Week 2 Lecture: External Environmental

Analysis
Understanding the Industry Environment: PESTEL Analysis
What is PESTEL Analysis?

PESTEL stands for Political, Economic, Social, Technological, Environmental, and Legal. It's a tool
that helps managers identify macro-environmental factors that might affect an organization.

1. Political:

 Description: Refers to the impact of government policies, regulations, and political stability.
 Example: A change in government might lead to stricter regulations in the banking sector,
affecting banking operations.

2. Economic:

 Description: Factors related to economic growth, inflation rates, and unemployment.

 Example: An economic recession might lead to lower consumer spending, impacting
businesses across various sectors.

3. Social:

 Description: Societal and cultural factors like demographics, lifestyle, and consumer
attitudes.
 Example: The growing trend toward health and wellness might lead to a surge in demand
for organic foods.

4. Technological:

 Description: Innovations, R&D activity, and technology incentives.

 Example: The rise of e-commerce platforms has transformed traditional retail business
models.

5. Environmental:

 Description: Climate change concerns, natural disasters, and sustainability issues.

 Example: The push for sustainable energy has led to growth in the solar and wind energy
sectors.
6. Legal:

 Description: Laws, regulations, and litigation that might affect business operations.
 Example: GDPR regulations in Europe impacted how companies manage and store personal
data.

Analyzing Competitive Forces: Porter's Five Forces Model

Developed by Michael E. Porter, this model helps us analyze the competitive intensity and
attractiveness of an industry.

1. Threat of New Entrants:

 Description: Barriers to entry in an industry.

 Example: High capital requirements and strict regulations can deter new entrants in the
airline industry.

2. Bargaining Power of Suppliers:

 Description: How easy it is for suppliers to drive up prices.

 Example: If there's only one supplier of a unique airplane part, they have significant
bargaining power.

3. Bargaining Power of Buyers:

 Description: How easy it is for buyers to drive prices down.

 Example: In industries with many similar products (like bottled water), buyers can easily
switch between brands, giving them more power.

4. Threat of Substitute Products or Services:

 Description: How easily can a product or service be replaced with another.

 Example: Ride-sharing apps like Uber are substitutes for traditional taxi services.

5. Rivalry Among Existing Competitors:

 Description: Intensity of competition in the industry.

 Example: The smartphone industry with key players like Apple, Samsung, and Google
fiercely competing for market share.

Identifying Opportunities and Threats

Once you've conducted PESTEL and Porter’s Five Forces analyses, you can use the insights to:

Opportunities:

 Description: Conditions that can benefit the company if taken advantage of.
 Example: A growing middle class in a developing country might present opportunities for
luxury brands to expand their market.

Threats:

 Description: Conditions that could harm the company.

 Example: The introduction of stricter emission standards might be a threat to auto
manufacturers who aren't investing in electric technologies.

In Summary:

 PESTEL analysis gives you a macro view of the environment in which an industry operates.
 Porter's Five Forces provides a micro view, focusing on competition within the industry.
 Both tools help in spotting opportunities and threats which are crucial for strategic planning

Industry Environment

The industry environment refers to the set of factors and conditions—such as competitors, suppliers,
substitutes, and buyers—that can influence, and are influenced by, a firm's competitive actions and
responses. This environment can dictate how companies operate, what threats they face, and what
opportunities they can capitalize on within their specific industry.

In other words, while the external (macro) environment (analyzed through PESTEL) is about broad,
overarching factors that affect all industries to some extent, the industry (micro) environment is
about factors directly related to the competitive situation in a particular industry.

Key Components of the Industry Environment:

1. Competitors: These are the firms that operate in the same industry and cater to a similar set
of customers. They directly influence a firm's competitive strategy.
2. Suppliers: Entities that provide resources (raw materials, services, labor) needed for
businesses within the industry. Their bargaining power can influence pricing and availability
of essential resources.
3. Buyers or Customers: Those who purchase products or services within the industry. Their
preferences, needs, and buying power directly affect how companies position and sell their
offerings.
4. Substitutes: These are products or services from different industries that serve the same or a
similar need. For instance, while trains and airplanes are from different industries, they can be
substitutes for intercity travel.
 5. Potential Entrants: These are firms that might enter the industry and become competitors.
The threat of their entry depends on barriers to entry and their resources.

Analyzing the industry environment (often using tools like Porter’s Five Forces) helps a company
determine the competitive forces at play, and how it might carve out a unique position or
competitive advantage in the midst of those forces.

In essence, understanding the industry environment is about recognizing where your business stands
among the entities with which it directly interacts, competes, or collaborates.
Industries can be classified in various ways based on different criteria. A common way to categorize
them is based on the primary value they add or the stage of production they're involved in. Here's a
breakdown of some primary industry classifications:

1. Based on Raw Material and Stages of Production:

 Primary Industries: Deal directly with natural resources or raw materials.

 Examples: Agriculture, fishing, forestry, and mining.
 Secondary Industries: Transform raw materials from primary industries into finished goods.
 Examples: Manufacturing industries like automobiles, electronics, and textiles.
 Tertiary Industries: Provide services rather than goods.
 Examples: Retailing, banking, education, and healthcare.
 Quaternary Industries: Deal with information processing, knowledge-based services, and
consultancy services.
 Examples: Information technology, financial consulting, and education.
 Quinary Industries: Concerned with high-level decision-making and include services such as
health, culture, research, and education.
 Examples: Healthcare, universities, non-profit organizations, and arts and culture.

2. Based on Size:

 Cottage or Household Industries: Small-scale industries typically run at home using

minimal machinery and relying heavily on manual labor.
 Example: Handmade crafts, jewelry.
 Small Scale Industries: Industries that employ a small number of workers and have limited
capital investment.
 Example: Small bakeries, local toy manufacturers.
 Large Scale Industries: Industries that require significant capital investment and employ a
large number of workers.
 Example: Automobile manufacturing, pharmaceutical companies.

3. Based on Ownership:

 Private Sector Industries: Owned and managed by private individuals or groups.

  Example: Apple, Coca-Cola, and Google.
 Public Sector Industries: Owned and managed by the government.
 Example: In many countries, railways, post offices, and certain energy companies.
 Joint Sector Industries: Owned and managed in partnership between the government and
private individuals or groups.
 Example: Some steel plants or energy enterprises.
 Cooperative Sector Industries: Owned and managed by the producers or suppliers of raw
materials, workers, or both.
 Example: Agricultural cooperatives or retail cooperatives.

4. Based on Market Area:

 Local Industries: Cater to the local market or community.

 Example: A local bakery or repair shop.
 Regional Industries: Serve a larger area, typically spanning several communities or states.
 Example: Regional beverage or food brands.
 National Industries: Serve an entire country.
 Example: National airlines or telecom companies.
 International or Multinational Industries: Operate in multiple countries.
 Example: McDonald's, Microsoft, and Toyota.

These classifications provide a broad overview of how industries can be categorized. However, it's
essential to recognize that some companies or sectors may not neatly fit into one category or may
span multiple categories.