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By: Dr. Chalchissa A. Associate Prof.
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By: Dr. Chalchissa A. Associate Prof.
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CHAPTER FOUR

External Environment

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CHAPTER OBJECTIVE
CHAPTER OBJECTIVE

n After studying this chapter, you should be able to do the

following:

1.Describe how to conduct an external strategic-management

audit.

2. Discuss 10 major external forces that affect organizations:

economic, social, cultural, demographic, environmental,
political, governmental, legal, technological, and competitive.

3. Describe key sources of external information, including the

Internet
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Purpose of External Analysis
o To understand the external environment as it affects the enterprise
o To identify opportunities and threats of environment
• Opportunity
o A condition in the general environment that helps a company achieve
strategic competitiveness

• Threat
o A condition in the general environment that may hinder a company’s
efforts to achieve strategic competitiveness

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 Analysis of the External Environments

§ 3 levels of analysis:
§ General changes in business(Macro) environment
• Focused on the future

§ Changes within the industry

• Focused on factors and conditions influencing a firm’s
profitability within an industry

§ Activities of competitors and other specifics

• Focused on predicting the dynamics of competitors’ actions,

responses and intentions

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Importance of External Environmental Analysis

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External Environmental Analysis…

§ 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
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Steps in Environmental
Analysis
Assess the nature of the
environment

Audit environmental
influences

Identify key
competitive forces

Identify
competitive position

Identify key
opportunities
and threats

Strategic
position

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External Environment

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General Environment

n Dimensions in the broader society that influence

and industry and the firms within it
¨ Economic
¨ Sociocultural
¨ Global
¨ Technological
¨ Political/legal
¨ Demographic

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General Environment
n The Economic Segment
¨ Inflation rates
¨ Interest rates
¨ Trade deficits or
surpluses
¨ Budget deficits or
surpluses
¨ Personal savings rate
¨ Business savings rates
¨ Gross domestic product

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General Environment (cont’d)
n The Sociocultural Segment
¨ Women in the workplace
¨ Workforce diversity
¨ Attitudes about quality of
worklife
¨ Concerns about
environment
¨ Shifts in work and career
preferences
¨ Shifts in product and
service preferences

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General Environment (cont’d)
n The Global Segment
¨ New global markets
¨ Changing existing
markets
¨ Important
international events
¨ Critical cultural and
institutional
characteristics of
global markets

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General Environment (cont’d)
n The Technological Segment
¨ Product innovations
¨ Applications of knowledge
¨ Focus of private and
government-supported
R&D expenditures
¨ New communication
technologies

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General Environment (cont’d)
n The Political/Legal Segment

¨ Antitrust laws
Ø Called competition law :ensuring that fair
competition exists in an open-market economy
¨ Taxation laws
¨ Deregulation philosophies
¨ Labor training laws
¨ Educational philosophies and
policies

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General Environment
n The Demographic
Segment
¨ Population size
¨ Age structure
¨ Geographic
distribution
¨ Ethnic mix
¨ Income distribution

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Industry Environment
n Set of factors directly influencing a firm and its
competitive actions and competitive responses
¨ Threat of new entrants
¨ Power of suppliers
¨ Power of buyers
¨ Threat of product substitutes
¨ Intensity of rivalry among competitors

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 Porter’s Five Forces
Model of Competition
Threat of
Threat
Newof New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Threat of
Substitute
Products
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Five Forces Model of Competition

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Threat of New Entrants
threat for the present firm

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Bargaining Power of Suppliers

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Bargaining Power of Buyers

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Threat of Substitute Products

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Intensity of Rivalry

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Industry Analysis (EFE)

Summarize & evaluate:

Economic Demographic Governmental

Social Environmental Technological

Cultural Political Competitive

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Competitor Analysis

Industry
Environment

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Competitor Environment

n All of the companies that the firm competes

against.

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Competitor Environment

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 END

CHAPTER FOUR

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 Homework
Case analysis

n (Hill ,p-74 )pharmaceutical industry

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