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ANALYSIS OF EXTERNAL INFLUENCE

SESSION 2:
Dr. Sasmita Palo
TISS, Mumbai
Today's agenda
ØWhat is the external environment?
ØKey components of external environment
ØAnalysis of external environment
ØTechniques of scanning of general environment
ØPEST Analysis
ØSWOT Analysis
ØCASE STUDY ANALYSIS
• What is external environment?

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A Copernican view of the
Organisation.

A Copernican view of the


The Copernican Universe Organisation.
A Ptolemaic view
Alternative Models of Superior
Returns
The I/O Model: Porter, Rumelt
The Industrial Organization model
suggests that above-average returns for
any firm are largely determined by
characteristics outside the firm.
Resource-based Model of Above-
Average Returns:barney, Wernerfelt

1. Firm’s Resources 1. Strategy dictated


by the firm’s unique
resources and
capabilities
2. Find an
environment in
which to exploit
The Firm these assets (where

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Alignment of Firm-Strategy-Environment

I/O model Resource-Based


Alignment/ ”Fit”
–External Model
Analysis --Internal
Integrat
--What might Analysis
ion

Environme Strategy FIRM


nt

Position Core
Competitive
ing Competencies
Arena

Intent, Mission, Core Resources &


Social, Strategy, Goals, Capabilities
Political, Effectiveness Valuable, rare, hard
Economic, to imitate

Technological,
Value chain, culture,
Industry Forces Leadership, control systems
Governance
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External Analysis:
Identification of Opportunities

Opportunities Threats
Layers of the Business
Environment
Components of
EXTERNAL Analysis
• Scanning: collecting information
• Monitoring: detecting the trend
• Forecasting: anticipating the future
• Assessing: impact on the firm
What is Environmental
Scanning
Environmental scanning is the
acquisition and use of information
about various events in an
organization's external environment,
the knowledge of which would assist
management in planning the
organization's future course of action.
Objectives Of An Environmental
Scanning System
detecting scientific, technical, economic, social,
and political trends and events important to the
institution,

defining the potential threats, opportunities, or


changes for the institution implied by those
trends and events, and

env. scanning is an important component


of the organization's strategic planning
process, improving the org 's ability to
react to and implement change in
response to external factors.
• Competitor intelligence
• Competitive intelligence
• Business intelligence
• Environmental scanning

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External Audit
Techniques
• PESTEL
• SWOT Analysis
Macro-environment –
PESTEL
POLITICAL/ GOVERNMENT

political stability and risk


political climate - amount of government activity
Political party in power and its philosophy
Economy

GNP or GDP per capita


GNP or GDP growth
unemployment rate
inflation rate
consumer and investor confidence
Disposable income
currency exchange rates
trading partners
balance of payments
government debt
budget deficit or surplus
future trends
Socio-Cultural

demographic factors such as:


 population size and distribution
 age distribution
 education levels
 income levels
 ethnic origins
 religious affiliations
attitudes towards:
 materialism, capitalism, free enterprise
 individualism, role of family, role of government, collectivism
 role of religion
 consumerism
 environmentalism
 importance of work, pride of accomplishment
cultural structures including:
 diet and nutrition
 housing conditions
Technology

efficiency of infrastructure, including: roads, ports, airports,


hospitals, education, healthcare, communication, etc.
industrial productivity
new manufacturing processes
new products and services of competitors
new products and services of supply chain partners
any new technology that could impact the company
cost and accessibility of electrical power
Ecology

Environmental laws
ecological concerns that affect
o the firms production processes
o customers' buying habits
o customers' perception of the company or product
LEGAL
Industrial laws
Labour laws
corporate and personal tax rates
payroll taxes
import tariffs and quotas
export restrictions
restrictions on international financial
flows

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Key Aspects of PESTEL
• Not just a list of influences
• Need to understand key
drivers of change
• Focus is on future impact of
environmental factors
• Combined effect of some of
the factors likely to be most
important
Issues Priority Matrix

Probable Impact on Corporation

High Medium Low

High High Medium


Priority Priority Priority
High

High Medium Low


Probability of Occurrence

Priority Priority Priority


Medium

Medium Low Low


Priority Priority Priority
Low
Issues Priority Matrix

Probable Impact on Corporation

High Medium Low

High High Medium


Priority Priority Priority
High

High Medium Low


Probability of Occurrence

Priority Priority Priority


Medium

Medium Low Low


Priority Priority Priority
Low
Internal Audit Techniques:
SWOT (1)
• After an environmental scan, a SWOT
will help analyze your results

Internal Environment
l Strengths Weaknesses

External Environment
l Opportunities Threats
The SWOT analysis
The SWOT analysis
External Factor Analysis Summary
(EFAS)
External Weighted
Factors Weight Ratin Score Comment
g s
1 2 3 4
Opportunities

Threats

Total Weighted Score

1
.00
Notes: 1. List opportunities and threats (5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2
based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding)
to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s
weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted
score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment. A weighted score
of 3.0 means average performance.
Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS).” Copyright © 1991 by Wheelen and Hunger Associates.
Reprinted by permission.
Internal Factor Analysis Summary
(IFAS)
Weighted
Internal Weight Ratin Score Comment
Factors g s
1 2 3 4 5
Strengths

Weaknesses

Total Weighted Score

1
.00
Notes: 1. List st and wea(5–10 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that
relevance of the factor to the company’s strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in
Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in
Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the
company in Column 4. This tells how well the company is responding to the strategic factors in its external environment A weighted score of 3.0 means
average performance..

Source: T. L. Wheelen and J. D. Hunger, “External Strategic Factors Analysis Summary (EFAS).” Copyright © 1991 by Wheelen and Hunger Associates.
Reprinted by permission.
IE Matrix

• Based on two key dimensions


– The IFE total weighted scores on the x-axis
– The EFE total weighted scores on the y-axis
• Divided into three major regions
– Grow and build – Cells I, II, or IV
– Hold and maintain – Cells III, V, or VII
– Harvest or divest – Cells VI, VIII, or IX
• grow and build : market penetration, market
development, and product development) or
integrative (backward integration, forward
integration, and horizontal integration) (intensive
strategy)
• hold and maintain - Market penetration and product
development
• harvest or divest - Liquidations, retrenchment and
divestiture ( defensive strategy)
The Ansoff Matrix
The Product/Market direction of the firm can be
modelled around the Ansoff Matrix. It identifies four
basic business strategies for the firm:
• Market Penetration
• Market Development
• Product Development
• Diversification
The Ansoff Matrix

Produc Present
Market New
Market Penetration Product
Consolidation Development
Prese Contraction
nt Market
Development Diversification

New
Market Penetration
Objective of this strategy is to increase
market share. This is done in the
following ways:
• Increase the number of users
– attract users from competitors
– convert non-users into users
• Increase the frequency of purchase
• Increase the volume of product
purchased
Product Development

This strategy is aimed at creating new


products aimed at existing customers.
Possibilities are:
• Product reformulation strategies
• Product quality improvement
• Product line extensions
• Product feature enhancements
• “New” product development
Market Development

The strategy here is to increase the


sales of present products by tapping
new markets:
Two Approaches:
• Geographic market expansion
• Using new distribution channels to reach un
served customers
Diversification - Types
Two basic types of diversification can be identified:
• Concentric Diversification: diversification into related business
areas
q Vertical integration

n Full integration (100% suppliers +controls distributors)

n Taper integration (<50% supplies; use own and external

distribution channels)
n Quasi-integration (buy/sell from outside

suppliers/distributors that under its partial control)


n Long-term contract

q Backward integration

q Forward integration
Examples
• Conglomerate Diversification: diversification into unrelated
business areas ....
Integration:
Backwards to
sources of supply

Vertical
Integration
Strategy
Forwards to the
customer
“ Diversification is a strategic move
into a new product/market activity
that requires the development of
new competencies or the
augmentation of existing ones. “
Harvest strategy: Limits investment and optimizes cash flow.

Divestiture: Company exits the industry by selling out early to


others, avoiding liquidation.
Daimler Chrysler selling Chrysler after a failed merger

Liquidation - Arthur Andersen after conviction for evidence


destruction which was later overturned.

Retrenchment - specific examples in the construction industry


due to the collapse of the housing market

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SWOT Matrix

Four Types of
Strategies
§Strengths-Opportunities (SO)
§Weaknesses-Opportunities (WO)
§Strengths-Threats (ST)
§Weaknesses-Threats (WT)
SO Strategies

Use a firm’s
Strengths internal
Weaknesses strengths
Opportunities
Threats
to take
SO advantage
Strategies
SWOT of external
opportunities
WO Strategies

Improving
Strengths internal
Weaknesses weaknesses by
Opportunities
Threats
taking
WO advantage
Strategies
SWOT of external
opportunities
ST Strategies

Use a firm’s
Strengths strengths
Weaknesses to avoid or
Opportunities
Threats
reduce the
ST impact
Strategies
SWOT of external
threats
WT Strategies
Defensive
tactics
Strengths aimed at
Weaknesses reducing
Opportunities internal
Threats WT weaknesses &
Strategies avoiding
SWOT environmental
threats
SWOT Matrix
COMPETITVE ADVANTAGES
OF A NATION
Porter’s Diamond
• PESTEL factors differ from country to
country –their competitive impact
will differ from country to country
• Porter’s (1990) suggests reasons why
some countries are more competitive
than others
Porter’s Diamond
Model: The Determinants of National

Source: M. Porter, Competitive Advantage of Nations, Macmillan, 1990.


Porter’s Diamond
• Factor conditions
– Education, infrastructure, cash, e.g.,
Taiwan
• Demand Conditions, e.g., Japanese
demand for quality.
• Firm Strategy, Structure & Rivalry.
• Supporting Industries, e.g Italy,
leather, Silicon Valley computer
related industry
Strength of interaction
• Industry clustering
• Geographical location
What is competitiveness?
• competitiveness as the set of
institutions, policies, and factors that
determine the level of productivity of
a country.
• The level of productivity, in turn, sets
the sustainable level of prosperity
that can be earned by an economy.
Nation’s level of
competitiveness
• A nation’s level of competitiveness
reflects the extent to which it is able
to provide rising prosperity to its
citizens.
12 pillars of
• First pillar: Institutions- framework within which
individuals, firms, and governments interact to generate
income and wealth in the economy. It includes
• Ways in which societies distribute the benefits
• Influences investment decisions and the organization of
production.
• Government attitudes toward markets and freedoms and
the efficiency of its operations, excessive bureaucracy and
red tape, overregulation, corruption, dishonesty in dealing
• with public contracts, lack of transparency and
trustworthiness, or the political dependence of the judicial
system
• Role of private institutions, - accounting and reporting
standards and transparency for preventing fraud and
mismanagement, ensuring good governance, and
Second pillar: Infrastructure
• Well developed infrastructure
• quality and extensiveness of
infrastructure networks such as
quality roads, railroads, ports, and air
transport
• electricity supplies
• solid and extensive
telecommunications network
Third pillar: Macroeconomic
stability
• Inflation rate
• interest payments on its past debts.
Fourth pillar: Health and
primary education
• quantity and quality of basic
education received by the population
• Health services provided
Fifth pillar: Higher education
and training
• measures secondary and tertiary
enrollment rates
• the quality of education as assessed
by the business community.
• The extent of staff training -
importance of vocational and
continuous on-the-job training
Sixth pillar: Goods market
efficiency
• Healthy market competition
• government intervention in form of
distortionary or burdensome taxes,
and by restrictive and discriminatory
rules on foreign ownership or foreign
direct investment (FDI).
• demand conditions such as customer
orientation and buyer sophistication
Seventh pillar: Labor market
efficiency
• Flexibility in the labour market
• clear relationship between worker
incentives and their efforts, as well
as the best use of available talent —
which includes equity in the business
environment between women and
men.
Eighth pillar: Financial market
• capital available for private-sector investment
from such sources as loans from a sound
banking sector, well-regulated securities
exchanges, venture capital, and other financial
products.
• ensuring that innovators with good ideas have
the financial resources to turn those ideas into
commercially viable products and services.
• the banking sector needs to be trustworthy and
transparent.
• Ninth pillar: Technological
readiness
• Tenth pillar: Market size
• Eleventh pillar: Business
sophistication (quality of a
country’s business networks and
supporting industries, which can
be captured by using variables on
the quantity and quality of local
suppliers and the extent of their
12 pillars of
United States - 1
Switzerland ------2
Denmark 3
Sweden 4
Singapore 5
Finland 6
Germany 7
Netherlands 8
Japan 9
Canada 10
Hong Kong SAR 11
United Kingdom 12
Korea, Rep. 13
Austria 14
Norway 15
France
CAGE FRAMEWORK
Competitor Analysis
• 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 competitor’s capabilities
are, as shown by its capabilities
(its strengths and weaknesses)
Competitor Analysis Components