors, each factor comprises various variables that influence the strategic decision making process of business organizations like EY.

2.

EY Porter’s Five Forces Analysis

This section analyses EY using each of the five forces of Porter’s model.

Threat of New Entrants

• The economies of scale is fairly difficult to achieve in the industry in which EY operates. This makes it easier for those producing large capacitates to have a cost advantage. It also makes production costlier for new entrants. This makes the threats of new entrants a weaker force.
• The product differentiation is strong within the industry, where firms in the industry sell differentiated products rather a standardised product. Customers also look for differentiated products. There is a strong emphasis on advertising and customer services as well. All of these factors make the threat of new entrants a weak force within this industry.
• The capital requirements within the industry are high, therefore, making it difficult for new entrants to set up businesses as high expenditures need to be incurred. Capital expenditure is also high because of high Research and Development costs. All of these factors make the threat of new entrants a weaker force within this industry.
• The access to distribution networks is easy for new entrants, which can easily set up their distribution channels and come into the business. With only a few retail outlets selling the product type, it is easy for any new entrant to get its product on the shelves. All of these factors make the threat of new entrants a strong force within this industry.
• The government policies within the industry require strict licensing and legal requirements to be fulfilled before a company can start selling. This makes it difficult for new entrants to join the industry, therefore, making the threat of new entrants a weak force.

How EY can tackle the Threat of New Entrants?

• EY can take advantage of the economies of scale it has within the industry, fighting off new entrants through its cost advantage.
• EY can focus on innovation to differentiate its products from that of new entrants. It can spend on marketing to build strong brand identification. This will help it retain its customers rather than losing them to new entrants.

Bargaining Power of Suppliers

• The number of suppliers in the industry in which EY operates is a lot compared to the buyers. This means that the suppliers have less control over prices and this makes the bargaining power of suppliers a weak force.
• The product that these suppliers provide are fairly standardised, less differentiated and have low switching costs. This makes it easier for buyers like EY to switch suppliers. This makes the bargaining power of suppliers a weaker force.
• The suppliers do not contend with other products within this industry. This means that there are no other substitutes for the product other than the ones that the suppliers provide. This makes the bargaining power of suppliers a stronger force within the industry.
• The suppliers do not provide a credible threat for forward integration into the industry in which EY operates. This makes the bargaining power of suppliers a weaker force within the industry.
• The industry in which EY operates is an important customer for its suppliers. This means that the industry’s profits are closely tied to that of the suppliers. These suppliers, therefore, have to provide reasonable pricing. This makes the bargaining power of suppliers a weaker force within the industry.

How EY can tackle the Bargaining Power of Suppliers?

• EY can purchase raw materials from its suppliers at a low cost. If the costs or products are not suitable for EY, it can then switch its suppliers because switching costs are low.
• It can have multiple suppliers within its supply chain. For example, EY can have different suppliers for its different geographic locations. This way it can ensure efficiency within its supply chain.
• As the industry is an important customer for its suppliers, EY can benefit from developing close relationships with its suppliers where both of them benefit.

Bargaining Power of Buyers

• The number of suppliers in the industry in which EY operates is a lot more than the number of firms producing the products. This means that the buyers have a few firms to choose from, and therefore, do not have much control over prices. This makes the bargaining power of buyers a weaker force within the industry.
• The product differentiation within the industry is high, which means that the buyers are not able to find alternative firms producing a particular product. This difficulty in switching makes the bargaining power of buyers a weaker force within the industry.
• The income of the buyers within the industry is low. This means that there is pressure to purchase at low prices, making the buyers more price sensitive. This makes the buying power of buyers a weaker force within the industry.
• The quality of the products is important to the buyers, and these buyers make frequent purchases. This means that the buyers in the industry are less price sensitive. This makes the bargaining power of buyers a weaker force within the industry.
• There is no significant threat to the buyers to integrate backwards. This makes the bargaining threat of buyers a weaker force within the industry.

How EY can tackle the Bargaining Power of Buyers?

• EY can focus on innovation and differentiation to attract more buyers. Product differentiation and quality of products are important to buyers within the industry, and EY can attract a large number of customers by focusing on these.
• EY needs to build a large customer base, as the bargaining power of buyers is weak. It can do this through marketing efforts aimed at building brand loyalty.
• EY can take advantage of its economies of scale to develop a cost advantage and sell at low prices to the low-income buyers of the industry. This way it will be able to attract a large number of buyers.

Threat of Substitute Products or Services

• There are very few substitutes available for the products that are produced in the industry in which EY operates. The very few substitutes that are available are also produced by low profit earning industries. This means that there is no ceiling on the maximum profit that firms can earn in the industry in which EY operates. All of these factors make the threat of substitute products a weaker force within the industry.
• The very few substitutes available are of high quality but are way more expensive. Comparatively, firms producing within the industry in which EY operates sell at a lower price than substitutes, with adequate quality. This means that buyers are less likely to switch to substitute products. This means that the threat of substitute products is weak within the industry.

How EY can tackle the Threat of Substitute Products?

• EY can focus on providing greater quality in its products. As a result, buyers would choose its products, which provide greater quality at a lower price as compared to substitute products that provide greater quality but at a higher price.
• EY can focus on differentiating its products. This will ensure that buyers see its products as unique and do not shift easily to substitute products that do not provide these unique benefits. It can provide such unique benefits to its customers by better understanding their needs through market research, and providing what the customer wants.

Rivalry Among Existing Firms

• The number of competitors in the industry in which EY operates are very few. Most of these are also large in size. This means that firms in the industry will not make moves without being unnoticed. This makes the rivalry among existing firms a weaker force within the industry.
• The very few competitors have a large market share. This means that these will engage in competitive actions to gain position and become market leaders. This makes the rivalry among existing firms a stronger force within the industry.
• The industry in which EY is growing every year and is expected to continue to do this for a few years ahead. A positive Industry growth means that competitors are less likely to engage in completive actions because they do not need to capture market share from each other. This makes the rivalry among existing firms a weaker force within the industry.
• The fixed costs are high within the industry in which EY operates. This makes the companies within the industry to push to full capacity. This also means these companies to reduce their prices when demand slackens. This makes the rivalry among existing firms a stronger force within the industry.
• The products produced within the industry in which EY operates are highly differentiated. As a result, it is difficult for competing firms to win the customers of each other because of each of their products in unique. This makes the rivalry among existing firms a weaker force within the industry.
• The production of products within the industry requires an increase in capacity by large increments. This makes the industry prone to disruptions in the supply-demand balance, often leading to overproduction. Overproduction means that companies have to cut down prices to ensure that its products sell. This makes the rivalry among existing firms a stronger force within the industry.
• The exit barriers within the industry are particularly high due to high investment required in capital and assets to operate. The exit barriers are also high due to government regulations and restrictions. This makes firms within the industry reluctant to leave the business, and these continue to produce even at low profits. This makes the rivalry among existing firms a stronger force within the industry.
• The strategies of the firms within the industry are diverse, which means they are unique to each other in terms of strategy. This results in them running head-on into each other regarding strategy. This makes the rivalry among existing firms a strong force within the industry.

How EY can tackle the Rivalry Among Existing Firms?

• EY needs to focus on differentiating its products so that the actions of competitors will have less effect on its customers that seek its unique products.
• As the industry is growing, EY can focus on new customers rather than winning the ones from existing companies.
• EY can conduct market research to understand the supply-demand situation within the industry and prevent overproduction.

Implications of Porter Five Forces on EY

By using the information in EY five forces analysis, strategic planners will be able to understand how different factors under each of the five forces affect the profitability of the industry. A stronger force means lower profitability, and a weaker force means greater profitability. Based on this a judgement of the industry's profitability can be made and used in strategic planning.

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