Entrepreneurship Development

External Environmental
Analysis
Presented by:
Prof. B.Manchanda
JIMS- VK
August,2019 1
 Learning Objective

After reading this subject, you should have a

good understanding of:

1. Environmental Analysis,
2.Opportunity Analysis and
3. The impact of the Environment on a firm’s
strategies and performance.

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 Macro-environmental Forces

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 General Environment

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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 Industry Environment

Set of factors directly influencing a firm and its

competitive actions and competitive responses

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 Competitor Environment

 All of the companies that the firm competes against.

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 Analysis of the External Environments

 General environment
 Focused on the future
 Industry environment
 Focused on factors and conditions influencing a firm’s
profitability within an industry
 Competitor environment
 Focused on predicting the dynamics of competitors’
actions, responses and intentions

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 Opportunities and Threats

 Opportunity
 A condition in the general environment that if exploited,
helps a company achieve strategic competitiveness
 Threat
 A condition in the general environment that may hinder a
company’s efforts to achieve strategic competitiveness

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 External Environmental Analysis

 A continuous process which includes

 Scanning for early signals of potential
changes and trends in the general environment
 Monitoring changes to see if a trend emerges from
among those spotted by scanning
 Forecasting projections of outcomes based on monitored
changes and trends
 Assessing the timing and significance of changes and
trends on the strategic management of the firm

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 General Environment

The Economic Segment The Socio-cultural Segment

Inflation rates Women in the workplace
Interest rates Workforce diversity
Trade deficits or surpluses Attitudes about quality of
Budget deficits or work-life
surpluses Concerns about
Personal savings rate environment

Business savings rates Shifts in work and career

preferences
Gross domestic product
Shifts in product and
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service preferences 10
 General Environment

The Global Segment The Technological Segment

 Important political Product innovations
events Applications of
 Critical global markets knowledge
 Newly industrialized Focus of private and
countries and emerging government-supported
R&D expenditures
markets
New communication
 Different cultural and technologies
institutional attributes

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 General Environment

The Political/Legal Segment The Demographic Segment

Anti Competition laws Population size
Taxation laws Age structure
Regulations Geographic distribution
Labour laws Ethnic mix
Educational policies Income distribution

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 External Environmental Analysis

 A continuous process which includes

 Scanning for early signals of potential
changes and trends in the general environment
 Monitoring changes to see if a trend emerges from
among those spotted by scanning
 Forecasting projections of outcomes based on monitored
changes and trends
 Assessing the timing and significance of changes and
trends on the strategic management of the firm

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 Components of the External
Environmental Analysis

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Exhibit 2.1 2-15
 Environmental Scanning & Monitoring
External Scanning
 surveillance of a firm’s external environment to
predict environmental changes and detect
changes already under way.
Alerts the firm to critical trends before changes
have developed a discernible pattern and before
competitors recognize them

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 Environmental Scanning & Monitoring
External Monitoring
 A firm’s analysis of the external environment that
tracks evolution of environmental trends,
sequences of events, or streams of activities

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 How to Spot Hot Trends
Listen
Pay attention
Follow trends online
Watch Competition

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 Spot Opportunities
The Japanese work side by side in an open office
plan that fosters frequent discussions and
promotes the sharing of real-time data as well as
field observations and anecdotes
This allows them to break out of their silos and
develop a holistic feel for the market, see how
their work fits, and sense new opportunities as
they arise.

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 Competitive Intelligence
Competitive intelligence
 A firm’s activities of collecting and interpreting
data on competitors, defining and understanding
the industry, and identifying competitors’
strengths and weaknesses.

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 Environmental Forecasting
 Environmental
forecasting
 The development of
plausible projections
about direction,
scope, speed and
intensity of
environmental
change

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 Environmental Forecasting
Scenario analysis
 An in-depth approach to environmental
forecasting that involves experts’ detailed
assessments of societal trends, economics,
politics, technology, or other dimensions of the
external environment

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 SWOT Analysis

Firm’s strategy must:

Build on its strengths
Remedy the weaknesses or work around them
Take advantage of the opportunities presented
by the environment
Protect the firm from threats

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 SWOT Analysis
SWOT analysis
 A framework for
analyzing a
company’s internal
and external
environment and
that stands for
strengths,
weaknesses,
opportunities, and
threats.
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 SWOT Analysis

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 Example: Royal Enfield
 Strengths
 Strong brand image. Old British marquee brand.
 Weaknesses
 Limited ability to develop “light” motorcycles with
75/100/125 cc engines-the biggest range as per customer
preferences.
 Opportunities
 Growing interest in “heavy” motorcycles worldwide
especially Europe & USA-a large market.
 Threats
 Differing trade policies governing motorcycles & stiff
competition from established global brands such as
August,2019 Harley- Davidson,etc. JIMS- VK 2-26
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 The General Environment
Factors external to an industry, usually beyond a
firm’s control
Demographic Technological
Sociocultural Economic
Legal/Political Global

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 Environmental Variables

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 Stages of Industry Evolution
Industry life cycle
Maturity Decline

Growth

Development

Growth
Rate Profits

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 Demographic Segment
Aging population
Rising or declining affluence
Changes in ethnic composition
Geographic distribution of population
Greater disparities in income levels

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 Sociocultural Segment
More women in the workforce
Dual-income families
Increase in temporary workers
Greater concern for healthy diets and physical
fitness
Greater interest in the environment
Postponement of having children

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 Political/Legal Segment
FDI in Retail
FDI in Insurance
Law pertaining to acquiring agricultural land
from farmers
Laws for establishing industries in backward
areas

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 Technological Segment
Genetic engineering
Emergence of Internet technology
Computer-aided design/computer-aided
manufacturing systems (CAD/CAM)
Wireless communication
Nanotechnology

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 Economic Segment
Interest rates
Unemployment
Consumer Price index
Trends in GDP
Changes in stock market valuations
Reduction in crude oil prices

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 Global Segment
Increasing global trade
Currency exchange rates
Emergence of the Indian and Chinese
economies
Trade agreements (NAFTA, EU, ASEAN)
Creation of WTO (decreasing tariffs/free trade
in services)

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 The Competitive Environment
Competitive environment
 factors that pertain to an industry and affect a
firm’s strategies
Competitors, customers, and suppliers

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 Porter’s Five Forces Model
of Industry Competition

August,2019 JIMS- VK Exhibit 2.7 2-38

 The Threat of New Entrants

Profits of established firms in the industry

may be eroded by new competitors
Sources of entry barriers
 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels
 Cost disadvantages independent of scale

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 QUESTION
If you are considering opening a new pizza
restaurant in your area, what would be the
threat of new entrants? How would you
evaluate Porter’s other forces for this industry?
Explain.

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 The Bargaining Power of Buyers
Buyers threaten an industry by:
 Forcing down prices
 Bargaining for higher quality or more services
 Playing competitors against each other

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 The Bargaining Power of Buyers
A buyer group is powerful when
 It is concentrated or purchases large volumes relative
to seller sales
 The products it purchases from the industry are
standard or undifferentiated
 The buyer faces few switching costs
 It earns low profits
 The buyers pose a credible threat of backward
integration
 The industry’s product is unimportant to the quality
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of the buyer’s products or services
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 The Bargaining Power of Suppliers
Suppliers can exert
power by threatening
to raise prices or
reduce the quality of
purchased goods and
services

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 The Bargaining Power of Suppliers
A supplier group will be powerful when
 The supplier group is dominated by a few companies
and is more concentrated than the industry it sells to
 The supplier group is not obliged to contend with
substitute products for sale to the industry
 The industry is not an important customer of the
supplier group

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 The Bargaining Power of Suppliers
(cont.)
A supplier group will be powerful when
 The supplier’s product is an important input to
the buyer’s business
 The supplier group’s products are differentiated
or it has built up switching costs for the buyer
 The supplier group poses a credible threat of
forward integration

2-45
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 The Threat of Substitute
Products and Services
The Threat of Substitute Products and
Services
 the threat of limiting the potential returns of an
industry by placing a ceiling on the prices that
firms in that industry can profitably charge
without losing too many customers to substitute
products.

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 The Intensity of Rivalry among
Competitors in an Industry
Price competition
Advertising battles
Product introductions
Increased customer service or warranties

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 The Intensity of Rivalry among
Competitors in an Industry
Interacting factors lead to intense rivalry

Numerous or equally Lack of differentiation

balanced competitors or switching costs
Slow industry growth Capacity augmented
High fixed or in large increments
shortage costs High exit barriers

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 How the Internet and Digital
Technologies Influences Industry

Exhibit
2.9
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Using Industry Analysis: A Few Caveats
Managers must not always avoid low profit
industries
 Can still yield high returns for players with sound
strategies
Implicitly assumes a zero-sum game,
determining how a firm can enhance its
position relative to the forces
Five Forces analysis is essentially a static
analysis
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Using Industry Analysis: A Few Caveats
(cont.)
Good industry analysis looks rigorously at the
structural underpinnings of profitability.
 A first step is to understand the time horizon
The point of industry analysis is not to declare
the industry attractive or unattractive but to
understand the underpinnings of competition
and the root causes of profitability.

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 The Value Net

Exhibit 2.10
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 Strategic Groups within Industries
Two unassailable assumptions in industry
analysis
 No two firms are totally different
 No two firms are exactly the same
Strategic groups
 Cluster of firms that share similar strategies

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 Strategic Groups within Industries
Value of strategic groups as an analytical tool
 Identify barriers to mobility that protect a group
from attacks by other groups
 Identify groups whose competitive position may
be marginal or tenuous
 Chart the future direction of firms’ strategies
 Thinking through the implications of each
industry trend for the strategic group as a whole

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