CHAPTER-2 ENVIRONMENTAL ANALYSIS (1)

Chapter 2– Environmental Analysis

Models for environmental analysis PESTEL analysis Porter’s Diamond

• Nature of environmental analysis • Nature of PESTEL • National

• The purpose of environmental analysis competitive
analysis • Political advantage
• Two key models of environmental environment • Four elements of
analysis: • Economic Porter’s Diamond
▪ PESTEL analysis environment model
▪ Diamond Model • Socio-cultural • Favorable factor
environment conditions
• Technological • Demand conditions
environment • Related and support
• Ecological industries
environment • Firm strategy,
• Legal environment structure and rivalry
• Limitations of • Role of government
PESTEL in creating
competitive
advantage
• Criticism on
Diamond model
CHAPTER-2 ENVIRONMENTAL ANALYSIS (2)

CHAPTER NO. 2
ENVIRONMENTAL ANALYSIS

Contents

1 Models for environmental analysis

2 PESTEL analysis
3 Porter’s Diamond model
CHAPTER-2 ENVIRONMENTAL ANALYSIS (3)

1. Models for Environmental Analysis

Section overview

◼ The nature of environmental analysis

◼ The purpose of environmental analysis
◼ Two models for environmental analysis
1.1 The nature of environmental analysis
A business entity cannot exist in isolation from its environment. It inter-relates with its
environment, and its survival and strategic success depend on how well it responds to the threats
and opportunities that the environment provides.
Anything that exists beyond the boundary of an organization forms its environment. The
environment includes:
• Customers • Suppliers
• Potential customers • Government
• Markets • Potential sources of new
• Competitors employees

Layers of environment
The term ‘macro-environment’ is used to mean general factors in the business environment of an
entity, rather than specific customers, suppliers and competitors. Environmental influences on an
organization vary with the size of the organization, and the industry and the countries in which it
operates.
CHAPTER-2 ENVIRONMENTAL ANALYSIS (4)

1.2 The purpose of environmental analysis

Environmental analysis is a part of the process of assessing strategic position. In order to make
strategic choices about the future, the management of an entity need to understand:
• the factors in the environment that have a significant effect on the entity and what it does
• the key drivers of change: these are the factors in the environment that will have the
greatest effect on the entity, and force the entity to change its strategies in order to
survive and succeed
• the difference in impact that key drivers of change in the environment will have on
different industries or different markets, or how changes in the environment might affect
one particular entity more or less than other entities.
The purpose of the analysis is to assess the environment, to analyze the position of an entity in
relation to its environment and to judge how the entity’s strategies should be developed to take
advantage of opportunities and deal with any potential threats. It is a first step towards
formulating a business strategy.

1.3 Two models for environmental analysis

• PESTEL: used to identify significant factors in macroenvironment of the organization
• Porter’s Diamond: used to analyze reasons why entities in particular countries, or
regions within a country, appear to have a significant competitive advantage over similar
entities in the same industry, but operating in other countries or other regions.
CHAPTER-2 ENVIRONMENTAL ANALYSIS (5)

2. PESTEL analysis
Section overview

◼ The nature of PESTEL analysis

◼ Political environment
◼ Economic environment
◼ Social and cultural environment
◼ Technological environment
◼ Ecological influences
◼ Legal environment
◼ Limitations of PESTEL analysis
◼ PESTEL analysis examples

2.1 Nature of PESTEL analysis

PESTEL analysis is a structured approach to analyzing the external environment of an entity.

There are six categories of environmental influence:
• P – Political environment
• E – Economic environment
• S – Social and cultural environment
• T – Technological environment
• E – Ecological influences
• L – Legal environment

2.2 Political environment

The political environment consists of political factors that can have a strong influence on business
entities and other organizations.
Investment decisions by companies will be influenced by factors such as:
• the stability of the political system in particular countries
• the threat of government action to nationalize the industry and seize ownership from
private business
• wars and civil unrest
• the threat of terrorist activit
CHAPTER-2 ENVIRONMENTAL ANALYSIS (6)

Example: Google
Google has to assess the prevailing political environment in a country and its influence on the
information dissemination.
Google, in the recent past had to deal with political issues with China. This is due to the laws
and regulations regarding access to sensitive information in China.
Google is still dealing with these censorship issues and has even lost greater share of the
market to a major Chinese search engine called Baidu. Such political factors can prevent
Google from thriving in certain countries.

2.3 Economic environment

The economic environment consists of the economic influences on an entity and the effect of
possible changes in economic factors on future business prospects. Factors in the economic
environment include:
• the rate of growth in the economy and per capita GDP
• the rate of inflation
• the level of interest rates, and whether interest rates may go up or fall
• foreign exchange rates, and whether particular currencies are likely to get weaker or
stronger
• unemployment levels and the availability of skilled or unskilled workers
• government tax rates and government subsidies to industry
• the existence or non-existence of free trade between countries, and whether trade barriers
may be removed
• the existence of trading blocs of countries, such as the European Community.

Example: Starbucks Corporation

Starbucks Corporation is an American coffee company and coffeehouse chain. It was founded
in Washington in 1971, it operates globally with major presence in United States, China,
Canada, Japan and United Kingdom.
The effect of economic environment on Starbucks revenues is quite direct and supreme. The
major economic factor responsible for determining the profitability is the buying power of
consumers which explains the overall economic state in the country. During 2007 – 2009, the
economic crises had disrupted the consumer buying power significantly and consequently
Starbucks saw a noticeable decrease in revenues. In 2008, the revenues had dropped by 28 % as
compared to the previous period that led to the closure of around 900 stores and a layoff of
about 6,700 employees.
Another important economic factor Starbucks and such other businesses operating worldwide,
is the Currency exchange rate. Strengthening home currency compared to foreign currencies
diminishes the profits of companies operating globally. Simply put, as home currency increases
in value, revenues generated in foreign markets in local currencies buy fewer units of the home
currency, thus diminishing the total profits.
CHAPTER-2 ENVIRONMENTAL ANALYSIS (7)

2.4 Socio-cultural environment

An entity is affected by social and cultural influences in the countries or regions in which it
operates, and by social customs and attitudes. Some influences are more significant than others.
Factors in the social and cultural environment include the following:
• The values, attitudes and beliefs of customers, employees and the general public.
• Patterns of work and leisure, such as the length of the working week and popular views about
what to do during leisure time
• The ethnic structure of society
• The influence of religion and religious attitudes in society
• The relative proportions of different age groups in society.

Example: Aging population

In many countries of Western Europe, the average age of the population is rising. A large
number of individuals are reaching retirement age, and (as a proportion of the total
population) the number of people in work is declining.
This demographic change will have consequences for many companies in the countries
affected. It could be much more difficult in the future to attract and retain employees. In
addition, a large part of the population will be older and in retirement from work. This could
affect the demand for various goods and services, such as holidays and health products.
Among people of retirement age, two distinct social groupings might emerge: those who have
retired because they have a sufficiently large pension and those who cannot afford to retire
because their pension would be inadequate for a reasonable living. An increase in the number of
older people continuing to work past normal retirement age will have an impact on human
resources planning for employers.

Example: Healthy living

In some countries there has been a growth in the awareness of ‘healthy living’ and ‘healthy
eating’. This has affected companies in industries such as health and leisure (the demand for
fitness clubs), clothing (the demand for sportswear and running shoes) and food manufacture
(the demand for organic food).
As a result, a large number of consumers have been prepared to pay more to obtain goods and
services that offer healthier living and healthier foods.
Companies might need to consider whether the trend towards healthy living will continue, and if
so, how they should respond to the continuing change in society.

2.5 Technological environment

The technological environment consists of the science and technology available to an

organization (and its competitors), and changes and developments in science and technology.
Some aspects of technology and technological change affect virtually all organizations.
Developments in IT and computer technology, including the Internet, are the most obvious
CHAPTER-2 ENVIRONMENTAL ANALYSIS (8)

example. Business entities that do not respond to changes in IT and computerization risk losing
their share of the market to competitors.
However, technological change might also affect particular industries. Scientific developments in
food and drugs, for example, are having a continual impact on companies in these industries.
For strategic planning, companies need to be aware of current technological changes and the
possible nature of changes in the future. Technology could have an important influence, for
example, on investment decisions in research and development, and investment in new
technology.
Example: Apple vs. Nokia
Apple is a great example of a successful consumer technology company known for its leading-
edge product innovation and style.
Apple was established in 1976 to sell personal computers. The original Macintosh was released
in 1984 becoming an instant success. Apple remained focused on the PC market and despite
enduring challenging times in the 1990’s launched the iPod digital audio player in 2001 shortly
after launching iTunes. The incredible (and somewhat unexpected) success of the iPod laid the
foundation for future product innovations such as the iPhone (launched in 2007 and now the
best- selling mobile device in history) and the iPad (launched in 2010).
In contrast, Nokia declined from being the market-leading vendor of mobile phones during the
early 2000’s to exiting the mobile phone market in 2014 and selling-off its ailing mobile phone
business to Microsoft in a deal totaling just
$7bn (a fraction of its peak market capitalization).
The contrast in fortunes lies in the fact that Apple focused on developing leading- edge
software, whilst Nokia focused more on hardware.

2.6 Ecological influences

For business entities in some industries, environmental factors have an important influence on
strategic planning and decision-making. They are particularly important for industries that are:
• subject to strict environmental legislation, or the risk of stricter legislation in the future (for
example, legislation to cut levels of atmospheric pollution)
• faced with the risk that their sources of raw materials will be used up (for example, parts of
the fishing industry and timber production industry)
• at the leading edge of technological research, such as producers of genetically modified
foods.
In some countries, companies have seen a commercial advantage in presenting themselves
as ‘environment-friendly’, by improving their reputation with the general public. Several
companies have adopted a policy of becoming ‘carbon neutral’ so that they remove as much
carbon dioxide from the atmosphere as they add to carbon dioxide with emissions from their
operating activities.
In other countries, companies have been forced to make such change. For example, oil
companies operating in the Niger Delta area of Nigeria (see example below) have been
forced to deal with oil pollution due to increasing hostility from the host communities.
CHAPTER-2 ENVIRONMENTAL ANALYSIS (9)

Example: Shell Petroleum in Niger Delta

In 2012 lawyers representing a Nigerian fishing community took legal action against Shell
Petroleum seeking compensation for oil spills. Shell accepted responsibility for the spillage
of around 4,000 barrels of oil in Ogoniland in the Niger Delta in 2008 causing environmental
damage to local communities. A contributing factor was the sabotage of oil pipelines in the
Niger Delta as well as leaks from old and allegedly poorly maintained pipelines.
A UN environmental assessment of Ogoniland concluded that the region may take up to 30
years to recover fully from damage caused by years of oil spills.

2.7 Legal environment

The legal environment consists of the laws and regulations affecting an entity, and the possibility
of major new laws or regulations in the future.
Laws and regulations vary between different countries, although international regulation is
accepted in certain areas of commercial activity, such as banking.
Strategic decisions by an entity might be affected by legal considerations. For example:
• an international company might locate some operations, for tax reasons, in a country with a
favorable tax system
• decisions to relocate operations from one country to another could be affected by the
differences in employment law in the two countries, or by new employment legislation
• in many industries, companies are faced with environmental legislation or health and safety
legislation, affecting the ways in which they operate, as well as the design of the products they
make and sell.
Example: Punjab Food Authority
In 2015 the Punjab Food Authority (PFA) raided many restaurants offering fast food as well as
continental dishes in Lahore. Most of the restaurants were sealed due to the provision of sub-standard
food and non-compliance with the proper regulations regarding food safety put in place by the
Government.
As a consequence, many restaurant owners had to invest much in their ambiance, staff policies and
kitchen hygiene as well as storage locations. They also had to invest in equipment to be used by the
staff while cooking and serving (e.g. caps and gloves).
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2.8 Limitations of PESTEL analysis

PESTEL analysis is a useful framework for identifying environmental influences on an entity.

However, there are limitations to the technique.
• It is easier to use PESTEL analysis to identify environmental influences in the past and
present. It is not so easy to identify the environmental influences that will have the biggest
influence in the future.
• It is a method of identifying environmental influences, by providing a framework for analysis.
It does not provide an assessment of environmental influences. It is used for qualitative
analysis, but not for quantification. A manager using PESTEL analysis might need to use his
(subjective) judgement to decide which environmental factors are more important than others.
Macroenvironmental influences – PESTEL framework

Exam Focus: In your examination, it is more likely that you will be required to apply PESTEL
analysis to a case study or scenario than to write about the method. You should therefore practice
with examples, trying to identify which environmental factors could be the most significant for a
particular type of entity.
CHAPTER-2 ENVIRONMENTAL ANALYSIS (11)

3. Porter’s Diamond
Section overview

◼ National competitive advantage

◼ The four elements in Porter’s Diamond
◼ Favorable factor conditions
◼ Related and supporting industries
◼ Demand conditions in the home market
◼ Firm strategy, structure and rivalry
◼ The role of government in creating competitive advantage
◼ Criticisms of Porter’s Diamond

3.1 National competitive advantage

Business entities in some countries appear to enjoy a competitive advantage over businesses in
other countries in particular industries. For example, the US and Japan appear to enjoy an
advantage in global markets for IT and communications products and services; Switzerland and
the US enjoy an advantage in pharmaceuticals, the UK appears to have some advantage in
investment banking, and so on.
This competitive advantage is often concentrated in a particular region of a country.

The reason for national competitive advantage: Traditional economic theory states that a
country ‘inherits’ a comparative advantage over other countries in particular industries because of
the natural resources that it enjoys. Natural resources include not only land and mineral deposits,
but also the labor force and size of the population.

Michael Porter challenged the traditional theory of comparative national advantage in his book
The Competitive Advantage of Nations. He put forward a different theory of national
competitive advantage, known as Porter’s Diamond.
National competitive advantage is developed when companies operating in a strong domestic
market can develop competitive strengths. They can then build on the strength of their ‘home
base’ to extend their business operations into other countries, where their competitive advantage
will also apply and help them towards success.
3.2 Four elements in Porter’s Diamond
Porter argued that a country could create factors that give its firms (business entities) a
comparative competitive advantage over firms in the same industry in other countries.
Comparative competitive advantage for a country (or region) means that business entities in the
country (or region) can compete successfully and effectively against business entities in the same
industry but operating in another country (or region).
When a country enjoys a comparative competitive advantage in a particular industry, there will be
a concentration of businesses in the country operating in the industry or in supporting industries.
This phenomenon is known as cluster.
CHAPTER-2 ENVIRONMENTAL ANALYSIS (12)

A cluster is a concentration of inter-connected companies in the same geographical region. It

consists of companies in the same industry, and also specialized suppliers and service providers
to the industry. There may also be firms in related industries: for example, if a region has a
competitive advantage in the manufacture of plastics, there may also be a concentration of firms
in the electronics, engineering and oil refining industries.
Porter used a diamond shape to present the factors that create comparative competitive advantage
for a country over other countries. There are four inter- related elements:
• Favorable factor conditions
• Related and supporting industries
• Demand conditions in the home market
• Firm strategy, structure and rivalry.

Porter’s Diamond – The determinant of national competitive advantage

3.3 Favorable factors conditions

‘Factors’ are the economic factors of production – land, labor, capital (equipment) and
entrepreneurship. ‘Factor conditions’ are conditions in a market with regard to one or more of
these factors of production.

Some factor conditions in a national market might be favorable for companies operating in a
particular industry and give them a strong national competitive advantage. Factor conditions in a
CHAPTER-2 ENVIRONMENTAL ANALYSIS (13)

country can be divided into two categories:

• Basic factors; and
• Advanced factors.
Basic factors: Basic factors are factors of production that exist naturally in the country. These
might be:
• large amounts of suitable land, such as land for agriculture
• large quantities of natural materials, such as timber, fresh water, and mineral resources
such as oil and metals
• a favorable climate.
For example, the basic factor conditions of climate and suitable soil help to explain why countries
such as Pakistan and Bangladesh are successful in agriculture and textile.
Advanced factors: Advanced factors are factors that are ‘created’ and developed over time.
Unlike basic factors, they are not ‘inherited’ and do not exist naturally. A country might be
successful at developing particular factors that make it easier for companies to compete more
successfully.
Examples of advanced factors are:
• Labour skills and knowledge. These might be general skills, such as a highly educated
workforce with excellent skills in language and mathematics. They might also be skills in
a particular industry or type of work. For example, a country might have a working
population with high levels of technical skill in computer software writing, or nuclear
physics.
• Technological resources. A country might benefit, for example, from the existence of
scientific research centers.
• Infrastructure. A country might benefit from excellent transport networks and
telecommunications networks.

3.4 Related and supporting industries

A country’s industry is made more competitive, compared to other countries, when there is strong
competition and innovation in related and supporting industries.
When supporting industries are highly competitive, costs are reduced, and innovation occurs
continually. Some of the benefits of lower costs and innovation in a supporting industry (or
related industry) are passed on to business entities in industries that the supporting industry
serves.
In Italy, for example, the leather footwear industry, the leather working machinery industry and
the design services, which underpin them, benefit from one another. In Singapore, port services
and ship repair industries are mutually advantageous.
3.5 Demand conditions in home market
CHAPTER-2 ENVIRONMENTAL ANALYSIS (14)

Porter argued that strong demand in local markets, particularly when this demand is sophisticated
and discerning, can help to make local firms more competitive in global markets.

For example, Japanese customers’ high expectations of electrical and electronic equipment have
provided an impetus for those industries in Japan leading to global dominance of those sectors.

3.6 Firm strategy, structure and rivalry

Porter suggested that other factors that create national competitive advantage are the strategy of
firms and their owners, the organization structure of firms and the rivalry between local firms in
the industry. In Germany the propensity for systematic, often hierarchical, processes of
management have been particularly successful in providing reliability and technical excellence in
engineering industries.

Domestic rivalry and the search for competitive advantages within a nation can help provide
organizations with bases for achieving such advantage on a more global scale.

3.7 Role of government in creating competitive advantage

Porter argued that the four elements in the diamond are all important for creating national
competitive advantage.
Governments can help to create suitable conditions for national competitive advantage.
• They can create an education and training system that develops appropriate labor skills
and knowledge.
• They can help companies to raise their performance levels by enforcing strict product
standards.
• They can create early demand for new and advanced products by purchasing the products
themselves.
• They can stimulate rivalry between local firms by enforcing strict anti-trust legislation.

3.8 Criticism on Porter’s Diamond

There are some weaknesses in Porter’s Diamond theory. In particular:
• It is more relevant to companies in advanced economies than to companies in countries
with developing economies.
• The diamond model does not consider the role of the multinational company, which
locates production operations in different countries across the world.
Exam focus: In your examination, you might be required to use Porter’s Diamond theory to
explain the global success of companies in a particular country. To do this, you would need to
consider the four factors in the Diamond, together with the influence of government.

PRACTICE QUESTION (W-19 – Q4A):

CHAPTER-2 ENVIRONMENTAL ANALYSIS (15)

Gertonia is the largest economy in the European region and enjoys a stable and business friendly
government. Its automotive industry is well known for producing top quality speed car brands and is
considered an industry leader in the world. It has an excellent road network with no speed limit that
makes it perfect to meet the Gertonian’s appetite and demand for quality and speed.
Gertonia’s automotive industry is the largest industry sector and employer in the country which includes
from the large car manufacturers to extensive support network of many subsystems, component and parts
manufacturers. The industry is well supported by iron and steel industries, efficient financial and IT
systems, well reputed technical education institutes, heavy public and private expenditure in education
and highly skilled workforce. There is an intense competition and a constant pressure on manufacturer to
innovate.
Fredrick Dunden, Head of Auto Industry Union, believes Gertonia has developed a national comparative
advantage over many other countries, however, he is hesitant about the future leadership position for
speed cars mainly due to the tougher regulations on emission requirements prompted by Gertonia’s
deteriorating environmental conditions, petrol depended engines and systems of speed cars, government
plans to introduce speed limits on all areas to reduce the increasing rate of car accidents in some areas,
changing needs of the tech-savvy consumers and the rising trend of people interested in driving rented
speed cars rather than owning one.
Required:
(a) Explain how Gertonia achieves the national comparative advantage over many other countries. (06)

SOLUTION
Porter’s Diamond shape model can be used to explain the national comparative competitive advantage for
a country over other countries. In the case of Gertonia they can be explained as such:
(i) Firm strategy, structure and rivalry:
a. There is intensive competition among the manufacturers and constant pressure to
innovate.
b. Public and private expenditure/investment in education.
(ii) Related and supporting industries
a. Extensive network of many subsystems, component and parts manufacturers.
b. The industry is well supported by iron and steel industries.
c. Well reputed technical education institutes.
(iii) Favorable factor conditions:
a. It has an excellent road network with no speed limit.
b. Efficient financial and IT systems.
c. Business friendly government.
d. Highly skilled workforce.
e. Repute for top quality speed car brands.
(iv) Demand conditions in the home market:
a. Gertonians have an appetite and demand for quality and speed.
4. World Trade Organization (WTO)
CHAPTER-2 ENVIRONMENTAL ANALYSIS (16)

Past papers Grid

CFAP CFAP (BMS) Module E (BM)

(SPM)
Attempt W- S- W- S- W- W- S- W- S- W- S- W- S- W- S- W- S- W- S- W- S-
22 22 21 21 20 19 19 18 18 17 17 16 16 15 15 14 14 13 13 12 12
Topic
Ch. 2
PESTEL Q9a Q1

Diamond Model Q6 Q4a Q4v

Total Qs of CFAP-3 (BMS) during W-2016 to W-2022 = 3

CHAPTER-2 ENVIRONMENTAL ANALYSIS (17)

PRACTICE QUESTIONS
Q NO. 1
Gertonia is the largest economy in the European region and enjoys a stable and business friendly
government. Its automotive industry is well known for producing top quality speed car brands and is
considered an industry leader in the world. It has an excellent road network with no speed limit that
makes it perfect to meet the Gertonian’s appetite and demand for quality and speed.
Gertonia’s automotive industry is the largest industry sector and employer in the country which includes
from the large car manufacturers to extensive support network of many subsystems, component and parts
manufacturers. The industry is well supported by iron and steel industries, efficient financial and IT
systems, well reputed technical education institutes, heavy public and private expenditure in education
and highly skilled workforce. There is an intense competition and a constant pressure on manufacturer to
innovate.
Fredrick Dunden, Head of Auto Industry Union, believes Gertonia has developed a national comparative
advantage over many other countries, however, he is hesitant about the future leadership position for
speed cars mainly due to the tougher regulations on emission requirements prompted by Gertonia’s
deteriorating environmental conditions, petrol depended engines and systems of speed cars, government
plans to introduce speed limits on all areas to reduce the increasing rate of car accidents in some areas,
changing needs of the tech-savvy consumers and the rising trend of people interested in driving rented
speed cars rather than owning one.
Required:
(a) Explain how Gertonia achieves the national comparative advantage over many other countries.
(06)
(b) Discuss the threat(s) and weakness(es) of the automotive industry for speed cars presented in the
case, and provide suggestions to Fredrick Dunden to tackle these issues. (12)
(Winter 2019, Q4)

Q NO. 2
Study the following scenarios (only scenario v belongs to 2nd chapter):
(v) There is concentration of inter-connected facilities and ancillary service organizations in that
region which offer value-creation advantages to all the firms located in it.
Match each of the above scenarios with any one of the following concepts/principles.
(i) environmental footprint (ii) change management
(iii) transformational change (iv) organic growth
(v) activists (vi) clusters
(vii) career progression (viii) ethical manufacturing
(ix) Delphi method (x) sustainable reorganization
(xi) conflict (xii) queuing theory
(xiii) horizontal growth (xiv) pragmatist

(Winter 2016, Q4(v))

CHAPTER-2 ENVIRONMENTAL ANALYSIS (18)

SOLUTIONS TO PRACTICE QUESTIONS

SOLUTION TO Q NO. 1
ICAP EXAMINER COMMENTS
(a)
• Some examinees did not answer this part in the light of Porter’s Diamond model.
• Many examinees could not classify the given information under the relevant factors of Porter’s
Diamond model.
(b)
• Many examinees could not differentiate between threats and weaknesses and discuss the factors
under these headings interchangeably.
• Instead of discussing the threats, some examinees simply mentioned the threats in single
statements.
• Only few examinees could identify and discuss the threat of changing needs of IT-savvy
consumers.
• General suggestions were offered rather than specific suggestions under the identified threat.
• Some examinees repeated the same suggestions under various threats with different wordings.

SOLUTION BY ICAP

(a) Porter’s Diamond shape model can be used to explain the national comparative competitive
advantage for a country over other countries. In the case of Gertonia they can be explained as
such:
(i) Firm strategy, structure and rivalry:
There is intensive competition among the manufacturers and constant pressure to
innovate.
Public and private expenditure/investment in education.
(ii) Related and supporting industries
Extensive network of many subsystems, component and parts manufacturers.
The industry is well supported by iron and steel industries.
Well reputed technical education institutes.
(iii) Favourable factor conditions:
It has an excellent road network with no speed limit.
Efficient financial and IT systems.
Business friendly government.
Highly skilled workforce.
Repute for top quality speed car brands.
(iv) Demand conditions in the home market:
Gertonians have an appetite and demand for quality and speed.
CHAPTER-2 ENVIRONMENTAL ANALYSIS (19)

(b) Threat: Tougher regulations on emission requirements / Deteriorating environmental conditions

This means companies would need to meet the new regulations, which in many cases would mean
changing the speed cars. This runs a risk of loss in business due to high costs, risk of comprise in
quality, difficulty in meeting regulations, etc.
Suggestions:
Make environmentally friendly cars to satisfy regulatory requirements.
Conduct CSR activities to reduce deterioration of environment causing by cars.
Threat: Government plans to introduce speed limits on all areas
One of the reasons Gertonia can produce high speed cars is because of the local demand to meet
Gertonian appetite. Plan to introduce speed limits would mean Gertonians cannot drive fast at
will which will consequently affect local demand for fast cars. Hence, this can compromise the
leadership position.
Suggestions:
Gertonia has a business friendly government, as such government can be asked to keep
no speed limits for areas that do not run the risk of accidents due to high speed e.g.
highways, etc.
The accidents may be due to reasons other than high speed cars (e.g. bad roads, etc), as
such a closer look at the issue should be suggested to the government.
Threat: Changing needs of the IT-savvy consumers
This would require the companies to upgrade to meet the high-tech demands of the consumers. If
not responded quick enough, this would result in loss of business.
Suggestions:
This is a manageable threat as Gertonia has efficient IT and financial systems, healthy spending
in education and a push to be innovative. The industry should quickly react to meet the customer
needs.
Threat: Rising trend of people interested in driving rented cars rather than owning one
This may result in lower demand resulting in lower profitability and an industry wide change
from targeting consumers to own the car to targeting organizations that rent out the car.
Suggestions:
Strategies should be planned to target businesses who would give people cars to drive.
Expand market and reach areas where people would like to own cars.
Weakness: Not responding quick enough to the changes in environment
Gertonian automotive industry has not been moving quick enough to respond to the changes in
the environment, for example, they are not responding to IT-savvy consumers, heavy reliance on
petrol and changing trends of driving a rented car rather than owning one.
Suggestion:
R&D should be encouraged in the industry.
Private and public investments should be diverted for R&D.
R&D efforts should be directed towards reducing reliance on petrol dependent engines
and systems to produce environmentally friendly cars.
SOLUTION TO Q NO. 2
ICAP EXAMINER COMMENTS
In this question seven brief scenarios and the candidates were required to match these with appropriate
concepts/principles which were also mentioned separately in the question. The performance was good.

SOLUTION BY ICAP
Clusters