1. Lecture 2
External Environment Analysis & Globalisation

2. SM Process: Strategic Position
Strategic position considers the current position of the firm in the light of future changes in the external global environment and its internal resource capabilities.
How to analyse an organisation’s position in the external, global environment (L2)
How to analyse the a firm’s internal resources, capabilities and core competencies (L3).

3. Learning Outcomes
Assess macro-environmental influences and the major drivers of change.
Understand how industry structure drives competition and determines the level of industry profitability
Analyse industry attractiveness by applying the 5 forces model and consider how changes to the forces can affect future profitability
Define international business, globalisation, and the multinational company (MNC)
Examine the impact of globalisation on the external macro-environment.

4. Strategic Position Analysis
Internal Resources & Capabilities
Strengths Weaknesses
Opportunities
Threats
External Environment

5. External Environment Analysis O & T
Opportunity
A trend in the external environment which potentially has a positive impact on the organisation and, if exploited, will improve it’s performance.
Threat
A trend in the external environment which potentially has a negative impact on the organisation and, if not addressed, will hinder it’s performance.

6. Spheres of External Analysis
Macro-Environment
Industry Competitive Environment
Competitors
Organisation

7. Key Questions: Macro Environment
Identify external trends –
which are the most important environmental forces
affecting the organisation?
Assess the impact of the trend on the industry and the firm (+ opportunity or - threat)
Evaluate trend and impact to derive key drivers from the external environment - which forces are likely to have a significant influence on the organisation in the future?
Build alternative scenarios from key drivers.
Useful framework = PEST ANALYSIS

8. Building your Analysis
Identify the PEST factors affecting the organisation and monitor changes.
Forecast/project the trends into the future.
Impact analysis - anticipate the impact of the trends on the strategy of the organisation and the expected timing of events.

9. P = Political and legal factors E = Economic + globalisation
PEST
Identifies trends but remember your impact analysis, leading to
key drivers for change
P = Political and legal factors
E = Economic + globalisation
S = socio-cultural factors + environment
T = technological developments
Johnson et al expand the framework to PESTLE
They have a separate set of trends for legal factors (L) and a 2nd E for changes in the natural environment - green issues.

10. From Macro to Industry Analysis
The national/ global economy
Technology
The Competitive
Environment
Suppliers
Competitors
Customers
Social -Cultural,
Environment
Political/Legal
The Macro - Environment is difficult for the organisation to influence.
The Macro Environment directly effects the Industry Competitive Environment. 3

11. Porter’s Model Use the 5 Forces Model to evaluate competiveness:
Assess profitability – industry attractiveness
Understand forces influencing competition
Identify which forces are critical to future competitiveness
Opportunities & Threats to support strategy choices:
Can the firm develop strategies to influence the key forces?
How can a firm develop a position against the forces & rivals to gain competitive advantage?

12. Porter’s Five Forces Model
Competition in an industry is more than the visible rivalry between competitors, you must in addition to competitive rivalry, consider 4 other forces:
Demand side (prices) – bargaining power of buyers
Supply side (costs) – bargaining power of suppliers
Potential for new entrants (more competitors)
Threat from substitute products (less demand)

13. Potential
entrants
Threat of
entrants
Bargaining
power
Suppliers
COMPETITIVE
RIVALRY
Buyers
Bargaining
power
Threat of
substitutes
Substitutes

14. Industry Structure and Profitability
Force Profitability Profitability
higher if lower if
Barg’ing power of suppliers weak suppliers strong suppliers
Bargaining power of buyers weak buyers strong buyers
Threat of new entrants high entry barriers low entry barriers
Threats from substitutes few substitutes many substitutes
Competitive rivalry little rivalry intense rivalry
Environment Attractive Unattractive
Analytical task: assess the influence of each force- weak/medium/strong
using the factors which influence each force. What are these factors?

15. The Threat of Entry
How easy it is for new potential competitors to enter the industry depends on the height of the barriers to entry:
Sources of barriers to entry are one or more of:
Capital requirements
Economies of scale
Absolute cost advantage
Product differentiation
Access to channels of supply & distribution
Legal and regulatory barriers
Expected Retaliation 9

16. Power of Buyers Are the buyers concentrated v. the competitors?
Are the switching costs high or low?
High or low product differentiation?
Does the buyer purchase a large portion of industry output?
Is their a threat of vertical backwards integration?

17. Power of Suppliers Are the suppliers concentrated v. the competitors?
Are the competitors a significant customer to the supplier group?
Are the suppliers inputs critical to competitor’s success?
(high or low product differentiation?)
Are the switching costs high or low?
Is their a threat of vertical forwards integration?

18. Threat of Substitutes
Not to be confused with other competitor products, substitutes meet similar customer needs but are meet by players outside the industry. The threat depends on:
the buyers’ propensity to substitute
the price-performance characteristics of substitutes. 8

19. Visible Signs of Rivalry
Using price competition
Advertising battles
Making new product releases
Increasing consumer service levels

20. Degree of Competitive Rivalry
Competitive Rivalry tends to be more intense when:
There are numerous competitors or a smaller number of equally balanced competitors
Industry growth is slowing and entering maturity
There are high fixed costs to cover
Products have limited differentiation (approaching commodity status) and low switching costs
There are high exit barriers.

21. Industry Structure and Profitability
Force Profitability Profitability
higher if lower if
Barg’ing power of suppliers weak suppliers strong suppliers
Bargaining power of buyers weak buyers strong buyers
Threat of new entrants high entry barriers low entry barriers
Threats from substitutes few substitutes many substitutes
Competitive rivalry little rivalry intense rivalry
Environment Attractive Unattractive
Analytical task: assess the influence of each force- weak/medium/strong
using the factors which influence each force. What are these factors?

22. Applying the Five Forces Model
Forecast Industry Profitability by:
identifying and evaluating the key forces influencing the future competitive environment and their impact on profitability
Review strategies to improve industry profitability:
which key forces are lowering profitability
which key forces can be changed in the future by individual firm strategy or in collaboration between existing or potential competitors

23. Strategic Groups Strategic Groups
A group of firms within an industry which compete on a similar bases and share similar characteristics – a subset of the industry ‘s 5 forces.
Examples of characteristics defining strategic groups are:
Product range
Geographic coverage – markets, production.
Market segments
Distribution channels
Technology
Organisation size
Industry examples:
Car industry, Airlines, Supermarkets

24. Global Environment: What’s Different?
Multiple Operating Environments
Diverse PEST trends impacting value chain e.g. consumer preferences, distribution channels
Responding to diverse host governments and cultures
Currency risks impacts on costs and revenues
Organisational complexity and diversity
Integration of operating units across time zones, languages and cultures

25. Summary
External environment analysis identifies future threats and opportunities
There are 3 potential levels of analysis: macro-environment (PEST), industry competitive environment (5 Forces), intra-industry strategic groups (SGA).
In PEST: discuss trend, assess impact, identify key drivers of future change.
In 5 Forces: assess each force by analysing underlying factors then conclude on the attractiveness of industry and key forces impacting future structure of industry competition
Refine 5 forces analysis further through SGA.