Business Environment (Essay Sample)

Analysis of ASDA’s Business Environment
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Executive Summary
This report analyses Asda’s business environment. Asda is one of the most prominent supermarkets in the UK. Consistent with most readings in the strategic management field, the external environment is viewed as comprising of the general environment, which is analysed using the PESTEL framework, and the task environment. The competitive environment, a subset of the task environment, is scrutinised with the help of the five forces framework. On the strength of the analysis carried out, it is concluded that Asda faces a broadly favourable political and economic environment. However, the legal environment is likely to increase compliance costs for the retailer. The technological, ecological, and socio-cultural environments provide threats that Asda must avoid, and opportunities it should exploit. Asda also faces high rivalry, but low threats from buyer bargaining power, supplier power, potential entrants, and substitutes. Thus, the industry can be described as moderate to attractive for Asda. To attain sustainable competitive advantage, Asda needs to align its internal environment to the trends described.
1.0 Introduction
The systems view of the organisation posits that firms are open systems, which are continuously interacting with their environments (Beynon-Davies, 2013). To gain competitive advantage, it is imperative that organisations scan the external environment and calibrate their internal environment to achieve a fit with the external environment (Nabyla, 2014). One of the tools commonly used to evaluate the general environment is the PESTEL framework, which this report uses to analyse Asda’s general environment. Headquartered in Leeds, the UK, Asda is one of the most prominent UK retailers and is owned by Wal-Mart, the world’s biggest retail chain (Denton, 2015). Porter’s five forces framework is then used to evaluate the competitive aspect of Asda’s task environment. A brief conclusion is thereafter presented.
2.0 Analysis of Asda’s General Environment
PESTEL analysis views the external environment as comprising of the political, ecological, socio-cultural, technological, economic, and legal aspects (Henry, 2011).
2.1 Economic Environment
This refers to the impact, which economic factors have on a business organisation. These factors include the rate of employment, the GDP, GDP growth rate, and the rates of inflation and interest, among others (Henry, 2011). The UK is the sixth largest economy in the world, with an estimated GDP of $41.8 trillion by 2013. Its GDP has been consistently expanding, growing from $38.4 trillion in 2010, to $41 trillion in 2011, $41.1 trillion in 2012, and then to $41.8 trillion in 2013 (World Bank, 2015) (See figure 1 below).


Figure 1: GDP trends in the UK. Source: Centre for Retail Research (2015)
A growing GDP, all factors held constant, is likely to increase per-capita and disposable incomes (see figure 2 below), thus increasing demand for Asda’s products. However, this growth has been muted and may not significantly increase retail demand. After having grown by 1.9% in 2010, GDP growth decelerated to 1.6% in 2011, then to 0.7% in 2012. In 2013, UK’s GDP growth rate was 1.7% (World Bank, 2015).


Figure 2: Per Capita Trends. Source: Centre for Retail Research (2015)
The rate of interest in the UK remains historically low, suggesting that consumers can easily take credit to finance consumption, boosting demand for retailers such as Asda. Additionally, inflation rates, as measured by the UK consumer price index (CPI), remain significantly low, which is expected to make goods cheaper and increase demand for Asda’s products. However, fears of deflation in the UK over the coming months could also hit Asda’s sales, as consumers hold back spending in anticipation of even cheaper products (Lambert, 2015).
2.2 Political Environment
The political environment encompasses all the actions of the government, which have the ability to affect an organisation. These include the economic and political systems, political stability in a country, and factors such as trade agreements and barriers (Henry, 2011). The predominant economic system in the UK is the market economy (CIA, 2015). Here, private ownership of the property is guaranteed and demand and supply forces regulate both production and consumption and the allocation of resources. This provides foreign firms such as Asda with the best economic environment, given that the market economy guarantees the protection of contractual rights and private property rights (Williamson et al., 2013). The UK also follows a democratic system of governance (CIA, 2015), which enjoins the strict observance of the rule of law and are accountability to citizens. Therefore, this provides Asda with a more favourable environment for doing business as compared to, for example, an autocratic or constitutional monarchy system (Williamson et al., 2013). The UK also has a long tradition of peaceful regime change and low levels of politically instigated violence. Consequently, it has been ranked among the most politically stable countries in the world. This translates to low levels of political risk and minimises the cost of doing business for Asda (Guardian, 2013).
2.3 Socio-Cultural Environment
Various social-cultural trends transpiring within the UK are likely to affect the operations of Asda. One of the notable trends is the rapid ageing of the UK population. This has been brought about by a rise in life expectancy levels (due to factors such as better healthcare), and a reduction in the rates of fertility. Consequently, the fraction of senior citizens (i.e. those aged above 65) relative to the total population now makes up close to a fifth of the UK’s population and continues to burgeon. Corresponding to this is the reduction in the percentage of the youthful population in the UK. (ONS, 2012) (See figure 3 below).


Figure 3: Rise in UK’s median age. Source: ONS (2012)
UK retail consumers are also increasingly demanding for convenience. This has been triggered by busier and increasingly complex lifestyles. The upshot of this is that retail shopping has become increasingly fragmented (Fagerhult, 2015). Another significant socio-cultural trend likely to impact Asda is the increase in the number of households headed by singles (Barrett, 2014).
The above socio-cultural trends are likely to affect Asda both positively and negatively. The elderly segments are likely to trigger increased demand for anti-aging products, thus creating increased opportunities for sales in this area. Simultaneously, the demand for technology, entertainment, and fashion products, which are mostly demanded by the youth, could possibly decline. This may reduce retail opportunities for Asda. With more single-person households, the number of shoppers (or shopping occasions and volumes) is also likely to decline and affect Asda’s sales volumes (SAS & Verdict, 2012).
2.4 Technological Environment
The significant advances in online technology, coupled with the rise in the number of UK internet users and the growth of e-commerce offer significant opportunities for Asda. The opportunities include expanding the scope of its markets and sales volumes without necessarily having to significantly invest in brick and mortar assets. By 2012, UK online sales were worth £29 billion and made up 9% of total retail sales (UK Government, 2013). It also offers Asda the opportunity to save substantial costs through dis-intermediation of the distribution channels. However, the increased popularity of internet-enabled devices such as smartphones allows retail consumers to engage in comparison-shopping and in the hunt for bargains (Fagerhult, 2015). Asda could lose price-conscious customers to lower cost rivals (Fagerhult, 2015). The development of RFID tags is likely to have a positive effect on Asda’s competitiveness. Specifically, by adopting the use of RFID tags, Asda will be able to better track its inventory and promotions, thus enabling it to better control its promotional and inventory practices (Davis, 2014). By adopting emerging in-store technology such as virtual greeters and electronic mannequins, Asda is also likely to improve the customer’s in-store experience. Moreover, Asda could generate higher sales, as well as higher levels of customer retention and loyalty (Fagerhult, 2015).
2.5 Ecological Environment
Awareness of the importance of the environment has increased in the UK, and necessitated an increased focus on the need for environmental preservation. Accordingly, Asda has been obliged to respond to the demand by “green” consumers for organic products by stocking them in its outlets (Asda, 2015). This is likely to generate more sales for Asda as it seeks to satisfy this segment of the market. However, the increased focus on the need to protect the environment has also led to extra focus being placed on the need to reduce food miles. Consequently, many “green” consumers now prefer to buy their farm produce from local outlets, farm shops, or markets (Centre for Retail Research, 2012). This is likely to shift away some of the purchases from Asda and other retail chains, and to impact negatively on Asda’s sales. Moreover, with the UK government having announced plans to substantially reduce packaging waste by 2020, Asda faces the challenge of adopting recyclable packaging for its products. It also has to undertake other initiatives such as energy efficiency initiatives and to cut back on emissions from its fleet of distribution vehicles (Centre for Retail Research, 2012; Asda, 2015).
2.6 Legal Environment
Asda is subject to a wide variety of UK and EU laws and regulations. These include mo...