Strategic Management

Week 4
Analysing the external environment
Keiron Coogan
Learning outcomes
• Discuss the importance of the external
environment to strategy
• Select appropriate tools and use them
to analyse the external environment
• Evaluate the strengths and weaknesses
of different strategic tools
Business environments
•Business environments can be conceptualized in
•different ways, in terms of:
• Industry, ecosystem, field, market, institutional and legal structures
• The key ‘rules of the game’, e.g. government regulations, demand drivers
• Relationships with other organizations, individuals, government bodies and
many other institutions
• Source: Clegg, S.R., Schweitzer, J., Whittle, A., and Pitelis, C. (2017) Strategy: Theory and Practice (2nd edn). London: Sageetition between rivals supplier and buyer relationships
Macro versus micro environment

• Macro environment:
• “The outer layer of environmental influence – that which can influence the
internal environment.” It comprises five categories of influence –
sociodemographic, political, economic, natural and technologic”
• Micro environment:
• “The near or immediate business environment that contains factors that
affect the business often and over which, individual business may have
some influence. Usually comprises competitors, suppliers and customers.”

• Evans, N (2015) “Strategic management for tourism, hospitality and

events”. 2nd ed. Abingdon: Routledge
Layers of the business environment
Understanding the macro environment
• PESTLE analysis:
• Political
• Economic
• Social
• Technological
• Legal
• Environmental
PESTLE analysis
• Analysis includes both market and non – market perspectives
• Identify what the key drivers for change are and evaluate what
their likely impact may be
• Use PESTLE to establish what is most important and needs to
be actioned
• Minimise the threats posed and maximise the opportunities
presented

• Source: Johnson, G. Whittington, R. Scholes, K. Angwin, D. and Regner, P. (2017).

Exploring Strategy. 11th edition. Harlow: Pearson
PESTLE analysis example

Source: Clegg, S.R., Schweitzer, J., Whittle, A., and Pitelis, C. (2017) Strategy: Theory and Practice (2nd edn). London:
Sage.
Undertaking a PESTLE analysis
• Consider how factors are changing now,
and how likely they are to change in future
• Many of the factors are linked
• Focus on key drivers for change
• Don’t try and list everything!
• Prioritise
External environmental factors
• Wide ranging i.e.
• Economic growth rates
• Ageing populations
• Climate change
• The internet

• Source: Johnson, G. Whittington, R. Scholes, K. Angwin, D. and Regner, P. (2017). Exploring

Strategy. 11th edition. Harlow: Pearson
Environmental factors
• Often their effect is not noticed in the short
term
• Examples include:
• The impact of e commerce
• Slow down in economic growth rates
• Source: Johnson, G. Whittington, R. Scholes, K. Angwin, D. and Regner, P. (2017). Exploring
Strategy. 11th edition. Harlow: Pearson
Source: Johnson, G.
Whittington, R. Scholes, K.
Angwin, D. and Regner, P.
(2017). Exploring Strategy.
11th edition. Harlow: Pearson
Forecasting
• Draws on analysis using PESTLE
• Intends to predict
• Can use three tools which are conceptual:
• Inflexion points, weak signals, megatrends

• Source: Johnson, G. Whittington, R. Scholes, K. Angwin, D. and Regner, P. (2017).

Exploring Strategy. 11th edition. Harlow: Pearson
Three types of forecasting
• Single point forecasting: Implies certainty to a degree i.e. sales
forecasting, demographic trends
• Range forecasting: Possible outcomes with different
probabilities and a most likely, central outcome (fan charts) i.e.
economic growth
• Alternative futures forecasting: Less certainty, different
outcomes

• Source: Johnson, G. Whittington, R. Scholes, K. Angwin, D. and

Regner, P. (2017). Exploring Strategy. 11th edition. Harlow:
Pearson
Directions of change
• Megatrends: PESTLE movements, gradual but
influential i.e. climate change
• Inflexion points: Turning points for trends i.e. online
booking reducing the need for high street travel
agencies
• Weak signals: Assist in identifying inflexion points
and are usually indicative of future trends i.e.
professional debate about an issue’s significance
• Source: Johnson, G. Whittington, R. Scholes, K. Angwin, D. and Regner, P. (2017).
Exploring Strategy. 11th edition. Harlow: Pearson
Scenario analysis
• Considers how the economy might develop
• Avoids making predictions
• Looks at and learns from different
possibilities
• Used when there is high uncertainty
• Learn rather than predict
• Source: Johnson, G. Whittington, R. Scholes, K. Angwin, D. and Regner, P. (2017).
Exploring Strategy. 11th edition. Harlow: Pearson
Five basic steps of scenario analysis
• Defining scenario scope; Subject and time span
• Identifying key drivers for change i.e. bio fuels
and driverless cars
• Developing scenario stories: enables
communication and helps strategic planning
• Identifying impacts i.e. contingency planning
• Monitor progress
• Source: Johnson, G. Whittington, R. Scholes, K. Angwin, D. and Regner, P.
(2017). Exploring Strategy. 11th edition. Harlow: Pearson
 Industrial organization approach
•Industrial organisation (IO):
Economic theory helpful in explaining market structures, organisational
strategic behavior and interactions together with industries they belong to
• Industrial organisation:
•Environmental settings in which organisations operate
•Has an external perspective on strategy
•Is concerned with the environmental settings firms operate within
•Behave as sellers, buyers and producers of goods and services

• Source: Clegg, S.R., Schweitzer, J., Whittle, A., and Pitelis, C. (2017) Strategy: Theory and
Practice (2nd edn). London: Sage.
Structure-Conduct-Performance
• The SCP approach proposes that a firm’s performance is largely a
function of the industry environment in which it competes
• SCP approach proposes that:
Industry structure drives an organisation’s conduct
Conduct then determines the performance of the organisation

• Therefore strategists need to analyse:

• The structure of an Industry
• From this, select which industries to enter and ways to compete in them

• Source: Clegg, S.R., Schweitzer, J., Whittle, A., and Pitelis, C. (2017) Strategy: Theory and Practice (2nd edn). London: Sage.
Industrial Organisation and the Structure –
Conduct – Performance approach
• Factors influencing the structure of industry include:
• Demand and supply
• Product differentiation
• Diversification and vertical integration
• Government policy

• Source: Clegg, S.R., Schweitzer, J., Whittle, A., and Pitelis, C. (2017) Strategy: Theory
and Practice (2nd edn). London: Sage.
Industrial Organisation and the Structure –
Conduct – Performance approach
•The SCP approach:
•May not specify exact relationships between an organisation's performance and market
structure, the performance and conduct of an organisation, may lack clarity regarding
factors pertaining to performance, conduct and structure.
• Organisations may not have the same knowledge of market
structure.
•This may give one party an advantage over the other.
• Market structure may be affected by an organisation's performance. This may be when
large organisations control access to limited resources or set prices.

• Source: Clegg, S.R., Schweitzer, J., Whittle, A., and Pitelis, C. (2017) Strategy: Theory and
• Practice (2nd edn). London: Sage.
Can industry be defined?
• When firms define industry on a narrow basis strategic errors may occur.
• This can be illustrated by a video rental firm failing to define the industry it operates in
as ‘film entertainment’ may therefore miss the threat posed by cinema and movie
streaming
• Similarly, the definition ‘leisure entertainment’ would include anything that substitute
or rival substitute it (i.e. theatre, video games)
• By widening definitions strategists are able to consider potential rivals from more
organisations (e.g. inter-city train lines may rival airlines offering domestic air
services.). This also enables consideration of substitutes and the threat they pose
(e.g. car transport as more affordable than rail travel)

• Source: Clegg, S.R., Schweitzer, J., Whittle, A., and Pitelis, C. (2017) Strategy:
Theory and
• Practice (2nd edn). London: Sage.
Different industry types
• -
Homogenous or pure market Information available about an organisation's
market, clients, production costs and products. Easy to imitate
• Monopoly - No direct competitors. Therefore an organisation’s strategic
• objective is to protect its position and maintain full control
• Oligopoly - The number of players is limited. An organisation's actions will be
predictable. Ways to supply products and services is coordinated.
• Hypercompetition - Competitive advantage can quickly changes. Therefore
profits which are above average will be difficult to sustain.
The corporate environment
• The five competitive forces that shape strategy
(2008) You Tube video, added by Harvard
Business Channel [Online] Available at:
https://www.youtube.com/watch?v=mYF2_FB
CvXw
• Accessed: 07 January 2020
Competitive advantage
Competitive rivalry
•High fxed costs
•High exit barriers
•Industry growth rate
•Competitor balance
•Low differentiation

•Source: Johnson, G. Whittington, R. Scholes, K. Angwin, D. and Regner, P. (2017).

Exploring Strategy. 11th edition. Harlow: Pearson
Threat of new entrants
•Access to supply or distribution channels
•Expected retaliation
•Scale and experience
•Legislation or government action
•Differentiation
• Source: Johnson, G. Whittington, R. Scholes, K. Angwin, D. and Regner, P. (2017).
Exploring Strategy. 11th edition. Harlow: Pearson
Threat of substitutes
•From outside the industry!
•The price/performance ratio
•Extra‐industry effects
Power of buyers
•Concentrated buyers
•Low switching costs
•Buyer competition threat
•Must distinguish between buyers and consumers!
Power of suppliers
•Concentrated suppliers
•High switching costs
•Supplier competition threat
Consider the following
• Define the appropriate sector
• Be aware of industries that are convergent
• Identify strategic groups
• No representation of complementary organisations
• Analyse the merits or otherwise of low barriers to
entry
The end

• Any questions?