In the modern era, the intensity of competition has increased significantly in industries. The corporations operating in these industries have to ensure that they adopt strategic policies to generate a competitive advantage over their competitors to sustain their growth in the market. The management uses strategy development tools while forming business strategies in order to evaluate the business environment factors which affect their operations (O’Brien and Meadows, 2013). This essay will evaluate PESTEL analysis and Porter’s five forces framework which are two of the most common strategy development tools used by corporations across the globe. Both of these theories will be evaluated to determine how they work and examples of Amazon and Nestle will be taken to understand how they assist the management in forming strategic policies.
The PESTEL analysis is a common strategy development tool which assists marketers in evaluating the key factors which influence their business. The PESTEL is an acronym for six factors which affect businesses and their operations in their respective industry. These factors include the political landscape of the market, economic outlook, socio-cultural adaptations, technology space and advancements, environmental and sustainability policies and legal and ethical domain (Yuksel, 2012). Through this model, the marketers are able to track the environment of the industry in which they operate if they plan to diversify their product offerings or services. This tool works as a bird-eye view of the industry through which different factors can be evaluated by the company. Political factors are influenced through political parties which affect the spending and confidence of customers. Economic factors include employment rate, rate of inflation, GDP and change rate. Social factors are linked with ideas, values, opinions and culture of market participants (Dockalikova and Kashi, 2014). Technological factors comprise opportunities and threats relating to technological advancements. Environmental factors include imposition of ecological responsibilities on parties to reduce environmental damage. Legal factors include regulations and ethical operations of businesses.
A PESTEL analysis of Amazon can assist in understanding how the management of the company uses this tool to form business strategies to achieve effectiveness. Evaluation of changes made in the political environment is important so that the corporation is ready to face key challenges. For example, Trump Administration has imposed a ban on free trade which affects the business of Amazon in other countries (Mac, 2017). The government has also decided to conduct the audit of postal services also affects the business of Amazon. In major markets of Amazon such as the United States, Australia and the United Kingdom, the economic stability assists the company in managing its operations and expands them in the market which increases the customer base of the enterprise. Amazon has a positive social image in the e-commerce industry. The perspective of customers towards the e-commerce market is changed as well, especially in developing countries such as India which assist Amazon in reaching new customers in order to increase its market share (Sen, 2018). The corporation uses modern technologies while managing its operations to ensure that it is able to increase the efficiency of processes and accuracy in management. For example, the warehouses of Amazon contain billions of products which are effectively managed through robots, barcode scanners, order processing and others (Caudell, 2017). The supply chain of the corporation is continually working to optimise shipping practices by leveraging technological advancements which provide it a competitive advantage in the industry. The corporation complies with environmental policies while managing its operations, for example, use of renewable energy and 40 thousand plants in the new rainforest office of the company which is situated in Seattle (Business Wire, 2018). Effective compliance with legal requirements such as labour laws, taxation laws, consumer protection policies, employment regulations and others assist the management in ensuring that they conduct their business in ethically manner. Evaluation of these factors assists the corporation in generating and maintaining a competitive advantage in the industry.
Porter’s Five Forces Framework
Understanding of the industry in which a company operates is significant to ensure that it develops its policies based on the factors which affect their operations. These factors also include the business of corporations when they decide to diversify their offerings into new markets (Dobbs, 2014). Michael Porter developed a tool which assists corporations in determining the five key forces of an industry which affects their business. This model enables enterprises in analysing the attractiveness and competitive intensity in the industry which influences their profitability in the market. The five forces include competitive rivalry, threat of new entrants, threat of substitutes, bargaining power of customers and bargaining power of suppliers. The competitive rivalry is referred to the intensity of competition in a particular industry. The threat of new entrants is referred to the ability of new competitors to enter into the industry and the entry barriers. The bargaining power of customers is referred to the the ability of consumers to drive the prices of products and services of the enterprise (Mathooko and Ogutu, 2015). The bargaining power of suppliers is their ability to influence the prices of the products and services offered by a company to its customers. These factors are influenced by factors such as switching costs, availability of parties, the rarity of materials and others.
The top-level managerial personnel use this tool to form strategic policies in order to address key issues relating to management while operating their business in an industry. For example, the management of Nestle uses this framework while developing business strategies. The company operates in the food processing industry, and it offers its products globally. The competitive rivalry in this industry is low because Nestle is an established brand which has a strong presence in the global market. The competitors of Nestle find it difficult to match with its success which provides a strong competitive position to the corporation (Sojamo and Larson, 2012). The threat of new entrants is low in the industry because companies have to make significant capital investment in the beginning which creates entry barriers for them. The threat of substitution is high in this industry because substitute products are offered by both local and international companies which provide various options to enterprises. The supplier bargaining power of customers is high in the industry because there are no switching costs for customers. The availability of alternative products is also high in the market which makes the process easier for customers. The bargaining power of suppliers is high as well (Igumbor et al., 2012). Nestle depends on its suppliers to provide quality raw materials within a reasonable time to ensure that it is able to meet its production requirements. These factors affect the profitability of Nestle in the market and result in increasing or decreasing its revenue, therefore, evaluation of these factors are necessary to sustain its growth.
In conclusion, the use of strategy development tools is significant for corporations to ensure that they are able to determine the key factors which affect their operations and implement policies which are targeted towards achieving effectiveness in the market. The use of PESTEL analysis and Porter’s five forces framework is common for companies while they develop their strategic policies. The PESTEL analysis is used by companies to evaluate their business environment and develop strategy while evaluating external environmental factors. Porter’s five forces framework assists companies in evaluating the attractiveness of an industry which influences their profitability. The corporations can use these tools to develop competitive advantage and sustain their future growth in the market.
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