Strategic Management

External Analysis

Professor Robert Hattemer 1

The Strategic Management Process

Company Vision, Mission und Objectives, Corporate Culture

Strategic Strategy Formulation Strategy

Analysis & Selection Implementation

▪ External analysis ▪ Develop strategies ▪ Structures & systems

▪ Internal analysis
▪ Evaluate strategic ▪ Operationalize
alternatives strategies through
programs, budgets
▪ Decide on strategy
▪ Inform, train and
motivate staff
▪ Evaluate, control

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Chapter 1 1
 Philosophy and Purpose of Strategic Anaylsis

• The environment has become more

dynamic and more complex
• “The only constant is change”
• Objectives:
– Become aware of the importance of the environment
– Identify relevant environmental factors
– Determine opportunities and threats
• Create a strategic fit between the
organization and the environment in order to
ensure the long-run future and success of
the entire organization

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Key Drivers of Change

• Forces likely to affect the

structure of an industry
• These normally include:
– Globalization
– Political and regulatory
changes
– Economic factors
– Lifestyle changes
– Technological changes

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Chapter 1 2
 Global Change

Legalized in countries
in 2000: 0
in 2022: 33
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Global Change

Internet users in China

in 2000: 22M Chinese investment in
Africa, e.g. G&H
in 2022: 1.05 bn
Garments in Rwanda
Smartphones
In 2000: 2M (mobile)
in 2022: 829M
Source: Statista, August 2022
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Chapter 1 3
 Global Change

Appears to be leading
Lowering costs for Infrastructure:
today, but success
batteries charging stations
depends on …

2017: 156,000
2022: 2.2 million

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Globalization

• Origin of the term: Theodore Levitt in Harvard Business Review

“The Globalization of Markets” (1983)
• Definition: the process of the increasing international, social,
political, economic, cultural, and technological integration of
individuals, societies, institutions, businesses, and countries.
• Relevance for business:
– Globalization of markets
– Globalization of industries
– Globalization of production

This will be addressed in depth in International Management

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Chapter 1 4
 Forces Underlying Globalization

Technological Forces
Industrialization
IT technologies
Economic Forces Social Forces
Transportation technologies
Increasing incomes Consumerism
World trade Convergence in consumer
Globalization of tastes
World financial markets
markets and Education and skills
Market forces
industries World travel
World competition

Political Forces
Reduced trade barriers
Expansion of trade blocs
Technical standards
Adapted from: Stonehouse et al.:
Global & Transnational Business,
2004

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Alternate View: Industry Globalization

Potential
Market Drivers

Global Market Participation

Global Products/Services
Global Locations
Global Marketing
Global Competitive Moves

Industry
Cost Drivers Globalization Government
Potential Drivers
Competitive
Drivers

Adapted from: G.Yip: Total Global

Strategy, 2003

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Chapter 1 5
 External Analysis: Strategy Frameworks

External Analysis
1. Porter’s Diamond
2. PESTEL
3. Porter’s Five Forces

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Layers of the Business Environment

Adapted from Johnson, Scholes, Whittington, 2012

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Chapter 1 6
 Porter’s Diamond: Determinants of National
Advantage
Firm strategy,
structure &
rivalry

Factor Demand
conditions conditions

Plus: Role of
Related & government and
supporting chance
industries

M. Porter, The Competitive Advantage of Nations, 1990

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Porter’s Diamond: Determinants of National

Competitive Advantage
• Porter determined that successful companies within 1 industry often
come from one country (e.g., Germany—printing presses)
• His theory: there may be certain geographic factors, favoring the
development of competitive advantage, specifically:
– Factor conditions: e.g., local traditions, geographic or climate
conditions, value systems, human factors—Switzerland: banking
– Demand conditions: e.g., highly sophisticated customer needs and
expectations in the home market—Japan: consumer electronics
– Related and supporting industries: e.g., automotive and automotive
supply industries in Germany; provide mutual benefits
– Firm strategy, structure and rivalry: high level of domestic rivalry
allows companies to continually improve and innovate—e.g.,
engineering industries in Germany, Fast-Food in the US, brewing in
Holland
• In addition Porter identified as influential factors: chance factors
and the role of government
• Porter then extended this model into Economic Cluster Analysis

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Chapter 1 7
 From Theory to Practice
EXERCISE

• Divide into small groups and brainstorm for 15 minutes, using Porter’s Diamond
model, which factors may have contributed to the fact that the following countries
have developed such a strong position in the following industries:
• German automotive industry (premium segment)
• Fast food industry in the USA
• Hardware and software industry in the USA
• Consumer electronics in Japan
• Each group gives an oral summary of 2 to 3 minutes.

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Relevant PEST (LE) Factors

Source: Boddy (Management), p. 88

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Chapter 1 8
 Applying PEST(EL) to Passenger Airlines

EXERCISE
• Which PESTEL factors have a strong influence on the passenger airline
industry? Provide specific examples for each.

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Industry Analysis: Porter’s 5 Forces Model

Threat of New Entrants

Rivalry among Existing

Power of Suppliers Power of Buyers
Competitors

Threat of Substitution

These forces determine the intensity of competition within an industry and

therefore the ultimate profit potential.

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Chapter 1 9
 The Five Forces

Rivalry among existing Number of competitors, diversity of rivals, industry growth

competitors rate, product differentiation, importance of brands, available
capacity, financial requirements, exit barriers, industry culture

Threat of new entrants Barriers to entry, economies of scale, product differentiation,

Threat of substitution
brand image, customer loyalty, switching costs, capital
requirements, access to distribution channels, other cost
factors, government policy
Product substitution vs. need substitution; value for money,
perceived benefits, switching costs, likelihood

Bargaining power of Concentration in supplier industry, availability of substitutes,

suppliers uniqueness of supplies, switching costs, ability to integrate
backward/forward, volumes

Bargaining power of buyers
Professor Robert Hattemer
Number of buyers and their % of seller‘s sales, volumes,
complexity of needs (e.g. quality, price), price sensitivity, ease
of substitution, switching costs, profitability, access to
information, brand loyalty, available choices
19

Applying Porter’s Five Forces: Passenger

Airlines

EXERCISE
• Assess the strength of each of the forces within the context of the passenger
airline industry. Provide specific examples for each.

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Chapter 1 10
 An Integrated Approach to Industry Analysis
Political Legal
Environment Economic
Environment Environment
Threat of New
Entrants

Power of Rivalry among Existing Power of

Suppliers Competitors Buyers

Threat of
Substitution

Socio-cultural Natural Technological

Environment Environment Environment

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Example: Summary of External Analysis

European Passenger Airline Industry
Political-Legal
10
Competitive Rivalry 8 Economic

6
4
Supplier Power Socio-Demographic
2
0

Buyer Power Technological

Substitution Environmental

Threat of New Entrants

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Chapter 1 11
 Additional Elements of Industry Analysis

• Overall importance for a nation’s and the global

economy: percentage of GDP, overall size in terms of
revenues, production, employees
• Sectors and branches within the industry and their
respective weight and growth rates
• International position: analysis of imports and exports
• Developments: past, present and future

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From Theory to Practice

CASE STUDY: Global forces and the European brewing industry

• Work in groups of 3 or 4. Using data from the case, carry out a PESTEL
analysis and a five forces analysis. What do you conclude?
• For the breweries outlined in the case, or breweries of your own choice,
explain:
• How these trends will impact differently on these companies
• The relative strengths and weaknesses of the companies

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Chapter 1 12
 External Analysis

Beer Industry

Political
10
Supplier Power Economic
8
6
Buyer Power 4 Socio-Demographic
2
0
Threat of New
Technological
Entrants

Threat of Substitution Legal

Competitive Rivalry Environmental

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Bibliography

Boddy, D.: Management: An Introduction, 6th Ed., Pearson, 2013

Johnson, G./Scholes, K./Whittington, R.: Exploring Corporate
Strategy, 9th Ed., Prentice Hall, 2012
Porter, Michael: Competitive Strategy: Techniques for Analyzing
Industries and Competition, Free Press, 2004
Porter, Michael: The Competitive Advantage of Nations, Free
Press, 1990
Stonehouse, G., Campbell, D., Hamill, J., Purdie, T.: Global and
Transnational Business, 2nd Ed., Wiley, 2004
Thompson, A./Peteraf, M./Gamble, J./Strickland, J.: Crafting &
Executing Strategy, 19th ed., McGraw-Hill, 2013
Yip, G.: Total Global Strategy II, Pearson, 2003

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Chapter 1 13