Page 2: Strategy and the external environment
The external environment is the context in which a business operates. This takes in various factors including those outside its control, for example, laws or standards. The external environment is the context in which a business operates. Each factor can have an effect on the business positive or negative and so companies make plans and strategies to try to anticipate these effects. If a company does not plan for external environment changes or ignores them, then it may miss opportunities to grow or suffer setbacks, for example, losing business to a competitor.
Every business strategy is designed to meet objectives and achieve targets. Ordinary firms must add value and reward shareholders. Failure to make an adequate return on capital can lead to the collapse of a firm or takeover by a competitor. Network Rail is required by its members to add value. This can be in money terms or as other benefits. If Network Rail does not make a profit, then less money will be available to improve the services.
Network Rail's 5-year plan includes targets such as reducing operating costs by £53 million by 2008/9. It re-invests its profits and has special responsibilities to satisfy the needs of its key stakeholders:
- The travelling public. They want reliable train services with safety as a top priority.
- The train operating companies. They want fair treatment and effectiveness in giving value for-money.
- The government. It has three expectations:
- ensuring the highest safety standards
- getting value for the taxpayers' money
- seeing its investment in railways meet national transport needs.
Profit-orientated businesses measure success in terms of costs and profits. Network Rail shares these priorities but also considers social costs and benefits. These affect the wider community and include costs of noise pollution or additional road use. Social benefits include regenerating derelict land or increasing trackside safety, for example, keeping fencing in good repair or increasing use of security CCTV. Balancing the costs of providing the social benefits against the need to maintain its profits is not easy!
Why use PESTEL analysis?
The PESTEL analysis is a standard way of environmental scanning. It groups together the factors which managers must be aware of and plan for. PESTEL analyses external influences affecting a business. It stands for:
Political - the current and potential influences from political pressures
Economic - the impact of local, national and world economy
Social - the ways in which changes in society affect the organisation
Technological - the effect of new and emerging technology
Environmental - local, national and world environmental issues
Legal factors - the effect of legislation in both the UK and other countries.
Successful managers need an all-round view of their environment for decision-making. Network Rail uses PESTEL analysis to draw attention to each of the key external environmental factors. This allows managers to identify links or inter-dependencies between them.
Opportunities and threats
More particularly, PESTEL highlights both opportunities and threats likely to affect Network Rail. These become the external input to a SWOT analysis that aids the strategy-making process. Network Rail also needs to be aware of its competitors. Although it is the only company that owns the railway track (and therefore has a legal monopoly), the market for travel is highly competitive. Other forms of travel, e.g. bus, plane, car, are sources of both threat and opportunity. One opportunity, for example, is that car users may find it cheaper to travel by train because of high petrol costs.