Chapter 2

External Analysis
KNOWLEDGE OBJECTIVES

● Define and describe the general

environment and the industry
environment.

● Discuss the four activities of the

external environmental analysis process.

● Name and describe the general

environment’s seven segments.
KNOWLEDGE OBJECTIVES
● Identify the five competitive forces
and explain how they determine an
industry’s profit potential.

● Define strategic groups and describe

their influence on the firm.

● Describe what firms need to know

about their competitors and different
methods (including ethical standards)
used to collect intelligence about them.
External analysis:
Understanding the environment
 Assess the nature of the environments and analyze key
environmental influences

 Identify competitive arenas and key players, analyze threats

 Get an overview of key opportunities and threats on the
external arenas

The Industry
The Firm: Environment:
Goals and Competitors
Values
Strategy Customers
Structures
Suppliers
Resources
Stakeholders
Activities
etc
 Analysis

The external environmental analysis process should be conducted

on a continuous basis. This process includes four activities:

 Scanning: Identifying early signals of environmental changes and

trends

 Monitoring : Explore meaning by ongoing observations of

environmental changes and trends

 Forecasting : Developing projections of anticipated outcomes

based on monitored changes and trends

 Assessing: Determining the timing & importance of

environmental changes and trends for firms' strategies & their
management
The Business Environment
(Johnson et al. 2008: 54)

The
Organisation

2-4
 External analysis stages
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. PESTEL factors,
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.
 The Macro-Environment
Difficult for the firm to influence
Changes can be far-reaching
The media: rich source of both information and
speculation
Tools for analysing the macro-environment
The PESTEL (Variants PEST/DEEPLIST) framework
Key drivers
Scenarios
 The PESTELFramework
The PESTEL framework categorises environmental
influences into six main types:
Political -
Economic
Socio-cultural
Technological
Environmental
Legal

PESTEL analysis evaluates the broad societal

trends that affect many industries. It identifies current
and future developments that will shape the micro-
environments of each industry sector.
 PEST(EL) analysis: The things you cannot (easily)
do anything about
P = Political and legal factors E = Economic factors

Competitive regulation Interest rates

Tax laws Business cycles
Trade agreements Inflation
Political stability Disposable income
Energy availability and cost
S = Socio-cultural factors T = Technology factors

Income distribution Research and

Education development
Demography Technology transfer
Work attitudes Innovation rates
Consumption
E = Environment L = Legislation
Permits (pollution etc) Legislatation of organizational life
Treatment of waste (toxic) Workers rights/legislation
Community approach Unions
 Group work:

Using PEST or PESTEL to analyze the Macro

evnvironment that Saigontourist is now doing business.
Key Drivers and Scenarios Planning
Key drivers for change are environmental
factors that are likely to have a high impact on
the success or failure of strategy.

Scenarios are detailed and plausible views of

how the business environment of an organisation
might develop in the future based on key drivers
for change about which there is a high level of
uncertainty.
 Industries and SectorsAnalysis
An industry is a group of firms producing the same
principal product or service.
The industry analysis involves identifying
Competitive forces
Industry life cycles
Competitive cycles

Porters five forces framework has two main aims:

To understand the drivers of competitive behaviour in
the sector and;
To evaluate the long-run profit potential of the sector
The Five Forces Framework (Johnson et al. 2008: 60)

Potential
entrants

Competitive
Suppliers Buyers
rivalry

Substitutes
 Five forces model – Details
• Capital requirements
• Differentiation
• Switching costs
• Access to Threats of Potential • Size of purchases
supply/distribution entrants • Differentiation in product
channels • Few substitutes
• Intellectual property • A few big suppliers
• Expected retaliation • Threat of backward integration
• Legislation/Government
action Competitive rivalry
• Economies of scale
• Competitor balance
Power of • Industry growth rate Power of
Suppliers • High fixed costs Customers
• High exit barriers
• Low differentiation
• Size of purchases
• Undifferentiated product
• Per cent of cost
• Low margins (buyer)
• Threat of forward • Degree of differentiation
integration • Technological innovation
• Impact on quality Substitute • Price performance relationships
•Price performance is
high
5
 Potential Competitors
New entrants into an industry threaten
incumbent companies.
Barriers to entry:
 Brand loyalty
 Absolute cost advantages
 Economies of scale
 Switching costs
 Government regulation

Entry barriers reduce the threat

of new and additional competition.
 Rivalry Among Established
Companies
The intensity of competitive rivalry in an industry
arises from:
 Industry’s competitive structure.
 Demand (growth or decline) conditions in industry.
 Height of industry exit barriers.
 Competitive Structure
Continuum of
Industry Structures

Fragmented Consolidated
Many firms, Few firms, One firm or one
no dominant shared dominance dominant firm
firm (oligopoly) (monopoly)
 The Bargaining Power of
Buyers
Buyers are most powerful when:
 There are many small sellers and few large buyers.
 Buyers purchase in large quantities.
 A single buyer is a large customer to a firm.
 Buyers can switch suppliers at low cost.
 Buyers purchase from multiple sellers at once.
 Buyers can easily vertically integrate to compete with
suppliers.
 The Bargaining Power of
Suppliers
Suppliers have bargaining power when:
 Their products have few substitutes and are
important to buyers.
 The buyer’s industry is not an important customer to
the supplier.
 Differentiation makes it costly for buyers to switch
suppliers.
 Suppliers can vertically integrate forward to compete
with buyers and buyers can’t integrate backward to
supply their own needs.
 Substitute Products
The competitive threat of substitute products
increases as they come closer to serving similar
customer needs.

Far Close
cooking oil
 A Sixth Force:
Complementors
Complementors:
 Companies whose products are sold in tandem with
another company’s products.
 Increased supply of a complementary product
collaterally increases demand for the primary
product.

Example:
 Faster CPU chips fuel sales
of personal computers.
 Strategic Groups Within
Industries
The concept of strategic groups
 Within an industry, a competitor grouping using
similar strategies that differ from other industry
groups.

Implications of strategic groups

 The closest industry competitors are those in the
group.
 The various industry groups are differentially and
competitively advantaged and positioned.
 Mobility barriers inhibit the movement of competitors
from one strategic group to another.
 Strategic Group Analysis (SGA)
“A strategic group is the group of firms in an industry following
the same or a similar strategy along the strategic dimensions1.”
Porter (1980), p.129.

Broad Motor Industry

Global full-line
producers
Regional The key to the strategic
Broad-line group concept is that
Product Luxury differences in profitability
Range producers between groups persists
because of the existence
of mobility barriers that
National Niche- High performance stop firms entering or
specialists sports
moving between groups
Narrow and thus competing away
National Geographic Global profit differentials.
Scope
Strategic Groups in the Pharmaceutical
Industry
Limitations of the Five Forces and Strategic
Group Models

Both models are static and ignore innovation.

Their focus is on industry and group structures
rather than individual companies.
 Innovation creates change in
industry structures, altering the
competitive environment.
 Industry structure cannot
fully explain the performance
differences between industry
competitors.
 The Industry Life Cycle Model
Stages in the industry life cycle:

The development stage of an industry (or

strategic group) tells you a lot about the
environment in which a business operates.
The Industry Life Cycle
(Johnson et al. 2008: 68)

2-15
 Competitor Environment
Competitor intelligence is the ethical gathering of
needed information and data about competitors’
objectives, strategies, assumptions, & capabilities.
• What drives the competitor as shown by its future
objectives,
• What the competitor is doing and can do as revealed
by its current strategy,
• What the competitor believes about itself and the
industry, as shown by its assumptions,
• What the the competitor may be able to do, as shown
by its capabilities.
Competitor Analysis
Components

34
 Group work

Using the 5F model to carry out the industry analysis

for Vinamilk