BUSINESS CONTEXT

External Context Analysis

• An organization operates within an environment that is
affecting it.
• It might be larger trends and influences that affect all
organizations but in different ways or it might be more
specific to an industry.
External Context Analysis
Growth in an economy fueled by decreased
interest rates affects all organizations.

However, new safety regulations for

transportation of animals or a price change
in meat prices predominantly affect certain
industries.

There are many factors in the external

environment and it is impossible to
consider them all
External Context Analysis: PEST ANALYSIS
• PEST analysis provides a structured way of analyzing the
external environment of the organization by looking at
four sources of changes that affect an organization
– Political
– Economic
– Social
– Technological
 PEST ANALYSIS: POLITICAL
• Political factors that can lead to changes that affect an
organization. It could be regulations for an industry.
 PEST ANALYSIS: ECONOMIC
• : Economic factors can be, for instance, the
unemployment rate, the current economic growth or
decline in a country or region, market growth, foreign
exchange rates.
• These economic factors affect a company in regard to
availability of resources, costs, profitability, and
attractiveness to enter new markets
PEST ANALYSIS: ECONOMIC
 PEST ANALYSIS: SOCIAL
• Social factors concern the socio-economic environment
such as demographics of the population, lifestyle
attitudes, sentiments or education.
• The change in population growth or the age distribution is
highly relevant for a company managing pension funds.
• Other examples are the levels of health, education,
mobility, and attitudes. Changes in such factors can have
an effect on the customer base and have a long-term
effect on the company.
 PEST ANALYSIS: TECHNOLOGICAL
• Technological factors refer to both the positive and
negative impact of advances in technology. These
factors can be new technologies or the penetration of a
specific technology.
• A company that is attuned to the technological changes
can use the emerging technology to improve their
profitability.
External Context Analysis: PEST ANALYSIS

The main idea of a PEST

analysis is to identify emerging
opportunities or give advance
warnings of significant threats.
External Context Analysis: PEST ANALYSIS
• The PEST analysis can be carried out in workshops or
brainstorming sessions. It might be helpful to think of the
following questions when conducting a PEST analysis:
– What is relevant to the organization or the problem area at
hand?
– What is likely to happen?
– What trends are emerging?
– What do these identified likely factors mean for the
organization/the problem and solution?
External Context Analysis:
Porter’s Five Force Analysis
 External Context Analysis:
Porter’s Five Force Analysis
• Porter’s five forces analysis is a tool that facilitates
analysis of the five competitive forces that can either be
helpful or an obstacle to profitability in an industry.
• The five forces framework is a way to assess the
attractiveness of an industry.
 External Context Analysis:
Porter’s Five Force Analysis
• If the five forces are intense (e.g. airline industry),
almost no company in the industry earns attractive
returns on investments. If the forces are mild however
(e.g. softdrink industry), there is room for higher
returns.
 RIVALRY AMONG COMPETITORS: INTENSINTY OF
RIVALRY
• The intensity of rivalry refers to the intensity with which
a company is competing with its direct rivals or
competitors.
In fact, both Coca-Cola and
Pepsi have their share of the
market and it can be said
that intensity of rivalry is
low.
On the other hand, the market
share of both Coca-Cola and
Pepsi will decrease if new
companies enter the market. As
such, the potential profitability
decreases. The more companies
competing in a market the
higher the intensity of the
rivalry
If the incentives to compete in an industry are lower, the
intensity of rivalry will be lower.
 Industry Size

For instance, if the industry is growing strongly, there is

less incentive for competition because the incumbent
firms are seeing their profits increase and there is
enough growth potential for all.
 What are these incentives?

Increase in Increase in
market share profit
RIVALRY AMONG COMPETITORS: INTENSINTY OF
RIVALRY

In such cases, companies

would not need to fight with
other competitors to gain a
market share
RIVALRY AMONG COMPETITORS: INTENSINTY OF
RIVALRY

Another factor is the degree of

differentiation in the market. If
the firms are offering products
that are differentiated from
each other, all firms have their
own segment of the market and
the need to engage in price
wars is low.
In a way, the existing firms have divided the market between
them and there is enough space for all. Therefore, the
intensity of the rivalry is also low.
 RIVALRY AMONG COMPETITORS: INTENSINTY OF
RIVALRY

Another factor that affects the

intensity of rivalry is exit costs.

Barriers to exit are obstacles or impediments that prevent a

company from exiting a market in which it is considering cessation
of operations, or from which it wishes to separate. Typical barriers
to exit include highly specialized assets, which may be difficult to
sell or relocate, and high exit costs, such as asset write-offs and
closure costs.
If the cost of leaving the market
is very high, firms have more
incentive to fight for their
position in the market
 RIVALRY AMONG COMPETITORS: INTENSINTY OF
RIVALRY

To summarize, some of the aspects to consider for the intensity of

rivalry are as follows:

• Number of competitors (direct competitors and close

competitors)
• Size of the competitors
•Industry growth rate
•Exit barriers.