1. Evaluating a Company’s External Environment
Future Minds
How the digital age is changing our minds, why this matters, and what we can do about it
Richard Watson
Jennifer I. Malabrigo
October 24, 2011

2. Introduction
A company’s environment consists of both external and internal factors.
The external business environment refers to the range of factors that can influence the operation and performance of a business. The business has limited control over these factors. The external business environment includes such things as laws, regulations, social and cultural influences and changes in economic conditions
Environment must be scanned so as to determine development and forecasts of factors that will influence organizational success.
The external business environment refers to the range of factors that can influence the operation and performance of a business. The business has limited control over these factors. The external business environment includes such things as laws, regulations, social and cultural influences and changes in economic conditions.
The Factors affecting an organization can usually be classified as;
Internal Factors
Strengths -Positive tangible and intangible attributes, internal to an organization. They are within the organization’s control .
Weaknesses -Factors that are within an organization’s control that detract from its ability to attain the core goal. In which areas might the organization improve?
External Factors
Opportunities -External attractive factors that represent the reason for an organization to exist and develop. What opportunities exist in the environment which will propel the organization?
Identify them by their “time frames”
Threats -External factors, beyond an organization’s control, which could place the organization’s mission or operation at risk. The organization may benefit by having contingency plans to address them should they occur
Classify them by their “seriousness” and “probability of occurrence”

3. External Environmental Analysis
A continuous process which includes
Scanning: Identifying early signals of environmental changes and trends
Monitoring: Detecting meaning through ongoing observations of environmental changes and trends
Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends
Assessing: Determining the timing and importance of environmental changes and trends for firms’ strategies and their management
External Environmental Analysis is a continuous process which includes:
Techniques in environmental scanning involve two phases: Information gathering and Evaluation
1) Verbal & Written Information:
verbal information includes, information obtained by direct talk with people, by attending seminars, meetings, etc..
Written or documentary information includes both published and unpublished materials
2) Search and Scanning:
this involves research for obtaining the required information
3) Spying:
Even though it is not considered as ethical, spying to get information about the competitor is not uncommon
These 3 pertains to source of information/methods of gathering information
4) Forecasting:
done by corporate planners or other staff personnel or consultants
This pertains to use the information gathered by above mentioned 3 methods for picturing the future scenario.

4. External Analysis Stages
Macro-environment
Micro-environment
Competitor analysis
Market analysis
Analysing the external environment involves breaking a complex inter-related reality into sets of issues to make the analysis manageable. The main sets of issues are usually:
Macro-environment – these are broad trends shaping the national and international environment in terms of political, economic, social and technological trends (i.e. The key drivers ).
Micro-environment – this is the operating environment or industry sector in which the firm competes. It addresses a range of issues such as suppliers, customers, competitive intensity, threat of new entry and of substitute products arising (i.e. the ‘five-forces’ analysis).
Competitor analysis – seeks to understand the rival offers from other firms seeking to serve the same customers and to out manoeuvre their managers with our innovation and competitive moves.
Market analysis seeks to evaluate the current needs of today’s customers and the emerging needs of tomorrow’s customers so new products can be anticipated. These will be different in different market segments

5. Company’s Macro-environment
Relates to the larger forces having an impact on society as a whole.
A company has little influence on these forces and therefore can only adapt its marketing mix to account for the resulting opportunities and threats.

6. Major forces of the macro-environment

7. Company’s Macro-environment
Demographic Forces
Trends in the physical characteristics of population such as:
Changing age structure
Changing family structure
Geographic shifts in population
Higher education level & more white collar job holders
Increasing globalization of cities
Characteristics of the population
e.g., age, race, gender, sexual orientation and social classes
Domestically - falling birth rates, falling death rates, increase in minority populations
Internationally – birth rates are increasing in some of the poorest (and most underserved) populations of the world.

8. Company’s Macro-environment
Economic Forces
Economic Conditions includes the impact of economic factors like Interest rates, inflation, changes in disposable income and the stage of general business cycle e.g when consumer’s incomes fall their confidence about job security declines, they will postpone purchasing any thing that is not necessary
Important factors are:
Economic conditions
Economic policies
Economic systems
Economic condition
The economic conditions of a country –for example, the nature of the economy, the stage of development of the economy, economic resources, the level of income, the distribution of income and assets, etc.- are among the very important determinants of business strategies.
In a developing country, the low income may be the reason for the very low demand for the product.
Some types or categories of business are favourably affected by government policy, some adversely affected, while it is neutral to some others.
E.g. a restrictive import policy may greatly help the import competing industries, while a liberalisation of the import policy may create difficulties for such industries.
Economic System
The scope of the private business depends on the economic system.
The freedom of the private enterprise is the greatest in the free market economy.

9. Natural Environment Forces
Company’s Macro-environment
Natural Environment Forces
Natural trends include those natural resources used in production or those affected by marketing activities
Raw material shortages
Increase in energy cost
Increase pollution levels
Increase in Governmental intervention in natural resource management
Geological and ecological factors, such as natural resources endowments, weather and climatic conditions, topographical factors, location aspects in the global context, port facilities etc., are relevant to business.
Differences in geographical conditions between markets may some times call for changes in the marketing mix. Geographical and Ecological factors also influence the location of certain industries. E.g. industries with high material index tend to be located near the raw material sources.
Topographical factors may affect the demand pattern
E.g.. In hilly areas with difficult terrain, jeeps may be in a greater demand than cars.
Ecological factors have recently assumed great importance. The depletion of natural resources, environmental pollution and the disturbance of ecological balance have caused great concern

10. Company’s Macro-environment
Technological Forces
Changes in technology that affect the workplace, and the products and services consumers expect.
e.g., Information technologies, entertainment technologies, product technologies.
Consists of forces that affect new technology, new product development and market opportunities
Faster pace of technological change
Shorter PLC
Higher R&D budgets
Concentration on minor improvements
Increased regulations
Business prospects demands availability of certain physical facilities
E.g. demand for electrical appliances is affected by the extent of electrification and the reliability of power supply.
Demand for LPG stoves depend on rate of growth of gas connections
differing technological environment of different markets may call for product modifications
E.g. Many appliances are designed for 110 V in USA. They should be converted for 240v in India
Technological developments may increase or decrease the demand for some existing products
E.g. voltage stabilizers help increase in sale of electrical appliances in markets characterised by frequent voltage fluctuations
Introduction of TVs, Refrigerators, etc. with in-built stabilizers adversely affects the demand for voltage stabilizers.

11. Socio-cultural Forces
Company’s Macro-environment
Socio-cultural Forces
Attitudes of society towards work, careers, products, services and consumer activism.
e.g., concern for quality of life, birth rates, woman in the work force, health consciousness, respect for intellectual property, desire for “green retailing”
Major factors are:
the buying and consumption habits of people,
their language beliefs and values,
customs and traditions,
tastes and preferences,
Education
Strategy should be appropriate in the socio-cultural environment.
Eg: nestle brews a very large variety of instant coffee to satisfy different national tastes
Even when people of different cultures use the same product; the mod of consumption, conditions of use, purpose of use or the perceptions of the product attributes may vary so much so that the product attributes, method of presentation, positioning or method of promoting the product may have to be varied to suit the characteristics of different markets.
E.g.: Vicks Vaporub, the popular pain balm is used as mosquito repellent in some tropical countries

12. Political/Legal Forces
Company’s Macro-environment
Political/Legal Forces
Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.
Has close relationship with the economic system and economic policy.
In many countries regulations to protect consumer interests have become stronger.
Some governments specify certain standards for the products to be marketed in the country; some even prohibit the marketing of certain products.
Promotional activities are subject to various types of controls.
Like in India , Advertisement of alcoholic product is prohibited.
and the packages must carry “injurious to health” warnings
Trends in the legal and political environment include
Increased legislation regulating business
Singapore’s Fair Trading Act (impending)
Changing government agency enforcement
Growth of public interest groups
Regional groupings
ASEAN FTZ

13. International Environment
Company’s Macro-environment
International Environment
Particularly important for the industries directly depending on imports or exports and import-competing industries
Recession, economic boom, liberalization
Major international developments have their spread effects on domestic business.
E.g. Oil price hikes increased the cost of production and the prices of certain products such as fertilizers , synthetic fibres. So usually, the demand for natural fibres and manures increased.
Also demand for automobiles that economise energy consumption got increased.
The oil crisis also promoted some companies to resort to demarketing
“demarketing” refers to the process of cutting consumer demand for a product back to the level that can be supplied by the firm.
E.g. The Indian Oil Corporation have publicised tips on how to cut oil consumption

14. Company’s Micro-environment
This is the operating environment or industry sector in which the firm competes. It addresses a range of issues such as suppliers, customers, competitive intensity, threat of new entry and of substitute products arising

15. Major forces of the micro-environment

16. What Forces Are at Work to Change Industry Conditions?
Industries change because forces are driving industry participants to alter their actions
Driving forces are the major underlying causes of changing industry and competitive conditions 16

17. Industry Competition
Different industries can sustain different levels of profitability; partly due to the difference in industry structure
Porter’s Model of Competition, commonly known as Porter’s Five Forces provides a framework for analyzing the influence of the forces on the industry to determine the industry’s profitability and competitiveness
What Forces Are at Work to Change Industry Conditions?
Industries change because forces are driving industry participants to alter their actions
Driving forces are the major underlying causes of changing industry and competitive conditions

18. Porter’s Five Forces
The threat of entry of new competitors (new entrants)
The threat of substitutes
The bargaining power of buyers
The bargaining power of suppliers
The degree of rivalry between existing competitors

19. Potential New Entrants
Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents.
Firms can create “barriers to enter”
Barriers of entry are desirable for entrenched firms
Threat of New Entrants
New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include
- Economies of scale - Capital / investment requirements - Customer switching costs - Access to industry distribution channels - The likelihood of retaliation from existing industry players.

20. Barriers to Entry Sizable economies of scale
Absolute cost advantages
Proprietary learning curve
Access to inputs
Government policy
Economies of scale
Capital requirements
Brand identity
Switching costs
Access to distribution
Expected retaliation
Proprietary products
Sizable economies of scale
Cost and resource disadvantages independent of size
Brand preferences and customer loyalty
Capital requirements and/or other specialized resource requirements
Access to distribution channels
Regulatory policies
Tariffs and international trade restrictions
Ability of industry incumbents to launch vigorous initiatives to block a newcomer’s entry
(Source: Michael Porter, “On Competition”)

21. Threats of Substitutes
Buyer willingness to substitute
Relative price performance of substitutes
Switching costs
Substitutes matter when customers are attracted to the products of firms in other industries
The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on:
- Buyers' willingness to substitute - The relative price and performance of substitutes - The costs of switching to substitutes
Examples:
Sugar vs. artificial sweeteners
Eyeglasses and contact lens vs. laser surgery
Newspapers vs. TV vs. Internet
How to tell whether a substitute products are a strong force?
Whether substitutes are readily available and attractively priced
Whether buyers view substitutes as being comparable or better
How much it costs end users to switch to substitutes
(Source: Michael Porter, “On Competition”)

22. Buyer Power Bargaining Power of Buyers
Bargaining leverage
Buyer volume
Buyer information
Brand identity
Price sensitivity
Threat of backward integration
Product differentiation
Buyer concentration vs. industry
Substitutes available
Buyers' incentives
Bargaining Power of Buyers
Buyers are the people / organisations who create demand in an industry
The bargaining power of buyers is greater when
There are few dominant buyers and many sellers in the industry - Products are standardised - Buyers threaten to integrate backward into the industry - Suppliers do not threaten to integrate forward into the buyer's industry - The industry is not a key supplying group for buyers
Who are your key buyers? - who provides our revenues?
Can they force:
lower prices, higher quality and service – affect the terms and conditions of the exchange?
What affect buyers’ power?
Volume/Frequency of purchase
Portion of buyer’s costs
Lack of differentiation
Low switching costs
Self-source or backwards integration
Criticality
Buyers’ knowledge
Buyers’ profitability
(Source: Michael Porter, “On Competition”)

23. Supplier Power Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or differentiation
Switching costs of firms in the industry
Presence of substitute inputs
Threat of forward integration
Cost relative to total purchases in industry
Suppliers are the businesses that supply materials & other products into the industry. The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when:
There are many buyers and few dominant suppliers - There are undifferentiated, highly valued products - Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets) - Buyers do not threaten to integrate backwards into supply - The industry is not a key customer group to the suppliers
Who are you key suppliers?
Suppliers are a strong competitive force when:
Only a few suppliers exist
Few substitutes
Buyers not important customers to suppliers
Suppliers provide a product crucial to production process, and/or significantly affects product quality
It is costly to switch suppliers
Forward integration a credible threat
They can supply a component at a lower cost
(Source: Michael Porter, “On Competition”)

24. Degree of Rivalry Intensity of Rivalry
Industry growth
Industry concentration ratio
Fixed costs/Value added
Product differentiation
Buyers' incentives
Exit barriers
Intensity of Rivalry
The intensity of rivalry between competitors in an industry will depend on:
Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less
-Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry
The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader
- The structure of industry costs - for example, industries with high fixed costs encourage competitors to fill unused capacity by price cutting
- Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier
- Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry.
(Source: Michael Porter, “On Competition”)

25. Strategic implications of the Five Competitive Forces
Competitive environment is unattractive from the standpoint of earning good profits when:
Rivalry is vigorous
Entry barriers are low and entry is likely
Competition from substitutes is strong
Suppliers and customers have considerable bargaining power
Competitive environment is ideal from a profit-making standpoint when:
Rivalry is moderate
Entry barriers are high and no firm is likely to enter
Good substitutes do not exist
Suppliers and customers are in a weak bargaining position

26. The Competitor Analysis

27. Competitor Analysis
It seeks to understand the rival offers from other firms seeking to serve the same customers and to out manoeuvre their managers with our innovation and competitive moves.

28. Competitive Analysis Is price competition vigorous?
Who are your competitors?
Do you know about your close competitors’ strengths and weaknesses?
How detail should we analyze the competition?
Use a systematic approach
Analysis competition at various levels Important in concentrated industries (few, large share competitors)
Benefits
forecast future actions, predict reactions
can we influence rivals’ behavior?
Is price competition vigorous?
Active efforts to improve quality?
Are rivals racing to offer better performance features? better customer service?
Lots of advertising/sales promotions?
Active efforts to build a stronger dealer network?
Active product innovation?
Active use of other weapons of rivalry?

29. Levels of Competition
Generic competition—e.g. Honda against Silver Sea Cruise for the same consumer dollars
Form competition—e.g. Toyota against manufacturers of other vehicles that provide the same service such as Yamaha (motorcycle)
Industry competition—e.g. Honda against Mercedes, Lexus etc who make the same products or class of products (different prices)
Brand competition—e.g. Honda against Toyota, Nissan etc. who offer similar products and service to the same customers at similar prices

30. Common Types of Driving Forces
Changes in long-term industry growth rate
Changes in who buys the product and how they use it
Product innovation
Technological change/process innovation
Marketing innovation
Entry or exit of major firms
Diffusion of technical knowledge
Increasing globalization of industry
Changes in cost and efficiency
Market shift from standardized to differentiated products (or vice versa)
New regulatory policies and/or government legislation
Changing societal concerns, attitudes, and lifestyles
Changes in degree of uncertainty and risk
Industries change because forces are driving industry participants to alter their actions Driving forces are the major underlying causes of changing industry and competitive conditions
Where do driving forces originate?
Outer ring of macroenvironment
Inner ring of macroenvironment
Three keys steps in analyzing driving forces:
STEP 1: Identify forces likely to exert greatest influence over next years, Usually no more than factors qualify as real drivers of change
STEP 2: Assess impact
Are driving forces acting to cause market demand for product to increase or decrease?
Are driving forces acting to make competition more or less intense?
Will driving forces lead to higher or lower industry profitability?
STEP 3: Determine what strategy changes are needed to prepare for impacts of driving forces

31. Strategic Group Mapping
Firms in same strategic group have two or more competitive characteristics in common
Have comparable product line breadth
Sell in same price/quality range
Emphasize same distribution channels
Use same product attributes to appeal to similar types of buyers
Use identical technological approaches
Offer buyers similar services
Cover same geographic areas
Procedures in constructing strategic group map
STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another
STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics
STEP 3: Assign firms that fall in about the same strategy space to same strategic group
STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales

32. The Market Analysis

33. Market Analysis
It seeks to evaluate the current needs of today’s customers and the emerging needs of tomorrow’s customers so new products can be anticipated. These will be different in different market segments .

34. The Industry Life Cycle
2-34

35. Identification of Key Success Factors?
KSFs are product attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability
Key Success Factors (KSFs) are competitive factors and attributes that affect every industry member’s ability to be competitively and financially successful.
KSFs are those particular attributes that are so important that they spell the difference between
Profit and loss
Competitive success or failure
KSFs can relate to
Specific strategy elements
Product attributes
Resources
Competencies
Competitive capabilities
Market achievements
The answers to 3 questions often help pinpoint an industry’s KSFs
On what basis do customers choose between competing brands of sellers?
What resources and competitive capabilities does a company need to have to be competitively successful?
What shortcomings are likely to place a company at a significant competitive disadvantage?
Rarely are there more than factors that are truly key to the future financial and competitive success of industry members

36. The Components of a Company’s Macro-Environment
SUMMARY   
External analysis involves four main areas: PESTEL factors, Industry analysis, competitor profiling and market analysis.
The macro-environment can be analyzed in terms of PESTEL factors.
Industries and sectors can be analyzed using Porter’s Five Forces model.
Industry changes can be analyzed through industry life cycle & hyper competitive models of competition.
The inner layer of the environment can be analyzed with strategic group analysis, market and segment analysis. 36

37. Factors to Consider in Assessing Industry Attractiveness
Involves assessing whether the industry and competitive environment presents a company with an attractive or unattractive opportunity
for earning good profits
Factors to consider:
Industry growth potential
Whether competitive forces are growing stronger/weaker
Whether driving forces will favorable/unfavorably impact industry profitability
Degree of risk and uncertainty in industry’s future
Whether the industry confronts severe problems
Firm’s competitive position in industry vis-à-vis rivals
Firm’s potential to capitalize on industry opportunities or the vulnerabilities of weaker rivals
Whether a firm has sufficient competitive strength to defend against unattractive industry factors
As a general proposition
If an industry’s overall profit prospects are above average, the industry environment is basically attractive
If an industry’s overall profit prospects are below average, the industry environment is basically unattractive
However
Attractiveness is relative, not absolute. Conclusions about attractiveness have to be drawn from the perspective of a particular company.
An industry is unlikely to be equally attractive or unattractive to all industry members
Industry environments attractive to strong competitors may be unattractive to weak competitors
A favorably positioned company may survey an industry environment and see opportunities that weak competitors have little or no ability to capture
Industry environments attractive to insiders may be unattractive to potential entrants
Under certain circumstances, a firm uniquely well-situated in an otherwise unattractive industry can still earn good profits by taking sales and market share away from weaker competitors

38. Core Concept: Assessing Industry Attractiveness
The degree to which an industry is attractive or unattractive is not the same for all industry participants or potential entrants.
The opportunities an industry presents depend partly on a company’s ability to capture them.
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39. An Interview with Michael E. Porter, Professor, Harvard University
An Interview with Michael E. Porter, Professor, Harvard University. Porter's five competitive forces is the basis for much of modern business strategy. Understand the framework and how to put it into practice

40. Thank you and God bless us all!
End of my presentation
Thank you and God bless us all!