1. Chapter 3 Strategic Planning Process:
The External Environmental Analysis

2. Learning Objectives After reading this chapter, you should be able to:
Explain the key external environmental forces.
Describe the nature of the industry environment.
Discuss the five forces that make up the industry environment.
Discuss the importance of monitoring the external and industry trends and events.
Explain how to analyse the external environment using the positive and negative method and the weighted score method.

3. External Environment
The external environment represents factors which are beyond the control of an organization.
It is divided into two categories:
1. General environment
2. Industry environment

4. The General and Industry Environments
The general environment, also known as the macro environment, includes the environmental factors that have an impact on all organizations and firms within the company.
Easily remembered by the simple acronym PEST
P : Political factors
E : Economic factors
S : Socio-cultural factors
T : Technological factors

6. The General and Industry Environments (cont.)
The industry environment or the micro environment refers to factors that directly affect the firm and its competitive responses.
Threats of new entrants
The bargaining power of the supplier
The bargaining power of the buyers (customer)
Threats of substitute products and services
Rivalry among the existing firms.
These factors have the ability to affect the firm’s profitability and shape the competition in an industry.

7. The General and Industry Environments (cont.)
When formulating a business strategy, one of the most important aspect is to consider the firm’s competitor.
Conduct a competitor analysis.
Involves analyzing the competitor’s strengths, weaknesses, strategies and capabilities.
Competitor analysis is an important element when analyzing the external environment.
Helps company to identify opportunities which can then be matched with the firm’s core competencies to create competitive advantage.

8. External Environmental Analysis
This analysis provides information to managers regarding the key trends and changes in the external environment, such as the following:
Population shifts
Changing demographics (e.g. aging population)
Information technology
Advancement in technology creates new opportunities but also destroy the existing one.
New government regulations

9. External Environmental Analysis (cont.)
External environmental analysis reveals:
– Opportunities: External environment factors which can help the organization improve its performance and achieve its strategic objectives. (e.g. The rising petrol price is an opportunity for bicycle shops which have reported an increase in sales.)
– Threats: External environment factors which can hinder an organization’s performance and prevent the organization from achieving its strategic objectives

10. External Environmental Analysis (cont.)
Based on the external environmental analysis, managers formulate strategies that:
Take advantage of opportunities
Avoid/reduce impact of threats
Sources of information for external environmental analysis include customer surveys, market surveys, periodicals, journals, reports, books, newspapers, conferences and the Internet.

11. Factors in the General Environment
Political and Legal Factors
Looks at how the government can influence organizations
Comes from government and powerful group and institutions.
Examples:
employment laws
environmental regulations
competitive regulations
government leadership
tax policies
quotas on goods produced
consumer protection laws

12. Factors in the General Environment (cont.)
Economic Factors
Unemployment rates
Inflation rates
Consumer and investor confidence
Taxation level
Inventory levels
Currency exchange rates
Gross Domestic Product (GDP)
Read text chapter 3- pg 36 – pg 38

13. Factors in the General Environment (cont.)
Socio-cultural Factors
Concerned with changes in
society’s attitudes,
cultural values
demographic (age, gender, race, family size, etc),
lifestyle,
population shifts,
education levels of population,
immigration/emigration
Health
Living standard etc..

14. Factors in the General Environment (cont.)
Socio-cultural Factors
Include factors such as:
Demographic factors (e.g. population size and distribution, age distribution, education levels)
Attitudes towards materialism, capitalism, free enterprise

15. Factors in the General Environment (cont.)
Technological Factors
Include factors such as:
Rate of technology transfer
Energy use and cost
New products and services of competitors
Changes in Internet
Changes in mobile technology
Technological breakthroughs can create new industries or create new products and services which might render existing products and services redundant.

16. Factors in the Industry Environment
A set of factors that directly affects a firm
Also known as micro environment
These factors are analysed to assess how the forces of the organization’s immediate environment affect the attractiveness or profitability potential of the firm.
Michael Porter’s Five Forces Model (1980) is one of the most widely used and best known conceptual frameworks to assess the industry environment.

17. Industry Environment Analysis/Competitive Analysis: Michael Porter’s Five-Forces Model
Potential development
of substitute products
Rivalry among
competing firms
Bargaining power
of suppliers
Bargaining power
of consumers
Potential entry of new competitors

18. Factors in the Industry Environment (cont.)
Threat of New Entrants
New entrants to an industry can raise the level of competition
The threat of new entrants depend on the barriers to entry
Barriers of entry can be affected by economies of scale, product differentiation, capital requirements, switching costs and government regulations.

19. Factors in the Industry Environment (cont.)
Bargaining Power of Suppliers
A supplier group is powerful when
the suppliers’ goods are critical to the buyers’ marketplace success.
the inputs required by the buyers are unique, making it costly to switch suppliers.
the buyers’ inputs do not represent a significant portion of the supplier’s business.

20. Factors in the Industry Environment (cont.)
the buyers’ inputs are only available from a small group of suppliers.
the suppliers can sell directly to the firm’s customers, bypassing the need for the firm.

21. Factors in the Industry Environment (cont.)
Bargaining Power of Buyers
Customers (or buyer groups) have the most power when
they are large and purchase most of the industry’s output.
the industry has many small suppliers supplying the product and the buyers are large.
the products represent a relatively large expense for customers and sales of the product being purchased account for a significant portion of the seller’s annual revenues.

22. Factors in the Industry Environment (cont.)
they have access to sufficient information and are able to evaluate the competitive offerings.
the customers could switch to another product without incurring significant switching cost because the suppliers’ products are not unique or undifferentiated.
the customers could possibly make the product themselves.

23. Factors in the Industry Environment (cont.)
Substitute Products
Substitute products can be a threat when
the product is undifferentiated and customers can easily switch away from one supplier to another supplier with little or insignificant switching costs.
the customers or buyer groups are price sensitive and customers have little brand loyalty.
there is no real benefit offered by the products in the industry and consumers can do without the product offered by the industry.

24. Factors in the Industry Environment (cont.)
Rivalry Among Competitors
Rivalry among competitors is the strongest of the five competitive forces and can vary widely among industries.
If rivalry among the competitors is intense, companies in the industry may need to enhance their product offerings to keep customers and firms may earn less profit.

25. Factors in the Industry Environment (cont.)
Rivalry among competitors can be most intense when
the industry has two or three dominant firms which are battling to be the dominant firms in the industry.
there are numerous competitors in the industry.
the competitors are relatively equal in size and power.
the firms are competing in a slow or shrinking industry.

26. Factors in the Industry Environment (cont.)
there are high fixed costs of production.
the products are undifferentiated and are viewed by customers as commodities.
there are high costs for exiting the business.

27. Reference
Zainal Abidin Mohamed, Jo Ann Ho, Foong Yee Wong (2010) “Strategic Management” ,Oxford University Press, ISBN ,