INSTRUCTIONS: Please RESPOND to this answer from the Point of view as a student. Use credible sources and respond as if you are a manager of a marketing agency. Tell this student what your marketing agency would think of each of these answers from a Management perspective:
We have discussed in previous weeks the importance of internal analyses, understanding competitors in hopes of bolstering strategy and gaining competitive advantage. In addition to internal analyses, it is also imperative to understand the external context of the environment in which a firm operates. Not only is the external environment a source of business opportunities, it is also a source of threats, “forces that may impede the successful implementation of a strategy” (Carpenter & Sanders, 2008, p. 95). In hopes of understanding the external environment, it is necessary to gain an understanding of the macro environment, as well as the industry environment. The industry environment consists of firms operating in the same industry, in which “analysis helps managers determine the nature of the competition, the possible sources of imperfect competition in the industry, and the possibility of the firm’s earning above-normal returns” (Carpenter & Sanders, 2008, p. 102). The macro environment takes into account the larger political, economical, social, technical, environmental and legal issues that have impact on a firm (Carpenter & Sanders, 2008, p. 97).
In my workplace relating to real estate development, the external analyses are crucial components of strategy formulation. With every potential business endeavor, due diligence includes an in depth industry and macro environmental assessment. Last week I shared an example of how the VRINE model would apply to a generic situation in real estate development. In the scenario, I explain the opportunity being a piece of vacant land within a heavily developed suburban area, “prime” for development. I will continue with this example for the purpose of explaining how industry and macro environmental analyses would aid in strategy development, and in the determination of whether or not to pursue the opportunity. When an opportunity arises (in this case, a vacant piece of property), it is necessary to identify which type of development would yield the highest and best use. In real estate this highest and best use refers to the “reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and the results in the highest value” (Duncanbrown.com, n.d., n.p.). Upon determining the highest and best use, it is then possible to evaluate the industry in which the firm would be competing. (E.g. residential, commercial, etc.)
Equipped with an understanding of the industry, it is logical to further explore the external environment in a macro environmental assessment. The PESTLE analysis is a great tool that provides the framework for such an assessment. “It helps managers gain a better understanding of the opportunities and threats they face and consequently aids them in building an better vision of the future business landscape and how the firm might compete profitably” (Carpenter & Sanders, 2008, p. 98). The following is an example of how a PESTEL analysis would apply to the aforementioned generic real estate development opportunity.
Political: This is a critical component to the viability of a project. In order to develop vacant land, entitlements must be achieved. These entitlements (various permits and approvals necessary to develop) come from political agencies such as the city, county, state, and federal government. Evidently, understanding the political dynamics in the subject location is absolutely imperative.
Economic: A project is undertaken in hopes of earning economic profits, thus it is necessary to understand macro economic factors that will impact such as pursuit. “Factors such as inflation rates, interests rates, tariffs, the growth the local and foreign national economies, and exchange rates are critical” (Carpenter & Sanders, 2008, p. 98). Economic factors should also include supply and demand assessments, as well as resource costs assessments (E.g. materials, labor, etc.).
Sociocultural: Demographic assessment of the subject area is important, as they will provide insight in regards to attitudes towards consumerism, environmentalism, among many other factors. In California especially, environmentalism is a hot button, as CEQA (California Environmental Quality Act) provides anyone with the legal authority to challenge a project on just about any basis. In light of this, sociocultural analysis is imperative.
Technological: With the incredible rate of technological advancement, it is necessary to gain an understanding of new technological capabilities relevant to the industry. This could include new software aiding in the design and development, new tools, new materials, etc.
Environmental: In real estate development consideration of the environmental impacts is a must. How the development can reduce it’s carbon footprint, and how the development can embrace sustainability are just a few environmental considerations. As mentioned, CEQA requires extensive consideration of the environment with respect to proposed developments. Consequently, this is one of the largest cost items in the development process.
Legal: “Legal factors reflect the laws and regulations relevant to the region and the organization” (Carpenter & Sanders, 2008, p. 100). In the aforementioned sections I give mention to CEQA, and how it is one of the largest cost items in the development process. This is because projects are constantly sued under the Act, and lawsuits drag on for years and years. The legal component in regards to real estate development is directly related to the environmental and sociocultural analyses.
Carpenter, Mason A. and Sanders, Wm. Gerard. (2008). Strategic Management: A Dynamic Perspective. Chapter 4. Upper Saddle River, NJ. Pearson Education, Inc.
Duncanbrown.com. (N.d.). Highest and Best Use. Retrieved November 3, 2016, fromhttp://www.duncanbrown.com/highest-and-best-use